CME BTC Contract Versus Digitex BTC/USD Contract

Bitcoin has come a long way in a short period of time. From its humble beginnings on 3 January 2009, the digital currency has quickly become one of the most popular speculative trading vehicles within the investment community...

In fact, bitcoin’s meteoric rise in popularity caused the Chicago Mercantile Exchange (CME) to introduce a bitcoin futures contract on 18 December 2017.  Typically, it takes years (or even decades) before the CME will even consider converting an underlying asset into a futures contract.  This is a testament to bitcoin’s “staying power” among traders and investors.

For those skeptics who believe that bitcoin is doomed to failure, you should probably rethink your position.  The fact that the CME undoubtedly spent a rather sizeable chunk of its advertising budget rolling out a bitcoin futures contract (not to mention its reputation), should be a clear indication that bitcoin is here to stay.  There is no way a major commodity exchange would introduce a new futures product unless it was fairly certain that the underlying asset possessed a great deal of longevity.

Not to be outdone by the CME, The Digitex Futures Exchange has its own bitcoin trading vehicle designed to appeal to the fan base of cryptocurrency traders.  Let’s compare and contrast the CME bitcoin contract against the Digitex bitcoin contract. This will give us a better indication of which contract is more suitable for a typical cryptocurrency trader.

CME BTC Contract

Let’s begin with the CME bitcoin (BTC) futures contract.  For starters, the standard contract unit for the CME contact is 5 BTC.  The price quotation is US Dollars (USD) per BTC. For example, if the current futures quote is 8750, this represents a price of $8,750 per BTC.  The minimum price fluctuation is $5.00 per BTC. Therefore, the futures contract moves in $5 increments (i.e. 8750 to 8755). Based on the fact that the CME contract unit is 5 BTC, the minimum price fluctuation of each futures contract is $25 (5 BTC x $5 = $25).  

The CME BTC futures contract is traded on the Globex exchange.  Trading hours are fairly liberal. Essentially, the market is open 23 hours per day.  However, the market is closed during the weekend. The CME closes its Globex operation Friday afternoon @ 4:00 PM Central Time.  The exchange reopens @ 5:00 PM Sunday evening.

Trading the CME BTC futures contract is certainly not free.  There are fees involved. The CME charges a standard exchange fee for all of its products.  The exchange fee varies, depending on the futures product. In regard to bitcoin, the CME has listed BTC in the equity index category.  The exchange fee is $2.50 per side.

CME BTC Contract Versus Digitex BTC
Chicago Mercantile Exchange (CME)

 

Therefore, the trader is charged $2.50 each time a contract is purchased and sold. In addition to the exchange fee, the National Futures Association (NFA) charges $0.02 per side.  For those of you who may not be aware, the NFA is a self-regulatory organization designed to aid the Commodity Futures Commission (CFTC) in regulating the US futures industry. Each time a trader places a trade on a US futures exchange, the trader is required to provide financial support to the NFA by paying the NFA fee.

The CME uses a network of commodity brokerage firms to facilitate the buying and selling of futures contracts on the CME.  Individual traders must open an account with one of these member firms in order to transact business on the exchange. The brokerage firms charge a commission to their customers for the privilege of placing trades on the CME.  This includes the BTC futures contract.

The dollar amount of the commission rate is dependent on the service provided by the brokerage firm.  Many customers (particularly novice traders) require a great deal of service from their broker. This is known as a full-service relationship.  In this type of scenario, the commission rate is usually $20 to $30 per side. Traders who don’t need any “hand holding” from their broker, can expect a lower rate, known as a discount rate.  The average discount commission rate is $5 to $10 per side.

In addition to exchange fees, NFA fees and commission rates, customers are required to pay a data fee to the CME.  After decades of providing free price data to its customers, the CME began charging a fee to customers who want to receive real-time data.  The data fees became effective on 1 January 2015. Data fees were divided into two categories, professional traders and non-professional traders.  In 2015, the professional fee was $85 per month (per exchange).

The non-professional fee was $5 per month (per exchange).  Of course, it should come as no surprise that the CME eventually raised the data fee.  Effective 1 April 2018, the fee increased to $105 per month (per exchange) for professional traders.  The fee remained unchanged for non-professional traders.

The current price of the CME bitcoin futures contract is 7535, which is $7,535 for one BTC.  As we discussed earlier, the CME BTC contract is 5 BTC. Therefore, the dollar value of one BTC futures contract is $37,675.  In order to establish a position in a BTC futures contract, the CME requires a “good faith deposit” equal to 43% of the contract’s value (multiplied by 110%).  

For example, 43% of $37,675 is $16,200. 110% of $16,200 is $17,820. Therefore, the CME good faith deposit amount is $17,820. This is the amount of money required to control one BTC futures contract.  The “good faith deposit” is also called the margin requirement. Essentially, if you want to trade a single BTC futures contract, you must have $17,820 in your commodity account at all times.

Many aspiring futures traders are under the impression that an individual must be an accredited investor before an account can be opened.  Accredited investor status is not required in order to open a commodity futures account. However, brokerage firms do require minimum futures trading experience, minimum net worth and minimum annual income.  If these conditions are not met, the customer is required to complete an additional risk disclosure statement. Of course, all CME member brokerage firms require their customers to complete KYC/AML documents.   

Digitex BTC/USD Contract

Now, let’s turn our attention to the Digitex BTC/USD contract, which like the CME contract is also cash settled, meaning that no physical delivery of Bitcoins takes place. The CME contract is cash settled in USD and the Digitex contract is settled in DGTX tokens.

