As the correlation between bitcoin and ether fluctuates, market idiosyncrasies may affect one coin more than the other, creating trading opportunities.
The Ether/Bitcoin Ratio presents an ideal way to express a perspective on the economic outlook of bitcoin and ether, particularly with regards to blockchain adoption.
CME Ether/Bitcoin Ratio futures (EBR) offer market participants an efficient way to trade the relative value between Bitcoin and Ether futures in a single transaction. The contract is cash-settled based on the settlement prices of the corresponding futures contracts.
In a first for the industry, CME Group brings to market CFTC-regulated Ether/Bitcoin Ratio (EBR) futures. This unique, new contract enables investors to capture ether and bitcoin exposure in a single trade, without needing to take a directional view. EBR futures may create opportunities for a broad array of institutional clients looking to hedge positions or execute trading strategies, all in an efficient, cost-effective manner.
The market view
Bitcoin and ether dominate the cryptocurrency landscape accounting for approximately 65% of the entire cryptocurrency market cap. Until now, participating in the cryptocurrency market required taking a directional view on either bitcoin, ether, or both. EBR futures allow institutional investors to position themselves to address broader market dynamic questions through the anticipated strength of one currency over the other.
The new futures contracts allow institutional investors a divergence play to react to questions such as: “what will have greater market impact; staking of ETH vs the halving of BTC?” or “What will accelerate faster; tokenization using ETH vs adoption of BTC as a store of value?”
Sophisticated traders may now execute an operationally easy, relative value trade between Ether futures (ETH) and Bitcoin futures (BTC) in one transaction, bypassing the need for individual leg execution.
Historically, bitcoin and ether have been highly correlated. Over time, as the two assets have grown in their own capacities, market dynamics may affect the performance of one cryptocurrency more than the other.
Bitcoin continues to dominate the crypto market and could see some strong inflows as the macro-economic environment shifts. Large investors may continue to prefer BTC exposure for its liquidity, market cap, and relative stability. Simultaneously, ether has practical applications as the currency of the Ethereum smart contract network. Some see ether being more than a store of value and think there could be further ether outperformance on the Ether futures-based exchange-traded fund (ETF) narrative. Ether/Bitcoin Ratio futures enable professional participants to efficiently position themselves to benefit from the relative impact of these developments on the price relationship between ether and bitcoin.
Executing a notionally equivalent bitcoin ether spread trade manually may lead to price slippage and lost opportunity. The EBR futures seamlessly allow market participants the ability to rebalance positions between two different portfolios to benefit from better pricing and better liquidity. The innovative product also completes the cryptocurrency triangle allowing the ability to arbitrage synthetically, for the first time, all three futures legs: the BTC/USD, ETH/USD legs, and the ETH/BTC cross. EBR futures may also allow investors more flexibility when hedging positions in non-dollar offshore markets.
The ETH/BTC ratio
Like all cryptocurrency futures contracts offered by the world's largest derivatives marketplace, Ether/Bitcoin Ratio futures will be cash-settled. The ratio is determined as the daily value of CME Group Ether futures (ETH) final settlement price, divided by the corresponding CME Group Bitcoin futures (BTC) final settlement price. Using the idea of convergence to an index, the futures contracts settle to the quotient of the FCA registered and BMR compliant CME CF Ether Dollar Reference Rate divided by the CME CF Bitcoin Reference Rate. The value of the contract is found by multiplying the ratio by $1,000,000 resulting in a notional value of approximately $55,000 at current market levels.
Although spread trading is common in the institutional capital markets, the Ether/Bitcoin Ratio futures offering is the first of its kind, with CME Group being the only regulated platform to offer this functionality.
Much like the gold/silver ratio in the precious metals space, relative value trades executed through a ratio structure, enable participants to express their view where they generally expect one side of the ratio to predominate over a certain period of time, as it responds to macroeconomic or market-specific developments that may have a positive or negative impact on the price of one or both ratio assets.
Ratio futures, like inter-commodity spreads, can help maintain price alignment between the two underlying contracts, potentially improving the bid-ask spreads for the outright contracts. The spread functionality enhances liquidity and market efficiency by providing arbitrage between different futures' order books.
Ether/Bitcoin Ratio futures may be expected to reflect the impact of dominant developments important to these two blockchains. For instance, a relative value trade could be placed by an investor who believes bitcoin will outperform ether on the basis that the first U.S.-listed spot crypto ETF is one that invests in bitcoin, vs. the probability that it’s an Ether ETF. In such a scenario, a trader may expect bitcoin’s price to rise and ether’s price to remain the same.
Using a price of $1,885 for ether and $30,580 for bitcoin, the ratio is 0.061642 ($1,885 ÷ $30,580). The trader would sell the EBR contract at a notional value of $61,642 ($1,000,000 multiplier x current ratio). Assume bitcoin rises 5% while ether’s price remained the same, she would later buy the contract for $1,885 (ETH * 100%) ÷ $32,109 (BTC * 105%) = 0.058706 or notional value of $58,706, effectively making $2,936 per EBR contract on the trade.
Capitalize on crypto market correlations
The trading relationship between ether and bitcoin – as measured by the ETH/BTC ratio – refers to the number of bitcoin required to purchase a single ether, given their relative prices. At recent market levels, the current ratio is about 0.056769, such that 1 BTC is worth roughly 18 ETH. At the beginning of 2023, about 14 ETH were needed to buy one bitcoin. Since Ethereum's Merge upgrade in September 2022, the ratio has declined nearly 30%.
Ethereum enthusiasts have discussed the ratio at length in the past in tandem with “the flippening” – a hypothetical event that would see ether overtake or “flip” bitcoin’s market capitalization. The ETH/BTC ratio topped 0.087089 on December 8, 2021. For “the flippening” to occur, the ratio would need to reach 0.16220 based on the current circulating supply of both assets. Reaching that ratio would indicate that the market sees both networks as being equal in value.
The ratio may be deployed to exploit a view on ether given the strength of the so-called “flippening” which may increase the value of ether more than what the next halving may do for the price of bitcoin. EBR futures may also present potential trading opportunities when the ratio diverges from its historical average.
Low volatility environment
Since the banking crisis in March 2023, bitcoin and ether have been trading in a very narrow band between $25,000 – $32,000 for BTC and $1,500 – $2,100 for ETH and volatility has been trending downward. The low volatility environment sometimes makes directional trading decisions more difficult. Over the past year, bitcoin has experienced two-year lows in terms of daily volatility, with a 42% annualized volatility of daily price movements. Similarly, ether volatility is also near historical lows, around 59%, albeit higher than bitcoin.
For those that are not comfortable with the volatility of each individual futures contract, the EBR futures contract allows access to the crypto market using a product with even lower volatility, averaging about 24% in October.
Looking forward, the low volatility environment might not last: Large changes have occurred to ETH and a significant change is coming to BTC in April 2024, both of which could impact prices going forward. Differing BTC/ETH correlations could have implications for portfolio diversification and risk management. For institutional investors, it could mean a change in their hedging strategies. The Ether/Bitcoin Ratio futures are a way for market participants to gain directional exposure to Ether and Bitcoin markets in a regulated, USD cash settled, operationally efficient, single trade.
Ether/Bitcoin Ratio futures
Execute Bitcoin and Ether futures spreads with enhanced efficiency using ratio futures
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.