Micro Bitcoin Futures (MBT): A Lower-Risk Alternative to Bitcoin (BTC) Investment

Cryptocurrency-based futures are commonly offered by centralized exchanges, such as Phemex. In recent years, traditional marketplaces have also begun offering cryptocurrency-based futures. Micro Bitcoin Futures (MBT), recently launched by the Chicago Mercantile Exchange (CME) Group, is one such futures product.

What Is Micro Bitcoin Futures?

Micro Bitcoin Futures (MBT) is a futures product that aims to give small investors exposure to Bitcoin (BTC). They were launched by the Chicago Mercantile Exchange (CME) Group in May 2021. MBT contracts can be traded on two trading platforms under CME: CME Globex and CME Clear Port.

MBT is a smaller-sized contract, only one-tenth the size of a standard Bitcoin. For MBT, CME accepts fiat currency for contract settlement, so no Bitcoin actually needs to be held or exchanged by investors. Unlike Bitcoin, MBT is regulated by the US Commodity Futures Trading Commission (CFTC).

The price of MBT is based on the CME’s CF Bitcoin Reference Rate (BRR), which is a daily reference rate of the price of one Bitcoin in USD. This benchmark index price is obtained by aggregating trade data from multiple BTC/USD markets in various major cryptocurrency exchanges that follow the CME CF Constituent Exchange Criteria.

How Is Micro Bitcoin Futures Different from Bitcoin Futures and Bitcoin?

Before launching MBT, CME Group first established Bitcoin Futures in 2017, which proved successful. As shown in the figure below, Bitcoin’s price rose by over 4000% since the launch of Bitcoin Futures. Bitcoin’s dramatic price increase since 2017 also prompted CME Group to establish smaller-scale MBT contracts.

While each Bitcoin Futures contract unit costs 5 BTC, each MBT contract unit costs only 0.10 BTC. This lower contract unit resulted in a lower margin requirement, making the market more accessible to speculators and investors with limited capital.

CME Group requires investors to deposit 50% of the total amount of a particular contract as the margin. Suppose an investor purchased one Bitcoin Futures contract, costing 5 BTC. For a BTC price of $50,000, the total cost of the Bitcoin Futures contract would be $250,000, and the investor would need to deposit $125,000 (50%) as the margin. On the other hand, if the investor purchased one MBT contract which cost 0.1 BTC, then the total cost of the MBT contract would be $5,000, and the investor would need to deposit only $2,500 as the margin.

A comparison of the two futures products is shown in the table below. The margin requirement and nominal value is dependent on the CF BRR mentioned above.

Comparison of MBT and Bitcoin Futures (Source: The Ticker Tape)

MBT vs. BTC: What are the differences?

Even though MBT’s underlying asset is Bitcoin, there are some differences between the two:

• Crypto ownership: Purchasing an MBT contract does not mean owning the underlying Bitcoin. Contract trading is merely based on Bitcoin’s price, and CME settles contracts using fiat currency, with no need for crypto wallets. Purchasing MBT contracts means purchasing financial contracts that obligate you to buy or sell an asset at a predetermined date and a price standardized by Bitcoin’s price. In contrast, buying or selling Bitcoin means exchanging between Bitcoin and fiat currency or other cryptos. That Bitcoin can be sold at any time and without third-party obligations. Nevertheless, the price of MBT contracts is still anchored to Bitcoin’s price, whose fluctuations determine whether users gain profits or suffer losses.

• Regulation: The fact that MBT is regulated by the CFTC gives investors more confidence to trade regulated Bitcoin futures products. The CFTC acts as the mediator to monitor all contracts related to commodities and derivatives in the US. When abusive trading practices occur, the CFTC coordinates the situation and takes enforcement actions. In contrast, Bitcoin, as a cryptocurrency, is unregulated and is tradeable on exchanges of varying reputability. If you are affected by issues such as security vulnerabilities or scams on an unreliable exchange, you have no regulatory recourse.

Who Are Micro Bitcoin Futures For?

Micro Bitcoin Futures (MBT) is a futures product suitable for retail investors and institutional investors looking to trade flexibly. The smaller scale of the MBT contracts offers a lower barrier of entry, making MBT suitable for investors looking to fine-tune their Bitcoin exposure. MBT also serves as an alternative to Bitcoin Futures for those without sufficient capital for a Bitcoin Futures contract.

As previously mentioned, the price of MBT contracts is anchored to Bitcoin’s price, whose fluctuations affect users’ profits or losses. Users’ judgment on when to trade the contracts within the specified period also plays a key role in determining profits or losses. They have to decide whether to extend or close their contract position early within the predetermined period or wait until the MBT contracts expire and are settled by CME directly.

How Does Micro Bitcoin Futures Work?

Before trading Micro Bitcoin Futures, users are encouraged to understand the most important elements of trading:

• As mentioned previously, the contract unit is 0.10 Bitcoin.
• The minimum price fluctuation for an outright futures position is $5.00 per Bitcoin, equivalent to $0.50 per contract. An outright futures position refers to the investors’ actions of going long or short without hedging market risks.
• The minimum price fluctuation for calendar spreads is $1.00 per Bitcoin, equivalent to $0.10 per contract. A calendar spread refers to a futures or options strategy where the investor goes long and short on the same underlying asset with different expiration dates.
• Investors with insufficient capital can minimize their risks with the smaller tick value of MBT, which is $0.50 for an outright futures position. As the tick value is just $0.50, investors can better control the risk exposure and conduct MBT trades multiple times a day while protecting their capital. However, the return from each trade is much smaller.
• The MBT offered by CME Group works like the cryptocurrency-based futures products offered by centralized exchanges. With MBT, a trader can decide to go long by or go short. Suppose the trader buys 10 MBT contracts at a BTC price of $45,000. This means that the trader opened a position worth 1 BTC. At the end of the contracts’ duration, if the trader is going long and the price increases, they make a profit. However, if the price falls, then the trader experiences a loss.

What Is the Future of Micro Bitcoin Futures?

The world is moving toward greater adoption of Bitcoin and other cryptocurrencies. Bitcoin’s rise will help promote MBT among futures traders in particular. Non-crypto traders are presented with a more organized and lower-risk alternative.

Owing to the smaller scale of the MBT contracts, more people will have the opportunity to participate in the market due to the lower entry barrier. MBT’s rising popularity means increased adoption of Bitcoin as well. This increased adoption feeds into the attractiveness of MBT, creating a mutually beneficial relationship between Bitcoin and MBT.

However, MBT’s open interest (the total number of outstanding derivative contracts that have not been settled) has fallen, as shown in the figure below.

The open interest of MBT over the past year (Source: TheBlock)

Nonetheless, as Bitcoin prices rise again, interest in MBT and Bitcoin Futures may increase as well.

Conclusion

Micro Bitcoin Futures is a product suitable for small-scale investors due to its smaller contract size, which offers lower risk exposure. Users who purchased MBT have the financial obligation to buy or sell the underlying asset at an agreed-upon price on a predetermined date. MBT is regulated by the CTFC, which is responsible for monitoring markets to prevent abusive trading practices.

MBT trading offers traders and investors the chance to earn profits at lower risk. However, traders and investors must be aware of the trading period and futures contracts termination period to prevent unnecessary losses. Even though MBT contracts offer lower risks than Bitcoin trading, there is no guarantee of loss avoidance. Hence, readers are advised to do their own research. In addition, novice traders should practice trading futures using a crypto simulation trading platform or start trading with small amounts of capital to avoid making huge losses. Once they are comfortable, traders can then move on to trading with greater capital.