The tick size of the Digitex Bitcoin futures contract is $5 which is the same tick size as the CME contract. This means the price of Bitcoin is quoted in USD and the minimum price fluctuation possible is $5. However, the tick value is significantly smaller on the Digitex contract which makes it a more accessible trading vehicle than the CME contract. Every one tick movement of $5 on the CME contract is worth a whopping $25 ($5 x 5 BTC = $25), but on Digitex one tick is worth 1 DGTX.    

In order to clear up any confusion, please review the following example.  John is a bitcoin trader who believes the price of BTC will rise. Therefore, he buys 50 BTC/USD futures contracts.  John’s purchase price is 8350. John’s position immediately moves in his favor. He liquidates the entire position two hours later @ 8450.  As you know, the tick size for BTC/USD futures contract is $5. As a result, John’s profit is 20 ticks per contract (100 / 5 = 20). The total profit is 1,000 ticks (20 x 50 = 1,000).  In terms of Digitex BTC/USD, each tick is worth 1 DGTX token. Consequently, John has a profit of 1,000 DGTX.

Let’s move on to fees and commissions.  As we discussed earlier, CME BTC futures contract carries a load of fees and commissions (exchange fee, NFA fee, full-service broker commissions, discount broker commissions, professional data fees and non-professional data fees).  These fees and commissions can dramatically reduce the trading profits of a BTC trade.

In fact, profits can be completely eliminated and losses incurred as a result of commission charges. The Digitex Futures Exchange does not collect any of these fees or commissions from its clients.  Instead, Digitex traders are allowed to keep 100% of their trading profits. This is a perfect illustration of The Digitex Futures Exchange aligning itself with the best interest of the customer. Digitex is working in unison with the customer, not against the customer.

In regard to trading hours, the Digitex BTC/USD contract is open 24 hours per day, 7 days per week.  CME BTC is only open 5 ½ days per week.

Apart from zero trading fees, another big difference between Digitex and CME is the margin requirement.  For those of you who may not be familiar with this concept, the margin requirement is the amount of funds that must be kept in your account in order to maintain your futures position.  

The current margin requirement for CME BTC is 50% of the value of the contract which is $17,820. The margin requirement for Digitex BTC/USD is 1% of the value of the contract which is only 15 DGTX. Although traders can choose to pay more than 1% margin  to reduce the risk of being liquidated by a small price movement.

As you can see, the required margin money for Digitex is much less onerous than CME.  This is another example which proves that The Digitex Futures Exchange is much more suitable for the millions of smaller traders who simply can’t afford to trade at the CME.  The entire Digitex Futures Exchange is built in favor of the more active trader who doesn’t want to devote a considerable amount of her/his investment capital on a single contract.

Digitex Offers a Great Trading Experience

By comparing CME BTC against Digitex BTC/USD, it’s clear to see that The Digitex Futures Exchange was created with the intent of serving the needs of the millions of average traders who simply want a great trading experience without paying excessive fees and onerous margin requirements.  Digitex is definitely on the right path to becoming a major player in the futures trading arena.

Personal Thoughts

As an active futures trader, my personal belief is that the CME BTC contract is simply too large.  I have no intentions of shelling out $18K in margin money in order to trade a CME BTC contract. Of course, this probably explains why the CME BTC daily futures volume has been rather anemic.  

Daily trading volume has typically been in the range of 2K to 5K, with an occasional spike to 10K. However, volume has increased slightly during the past two weeks, most likely as a result of the recent BTC bullish breakout.  It’s much too early to know for sure if the increased volume will be sustainable.

Here’s a rather unique statistical fact: The CME officially introduced its BTC futures contract on Sunday evening, 17 December 2017 @ 5:00 PM Central Time.  The very first trade occurred @ 20650. So far, this has been the “top tick” of the BTC contract.

Brief Summary of CME BTC Versus Digitex BTC/USD

  • CME introduced BTC futures contract on 18 December 2017
  • The CME BTC tick size is $5
  • The CME BTC contract unit is 5 BTC
  • Trading hours for CME BTC is 23 hours per day, 5 ½ days per week
  • Several fees are involved for trading CME BTC (exchange fee, NFA fee & data fee)
  • CME uses member brokerage firms as an intermediary between the CME & the customer
  • The brokerage firms charge a commission to all account holders
  • The margin requirement for CME BTC is $17,820 which is 50% of the contract value
  • Brokerage firms require customers to meet certain financial conditions to open an account
  • If these financial conditions are not met, customers must complete risk disclosure statements
  • CME member brokerage firms require customers to complete KYC/AML documents
  • The Digitex BTC/USD contract type is cash settled in DGTX tokens
  • Digitex BTC/USD tick value is 1 DGTX
  • The Digitex Futures Exchange does not charge exchange fee, NFA fee or data fee
  • The Digitex Futures Exchange does not use member brokerage firms
  • Digitex BTC/USD does not charge commissions
  • Digitex BTC/USD margin requirement is 1% of contract value as opposed to 50% on CME
  • The Digitex Futures Exchange does not require financial disclosure documents
  • KYC/AML documents are not required by The Digitex Futures Exchange
  • The Digitex Futures Exchange was created to serve the needs of the millions of average traders
  • The Digitex Futures Exchange is on the path to becoming a major player in futures trading

Thank you, as always for supporting this exciting and disruptive project! Stay tuned, as we will continue to keep you informed about our company news and development progress. If you haven’t already done so, be sure to join our waitlist to get early access to the zero-fee futures exchange launching at the end of this year.

 

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