Crypto.IQ CME Expiration Analysis Accurately Calls This Weekend’s Rally, the Fundamentals of How CME Bitcoin Futures Expirations Impact the Market

October 28, 2019 / by Zachary Mashiach

On October 24 Crypto.IQ performed an analysis of each Chicago Mercantile Exchange (CME) Bitcoin Futures expiration so far in 2019, ultimately coming to the conclusion that “In most of 2019 there has been a strong downtrend in price right before the expiration, followed by a strong uptrend in the days after the expiration, although not every month fits this trend, just most.”

This article was written on the day of the CME Bitcoin Futures Expiration, i.e. the last Friday of October, previous to which the Bitcoin (BTC) price dropped from $8,000 to as low as $7,300. In the days after the article was written, which is simultaneously the days after the expiration, the price of Bitcoin (BTC) rallied $2,600 from $7,500 to as high as $10,100. 

Price action around the October 24 CME Bitcoin Futures Expiration on October 24, showing the $700 dip before the expiration and the $2,600 rally after the expiration. Courtesy of Bitcointicker.co

Indeed, the trend of the price dropping before the CME Bitcoin Futures Expiration followed by a price rally after the expiration has been observed in most of 2019, most strongly in the months of May, June, July, August, September, and October. 

Looking back to the Crypto.IQ analysis of CME Bitcoin Futures expirations in 2018, this trend has also been observed in February, March, June, November, and December of that year. 

Therefore, it is clear that monitoring the CME Bitcoin Futures Expiration can be a powerful and lucrative tool for cryptocurrency traders. At the least, there is almost always high volatility around the time of the expiration, and some sort of price rise/decrease in the days before and after the expiration. 

However, in the past six months, the trend has become even more predictable and has become an easy opportunity for traders to make profits shorting before the expiration and longing after the expiration. 

Of course, this trend does not hold every single month, and there is no guarantee that betting on the price dropping before the expiration and rising after the expiration will work out. In fact, the trend can be the opposite of the price rising before the expiration and falling afterward, or there can be no change at all around the time of the expiration, as will be explained further down in this article. 

Perhaps the impact of the CME Bitcoin Futures Expirations has become more definite the past six months due to skyrocketing volumes. In Q3 2019, CME Bitcoin Futures saw an average of $289 million traded every day, apparently up 61% from the previous quarter due to institutional interest. This volume is starting to rival the biggest spot exchanges in the world and has been persistently growing since CME Bitcoin Futures launched in December 2017. On one day in late June, CME Bitcoin Futures Volume hit $1.7 billion, which exceeds the biggest spot exchanges in the world. 

As for the fundamentals as to why the price of Bitcoin (BTC) is showing this trend of price dip before expiration and price rise after, essentially short positions close right before the expiration, and short traders ‘bang the close’ to increase their short profits, resulting in a dip in Bitcoin’s (BTC) price. Then longs open for the new month, and traders ‘bang the open’ to induce a rally to increase their long profits. 

It can happen the other way around too, where long traders ‘bang the close’ causing a rally before expiration, and short traders ‘bang the open’ causing a dip right after expiration. This trend was most drastic when the CME Bitcoin Futures opened in December 2017, and short traders jumped in to cause the price to crash from the all-time high of $20,000, bringing about the 2018 bear market. This trend happened again in January, July, and September 2018.

Essentially, it seems the ratio of short traders to long traders before the expiration determines which trend the market will follow around the CME Bitcoin Futures Expiration. If there are more shorts than longs before the expiration, then the price is suppressed before the expiration, and when this suppression is removed after the expiration the market rallies. If there are more longs than shorts before the expiration, the price rallies before the expiration and comes back down to earth after the expiration. 

On months where shorts and longs are about equal, little change is observed around the CME Bitcoin Futures Expiration. 

Thus, as volumes continue to grow on the CME Bitcoin Futures, to the point that they now rival top spot exchanges in the world, it seems the impact of CME Bitcoin Futures Expirations is becoming more pronounced. This is actually good for traders since traders can figure out the ratio of shorts/longs on the CME Bitcoin Futures, and potentially predict if the price will drop before expiration and rise afterward or vice versa, or if there will be no change at all. 

And a reminder, the cryptocurrency markets are a highly non-linear system, with many different factors impacting the markets. While the CME Bitcoin Futures Expirations appear to be becoming a stronger tool for predicting the markets, it is wise to use all of the other tools possible, since the CME Bitcoin Futures Expirations are just one factor.