Trading Bitcoin can follow many strategies. Do you use Fundamental Analysis or Technical Analysis? Are you a day trader, swing trader, scalper, or HODLer? No matter which type of trader you are, it is always good to “mind the gap”.
The Bitcoin CME gap: What it is and how to use it
So what is the Bitcoin CME gap? Let’s have a look at what Bitcoin and the CME are, to begin with.
What is Bitcoin crypto?
Bitcoin is the most recognized digital and decentralized cryptocurrency. It is created through solving cryptographic tasks. Transactions are written into a decentral blockchain, which ensures that Bitcoin is always available and immune to manipulation. The revolutionary aspect of Bitcoin is that it does not need a central authority like a bank for the validation of transactions. The current price of Bitcoin in USD/EUR/YEN (Fiat) is created through supply and demand.
After the creation of Bitcoin, many other cryptocurrencies started to pop every now and then. Despite that, Bitcoin remains the biggest cryptocurrency by market capitalization. it currently has a market dominance of 41.5%.
What are Bitcoin CME futures?
The CME, or Chicago Mercantile Exchange, is the world’s largest derivatives trading exchange. The CME traditionally offers futures or options on futures on any asset imaginable, from agricultural products, to forex, energy, commodities, and stock indexes.
A future is a legal agreement to buy or sell a well-defined quantity of something at a determined price at a determined day in the future. For example, buying 20 BTC at $19,500 on 1/2/2021. At the height of the 2017 Bitcoin bull run, on October 31st, the CME added Bitcoin to its portfolio of tradeable asset classes:
Shortly after, Bitcoin crashed from its all-time high. Nevertheless, CME Bitcoin futures kept increasing in popularity. The exchange settled an all-time high of 268.18K Bitcoins during May 2019 when Bitcoin ended its winter, moving from $5,250 up to $9,125.
What is the Bitcoin CME gap?
The Bitcoin CME gap, also called the “CME gap” for short, is the difference between the trading price of Bitcoin futures contracts when the market opens on Sunday, and when it closes on Friday. Unlike cryptocurrencies, traditional assets do not trade 24/7 around the clock. Most traditional exchanges follow normal working hours and close on holidays, and the CME is no exception to this!
While you can trade on Binance for example at any given time, the CME Bitcoin futures trading opens from Sunday evening until Friday evening (Central Time). From Friday to Sunday, the Bitcoin CME futures price is “fixed”, while Bitcoin’s price continues to move up (or down) on cryptocurrency spot exchanges. When the CME futures re-open, futures contracts catch up with spot prices, creating a gap!
Example: In this case, the Bitcoin futures closed at $16,925 on Friday, Nov 27th. During the weekend, Bitcoin’s price increased on spot exchanges. When the CME re-opened on Sunday, Nov 29th, the price opened at $18,430 creating a gap of $1,505 or +8.9%.
How does the Bitcoin CME gap affect the price of Bitcoin?
Bitcoin CME gaps have often been known to “fill”. Filling means that the spot price moves back to the previous close. In our example above Bitcoin would need to fall back to $16,925 to close the gap. Gaps can also close upwards. If for example Bitcoin closes on a Friday at $19,000 and re-opens on Sunday at $16,000, many traders would expect the price to go back up to $19,000 to “fill the gap”.
Keep in mind that trading is probabilistic, not deterministic in nature. This means that chart patterns and indicators can show you what is most likely to happen, but they cannot tell you what will precisely happen. The Bitcoin CME gap should be considered as one such indicator!
The CME gap doesn’t necessarily have to fill, it is just more likely to fill than not. Filling the gap can take hours, days, or even weeks. Other indicators must be taken into consideration as well when deciding on your next trade.
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