Bitcoin Futures Provide An Interesting Opportunity For CME

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CME Group (NASDAQ:CME) recently announced that it will be launching bitcoin futures trading on its platform from December. With this initiative, the company is looking to get an early movers’ advantage in the volatile but fast-growing asset class. Over the long run, this could provide a healthy boost to the exchange’s trading volumes. Below we discuss the opportunity provided by bitcoin futures.

We have a $120 price estimate for CME’s stock, which is below the current market price.

Strong Demand

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With strong global demand, Bitcoin prices have risen more 10x since the beginning of 2017. Out of a total limit of 21 million bitcoins which can be mined, based on the existing protocol, the current bitcoins in circulation stands around 16.7 million. Around 1800 bitcoins are mined per day currently, a number which will continue to decline going forward. With the growth in supply slowing down, bitcoin trading provides a solid opportunity for exchanges.

Introducing bitcoins on a well-established exchange exposes it to a large pool of traders and investors, which could drive volumes. Further, with futures, traders would only need to maintain a margin and buy and sell contracts, rather than taking ownership, which should open up further avenues for growth. Overall, bitcoin futures should help CME gain substantial volumes; since the beginning of 2017, around 14.9 million bitcoins were traded monthly.

Other Volume Trends

Transaction fees account for over 85% of CME’s revenue. Among the various asset classes, interest rate derivatives had the strongest trading volumes, and grew by 14% during the first three quarters of the year, driven by the Fed’s interest rate hikes in March and June. We expect the trading volumes to continue growing under the likelihood of further rate hikes.

See the full Trefis analysis for CME Group.

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