Micro Bitcoin and Ether Futures Offer Small Bites of Crypto

February 12, 2023 Beginner
At a fraction of the size of a standard futures contract, Micro Bitcoin and Ether futures can offer a more cost-effective way for traders to gain bitcoin exposure.

The world of cryptocurrency continues to make headlines, and if those reports spark the interest of futures traders who are unsure about trading a full-size crypto futures contract, they can gain bite-size crypto exposure through the CME Group's Micro Bitcoin (/MBT) futures and Micro Ether (/MET) futures, which are linked to the actual cryptocurrency but require less money up front. Micro Bitcoin futures and Micro Ether futures, like the CME Group’s contracts based on the S&P 500® index, offer smaller and potentially more cost-effective opportunities for futures and crypto newcomers.

Bitcoin ended 2022 with a market capitalization of $235 billion, and ethereum ended 2022 with a market capitalization of $148 billion, which—despite the volatility surrounding cryptocurrency during the year—could potentially indicate a growing acceptance of digital currencies among consumers and businesses worldwide.

But for many retail investors and traders seeking crypto exposure in bitcoin and ethereum, CME Group’s full-size bitcoin futures and ether futures might be a bar too high. That’s one reason "smaller-bite" micro futures could be worth considering. Micro futures can make it less expensive to trade, which can be a handy way for retail investors and traders to gain futures exposure but avoid pricier contracts. Micro Bitcoin (/MBT) and Micro Ether (/MET) futures may offer opportunities for lower-cost exposure to bitcoin and ethereum, along with other potential benefits, such as greater diversification and capital efficiency.

And as with any trade, it's important for investors to consider not only the benefits, but also the risks involved with their trade. These virtual currencies, including bitcoin and ether, experience significant price volatility, and fluctuations in the underlying virtual currency's value between the time an investor places a trade for a virtual currency futures contract and the time they attempt to liquidate it will affect the value of their futures contract and the potential profit and losses related to it. Like all futures products, speculating in these markets should be considered a high-risk transaction.

Here are a few basics on the CME Group’s /MBT and /MET futures and how they could be applied to an investing or trading strategy.

Micro Bitcoin and Micro Ether futures require lower margin than full-size Bitcoin futures contracts

Futures contracts, which are agreements to buy or sell a predetermined amount of a commodity or financial product on a specified date, are typically highly leveraged—meaning a relatively small amount of money can control a relatively large amount of underlying value (often referred to as "notional" value).

Micro Bitcoin futures represent 0.1 bitcoin and are one-fiftieth (about 2%) the size of the large Bitcoin (/BTC) futures contract the CME Group launched in 2017, which represent five bitcoins. So Micro Bitcoin’s margin requirement is also one-fiftieth the size of its larger counterpart. Micro Ether futures represent 0.1 ether and are 500 times smaller than the full-size Ether (/ETH) futures contract. That means the margin requirement for Micro Ether is also 500 times smaller than the margin requirement for the larger Ether futures contract. For comparison, in late December 2022, initial margin for one full-size /BTC futures contract was $27,500, whereas the /MBT futures contract was $550. At the same time, the large /ETH futures contract had a margin requirement of $22,000, and the /MET contract only had a margin requirement of $44.

When trading Micro Bitcoin or Micro Ether futures contracts, it's important for an investor to remember that cryptocurrency futures are leveraged products, meaning an investor could lose more than they initially invested, quickly and with relatively small price movements in the underlying futures product.

Futures markets are regulated and traded around the clock

U.S. futures trading, including the CME Group's bitcoin-based and ether-based futures contracts, is regulated by the Commodity Futures Trading Commission, and futures exchanges typically operate "clearinghouses" to backstop customers and make sure all trades are settled ("marked to market") daily. No such structural protections exist yet for actual bitcoin, ether, and other cryptocurrencies.

Micro Bitcoin and Micro Ether futures, like other CME futures contracts, trade on the CME Group's Globex electronic system, where markets typically open on Sunday nights (U.S. hours) and trade almost uninterrupted (except for a daily 60-minute break) through late Friday afternoons.

Like other futures contracts, /MBT and /MET futures settlement is determined by some sort of a cash market or reference benchmark. In the case of Micro Bitcoin futures, it's the CME CF Bitcoin Reference Rate. For Micro Ether futures, it's the CME CF Ether Reference Rate.

Markets could indicate a growing appetite for crypto, micros

Trading volume is an important indicator of liquidity, reflecting whether a market has ample buyers and sellers and that orders are executed quickly and efficiently. In 2022, 3.6 million /MBT contracts and 4.9 million /MET contracts were traded, which could reference the growing interest in these futures products.

Futures can potentially provide more capital efficiency

Because futures are often highly leveraged, you can control a relatively large amount of the underlying value with a relatively small amount up front, as well as take certain positions that don't tie up a lot of capital for long periods of time. But keep in mind, leverage can greatly magnify your losses, meaning a small amount of market movement can have a significant negative impact on an account’s losses, so investors should proceed with caution.

Similar capital efficiency aims can be applied to Micro Bitcoin and Micro Ether futures. Say, you hold actual bitcoin, ether, or other cryptocurrency you want to keep for the long haul but are concerned about short-term events that might hurt the value of your holdings. A hedging strategy based on /MBT or /MET futures may offer the potential to ride out such events without having to part with the underlying assets.

Bitcoin, ether, and other cryptocurrencies are still relatively new with big potential as well as big risks, and anything crypto-futures-related should be viewed through a similar lens. Investors would be wise to carefully weigh whether Micro Bitcoin or Micro Ether futures are appropriate by considering trading experience, long-term objectives, and other important factors.

Are futures right for your trade plan?

Looking to the Futures

Diverging inflation readings reaffirm the Canadian dollar’s downtrend.

How Hedging Can Reduce Portfolio Risk

Hedging with futures may help reduce risk in a portfolio. Lower volatility can translate into lower risk.

7 Tips Every Futures Trader Should Know

Here are seven strategies to help you improve your futures trading knowledge.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Futures and futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure Statement for Futures and Options prior to trading futures products.

Futures, futures options, and forex trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify. Forex accounts are not available to residents of Ohio or Arizona.

Charles Schwab Futures and Forex LLC (NFA Member) and Charles Schwab & Co., Inc. (Member FINRA/SIPC) are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.

Virtual Currency Derivatives trading involves unique and significant risks. Please read NFA Investor Advisory–Futures on Virtual Currencies Including Bitcoin and CFTC Customer Advisory: Understand the Risk of Virtual Currency Trading.

Charles Schwab Futures and Forex LLC is a member of NFA and is subject to NFA’s regulatory oversight and examinations. However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians, or markets.

You should carefully consider whether trading in virtual currency derivatives is appropriate for you in light of your experience, objectives, financial resources, and other relevant circumstances.

Diversification does not eliminate the risk of experiencing investment losses.

0223-3KBA