The Beginnings of Institutional Ethereum: Recapping the First Few Weeks of CME Ether Futures

On February 8, CME Group officially launched Ether futures. ETH futures went live just a little more than three years after CME Group began offering Bitcoin futures. In this interview, CME Group Global Head of Equity Index and Alternative Investment Products Tim McCourt discusses the origins of ETH futures, what convinced them that the time was right for the product to go live, how institutional investors’ attitudes towards Ethereum (and crypto as a whole) have changed, and how the response from the market has been.

When it comes to developing new products at CME Group, we really take our cues from customers in terms of what they're focused on. As soon as we launched Bitcoin futures back in December of 2017, customers were encouraging us to think about Ether in a similar fashion, as it was (and still is) the second largest token by market cap and daily trading volumes. It's not surprising it was on the fast follower list in terms of customer demand and express interest, but there were a few issues. So we were keeping our eye on it, evaluating it.

We really started to focus in on Ether as a tradable future when we introduced the CME CF Ether-Dollar Reference Rate back in May of 2018. So we introduced an analogous reference rate to the Bitcoin reference rate using ether-dollar fiat transactions from five constituent exchanges – Bitstamp, Kraken, itBit, Gemini and Coinbase -- and making sure that the price discovery in the spot market gave us the same comfort level for overlying a futures contract on that market. It took us some time to observe the underlying market, develop the history of the reference rate and then continue to also engage with customers.

It really picked up steam in terms of client interest and feasibility (from our perspective) to introduce a futures contract in 2020. This also parallels the continued increasing interest and enthusiasm around the Ethereum network and decentralized finance and some of the projects that are going on in the marketplace. These things really started to accelerate in 2020 and we kind of hit the tipping point in the latter half of the year in terms of going from the idea phase to the actual launch of the contract.

Often in the process of validating a new futures product, we reach a crossroads where we need to determine if a particular asset meets various thresholds for offering futures, or if it’s just an interesting market that doesn’t require a futures contract. In order to make that distinction, first and foremost, we want to determine if there is a hedging need.

Next, we examine whether there is a natural, two-sided market for a particular asset. This is important to facilitate, as we have a responsibility as the exchange where these trades take place to offer efficient price discovery and transfer of risk. We continually ask ourselves: will people want to buy and sell this asset at the same time? Can we match buyers and sellers efficiently? Some products are a great idea, but the demand is too one-sided and so it's hard for us to then build a centralized order book, to facilitate the efficient transfer of risk.

There is definitely increased enthusiasm around the underlying Ethereum network. I think people continue to be more and more fascinated and excited by the smart contract design elements and what it means for things like DeFi. Then you also look at some of the stablecoin products, many of which use the Ethereum network.

As people have become more accepting of crypto in traditional institutions, they start to look at bitcoin as the first and most popular. And when they start to look at Ethereum, they often discover there are some aspects of the network that might be more palpable for people in terms of how they can use it and what it means for them.

Therefore, there's more interest in developing projects that then increase the need for managing risk around ether. So, I just think it's benefiting from that upwelling of enthusiasm, that curiosity and some of the familiarity that bitcoin has already blazed that trail into cryptocurrency. I think people are more comfortable exploring it, both from an institutional perspective or an investment perspective, as well as from a development perspective.

For people who are in finance, DeFi is a more tactile, palpable adaptation. They're using some of their familiarity with the way finance works now and looking at potentially better ways to do it with more interesting technology. Whereas there is still a debate around exactly what bitcoin is, people are focusing more on the utility or utilization of the Ethereum network. It seems a bit more accommodating to entrepreneurial development, and I think that's where it's less intimidating.

Yes. It’s worth noting that our introduction of Ether futures coincided with increasing client demand and robust growth in our Bitcoin futures and options markets. While ether may be new to some clients, our futures contract specs and benefits will be familiar to users of our Bitcoin futures – cash-settled, based on the IOSCO-compliant CME CF Ether-Dollar Reference Rate and sized to appeal to a broad array of institution clients and sophisticated active traders.

When we look at the more anecdotal and direct customer response, it has been really positive. They're engaged. They're excited about it. A lot of the participants that are active in Bitcoin futures, whether they're trading or clearing members, are also now involved in ETH. The enthusiasm level is much stronger around ether in 2021 than for bitcoin in December of 2017, when people were still wrangling with the question of what is bitcoin? What do we do with it? The questions we're seeing now are more about specific ether strategy vs. bitcoin strategy. Are we investing in both? Do they have differences?

The reaction we're getting is a little bit more advanced as we're so much farther along in the history of crypto. It’s an industry that’s here to stay. It's been adopted by a lot of folks. And now they're focusing on questions around the size of investment and trading strategies. So, it's really been great to see.

Since their introduction, more than 20.9K CME Ether futures contracts have traded, which is equivalent 1M ether. More than 520 unique accounts have traded the product so far. And, 35% of the volume traded has originated outside the U.S. While it’s still early days, we’re encouraged by these numbers.