Non event? Why Friday’s $272M CME Bitcoin futures expiry is irrelevant

Chicago Mercantile Exchange (CME) Bitcoin futures and options markets are set to mature this Friday, leading some traders to fear that the most recent BTC dump is a presage of weakening markets.

According to a September 2019 Cointelegraph and Arcane Research report, there is typically a 2.3% drop ahead of each monthly CME expiry. Given the size of the upcoming expiry, it’s worth taking a moment to evaluate new data to evaluate if these ‘CME drop’ ghosts continue to spook the markets.

The 2019 study mulls "deliberate manipulation" as a culprit but aside from that, it did find that 15 out of 20 months had negative returns for the last 40 hours before CME expiry.

Recent data invalidates the CME expiry theory

By applying the same methodology as the 2019 study, one can promptly determine whether the theory still holds true. The CME expiry takes place at every last trading Friday of each calendar month.

The study was done by comparing the average price 40 hours ahead of each event with the previous 40 trading hours. Such a time frame is entirely arbitrary, although it will be kept to provide a comparison basis.

Bitcoin 40-hour change ahead of CME expiry. Source: Tradingview & CoinTelegraph

The negative trend observed by the September 2019 analysis persisted throughout the following couple of months. As the chart above indicates, November 2019 was a significant outlier with Bitcoin (BTC) posting a 4.4% gain ahead of expiry.

No other month since the beginning of the study in January 2018 yielded such a positive number. The previous high occurred in September 2018 as the cryptocurrency posted a 2.4% gain in the 40 hours ahead of futures contracts last trading hour.

The BTC halving may have altered the CME narrative

Bitcoin's third halving was scheduled for mid-May 2020; therefore, November was six months ahead of the important event. The average 40-hour return for the past ten months is +0.3%, and that includes September’s negative 5% performance.

One way of measuring this event's impact on investor expectations is by analyzing the change in the CME Bitcoin futures open interest. 

This data by itself does not assert whether investors were bullish or bearish at that time, but growth in open interest signals new investors' entry or more significant positions. 

Either way, this could indicate halving indeed had an impact on such price movements.

CME Bitcoin Futures Open Interest, USD terms. Source: Skew

CME Bitcoin futures open interest grew by 186% to $390 million over from November 2019 up to its May-11 halving. 

This indicates that institutional investors' interest started picking up at the same time such a 40-hour change indicator started to revert its negative trend. 

The latest data shows $658 million CME Bitcoin futures open interest, as per the above chart.

Contango took a hit after this Monday’s correction

Although this week’s $400 negative price swing could be deemed irrelevant considering Bitcoin's staggering 70% 3-month implied volatility, it certainly dampened professional investors' mood.

The futures premium, or basis, measures how longer-term contracts are priced relative to current spot (regular markets) levels. Professional traders tend to be more active than retail on such instruments due to the hassle of handling expiry dates.

These contracts usually trade at a slight premium, indicating sellers are requesting more money to withhold settlement longer. 

CME Bitcoin futures basis. Source: Tradingview & CoinTelegraph

CME Bitcoin futures basis briefly touched the unfavorable terrain on Aug. 26, which hadn't occurred since May 25. This movement was in stark contrast to late July and early August when the basis reached the 2% level.

It seems premature to ascertain whether this was a change of trend or a momentary correction as Bitcoin tested the $11,200 support level.

Futures contracts will rollover

One should keep in mind that investors typically roll over their futures contracts position over the last trading days. To carry a long position, one needs to buy the September contract and sell the August one, thereby reducing short-term contract open interest.

If these investors decide not to roll over their positions, this would likely increase the odds of additional volatility during expiry. 

Bitcoin Futures Open Interest, contracts worth 5 BTC each. Source: CME

The latest data from CME shows an open interest of 4,727 contracts for August, with each contract representing 5 BTC, amounting to $272 million. If a significant reduction in open interest doesn't occur over the next couple of days, it could lead to intense pressure for Friday's expiry.

As for now, the CME expiry ghost seems more like a past phenomenon which holds little relation to the current state of the markets.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.