Cardano (ADA), Solana (SOL), Polkadot (DOT), and several other popular altcoins will have reference rates and real-time indices—which could lay the groundwork for more ETFs and derivative products—by the end of the month.
The CME Group, which runs the Chicago-based derivatives exchange that goes by the same name, has teamed up with CF Benchmarks, a cryptocurrency index provider, to roll out the new rates on April 25.
The new reference rates will include index pricing for Algorand (ALGO), Bitcoin Cash (BCH), Cardano, Chainlink (LINK), Cosmos (ATOM), Litecoin (LTC), Polkadot, Polygon (MATIC), Solana, Stellar Lumens (XLM) and Uniswap (UNI).
The reference rates and indices themselves are not tradable investment products. As the name suggests, a reference rate is price data for an asset. But having that data available is an important prerequisite for offering products like ETFs and futures contracts.
At launch, price data for the indices will be provided by Bitstamp, Coinbase, Gemini, itBit, and Kraken.
“These new benchmarks, which capture 90% of the total investable cryptocurrency market cap today, are designed to allow traders, institutions and other users to confidently and more accurately manage cryptocurrency price risk, price portfolios or create structured products like ETFs,” said Tim McCourt, CME’s head of equity and FX products, in a press release.
ETFs, or exchange traded funds, bundle together assets and sell shares to investors. It’s a way to get exposure to the underlying assets without owning them directly. Futures contracts speculate on the price of an asset, which can be anything from a stock, commodity or, in this case, a cryptocurrency.
There’s reason to believe CME won’t wait long to increase its crypto product offerings.
Payal Shah, CME’s director of equity and cryptocurrency products, said last week that the group is “looking at” offering futures contracts for Cardano and Solana.
Right now, CME offers Bitcoin and Ethereum futures, as well as futures contracts for micro Bitcoin and micro Ethereum, which can be purchased in denominations one-tenth the size of one BTC or ETH.
And those futures contracts have done remarkably well for CME.
Micro Bitcoin futures, which launched last May, have already generated almost 5 million contracts, said Shah.
“In the few years—just over four years—since we launched our initial futures contract, the standard Bitcoin future with five-time multiplier, we’ve seen that grow from doing 1,000 contracts a day to now 10,000 a day,” she said. “That growth is mind-boggling.”
The excitement around investment products that give investors exposure to popular altcoins is shared by traditional and crypto native firms, too.
“Evolve’s physical-crypto ETFs rely on CME CF reference rates to provide liquidity, tight tracking and reliable [net asset value] for investors,” Elliot Johnson, chief investment officer at Evolve ETFs, said in a press release. “We’ve very excited to see the CME CF index family expanding to lay the foundation for new, innovative ETFs in this highly coveted asset class.”
The firm offers ETFs that give investors exposure to cybersecurity, automotive innovation and, more recently, Bitcoin and Ethereum. Once the reference rates are available, Evolve could potentially create ETFs to give investors exposure to altcoins.
At Genesis Global Trading, an over-the-counter crypto trading desk, having more reference rates will also create more lines of business.
“We’re excited to be a liquidity partner on the variety of instruments that will be built on top of them,” Joshua Lim, head of derivatives at Genesis Trading, said in the release.
A liquidity partner acts as a market maker for assets, in this case cryptocurrencies, buying and selling them at specified prices as orders are placed. Unlike a centralized exchange, OTC desks operate within a broker-dealer network.
They make a profit when there’s a difference between the price that’s been quoted to a buyer and the actual price of the asset. Having reference rate data makes it possible for firms like Genesis Trading to act as the market marker for more assets, either the cryptocurrencies themselves or futures contracts.
Disclaimer
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.
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