The Intersection of the Spot Market and the Futures Market
Author: Prathik Desai
Translation by: Block unicorn
Whenever I see someone betting on cryptocurrency because of a tweet about X, causing funds to flow, I find it amusing. I’ve had that experience too. I remember five years ago, I invested most of my savings for a month into Dogecoin because, well, Elon Musk mentioned it on Twitter. At that time, I didn’t even know what cryptocurrency was.
However, some funds entering the cryptocurrency space cannot be achieved through a single tweet, a podcast episode, or a keynote speech. It requires more. Perhaps a memorandum from federal regulators, a risk assessment, and a trustworthy platform would help.
The latest statement from the U.S. Commodity Futures Trading Commission (CFTC) allows spot cryptocurrency products to be traded on exchanges registered with the CFTC, which is exactly what this statement entails.
The tacit approval from the CFTC may prompt the most reputable derivatives trading market in the U.S.—the Chicago Mercantile Exchange (CME)—to list cryptocurrencies. If this happens, it will open the doors to the cryptocurrency market, attracting a significant amount of funds from traditional markets into the cryptocurrency space.
In today’s in-depth analysis, I will explain how this move can allow cryptocurrency to flow into the same building where the most trusted assets in the U.S. are held, and why this is important.
Let’s get started.
Long before the seamless financial markets we see today, people were reluctant to trade financial products. The issue was not a lack of buyers and sellers; there were plenty of them in the market. The problem was a lack of trust, with everyone worried, “What if the other party can’t pay?”
Today, you no longer have to worry about that. This is thanks to the often-underestimated invention of modern securities exchanges. They establish trust by standardizing contracts, enforcing disclosures, and regulating behavior. These mature markets incorporate all of this into “clearing” and “margin” mechanisms, thus avoiding settlement risks that hinder traders' enthusiasm every day.
Despite the talk of “trustless” systems, trust is hard to establish in the cryptocurrency market. The CFTC’s latest announcement may help bridge this gap.
CFTC Acting Chair Caroline Pham stated, “…the listing of spot cryptocurrency products will begin trading on CFTC-registered futures exchanges for the first time in the U.S.” Pham expects this move will provide “more choices for the American public and make it easier for them to access a safe, regulated U.S. market.”
This update redefines the boundaries of where the focus of cryptocurrency may shift, as regulators strive to integrate digital assets into the mainstream market of the world’s largest economy.
Just look at the data from the Chicago Mercantile Exchange (CME), and you can understand how significant it could be for the spot cryptocurrency market.
On November 21, the CME set a record for daily trading volume in cryptocurrency futures and options, reaching 794,903 contracts, surpassing the previous record of 728,475 contracts set on August 22 of this year.
The market also reported how much trading activity has shifted into its regulated framework this year. Its year-to-date (YTD) average daily trading volume is 270,900 contracts, with a notional value of approximately $12 billion, a year-on-year increase of 132%. Meanwhile, the average open interest for the year-to-date is 299,700 contracts, with a notional value of $26.6 billion, a year-on-year increase of 82%.
Even in a conservative scenario, if the CME converts just 5% of its notional trading volume into spot trading, that would amount to $600 million daily. If it reaches 15%, that number could approach $2 billion daily.
But what advantages does the CME gain by placing spot cryptocurrencies and derivatives under the same roof?
First, it shortens the distance between traders' positions and hedging. Currently, many traders keep their cryptocurrency exposure in one place while hedging in another. They might trade cryptocurrency futures on the CME because it is regulated and cleared, but their spot exposure might come from ETFs, prime brokers, or cryptocurrency exchanges. Each jump between different trading venues may not necessarily increase currency costs but can introduce non-monetary frictions. For example, it requires dealing with more counterparties, incurring higher operational costs, and facing more risk points.
If a regulated market accommodates both the spot and derivatives markets, hedging will be more convenient, and rolling positions will be more efficient. Both parts of the traders' bets can be incorporated into the same compliance framework, with margin, reporting, and monitoring all included.
Cryptocurrency-native platforms that operate both spot and derivatives—such as Coinbase (which owns Deribit), Kraken, and Robinhood—have already benefited from the “one-stop” service.
The second advantage is that it changes the definition of “spot” for large traders.
As a retail trader buying spot on a cryptocurrency exchange, you consider the price of the asset. However, when funds buy spot, they consider custody, settlement, reporting, and stability during market pressure.
Derivatives exchanges like the CME have established a system that can enhance market confidence. The clearinghouse, margin system, and monitoring measures provided by the CME can offer a regulated safe haven for large fund companies, allowing them to safely invest in the relatively volatile cryptocurrency market during uncertain times.
Hundreds of billions of dollars could flow from large fund companies. Just the U.S. spot Bitcoin ETF issuers hold over $112 billion in assets. Since their establishment in January 2024, these issuers have cumulatively received over $57 billion in inflows.
The ecosystem combining spot and derivatives may encourage some investors to shift from “holding through funds” to “trading in the market.” For fund companies, this can bring cost advantages and better control.
ETFs charge fees with the purpose of holding the underlying assets. While their trading resembles that of stocks, they still rely on the infrastructure of the stock market during trading hours. For fund companies that need to manage risk and capitalize on market inefficiencies, they prefer platforms that can provide around-the-clock hedging, strict basis execution, frequent rebalancing, or market-making functions.
The third advantage is operational.
The CFTC explains this move as a response to “recent offshore exchange events” and argues that the American public deserves access to markets with consumer protection and market integrity guarantees. The key hidden behind this is leveraged trading. Pham pointed out that Congress initiated relevant reforms after the financial crisis, indicating that Congress originally hoped that retail commodity leveraged trading could occur on futures exchanges, but has failed to clarify relevant regulations for years.
Leveraged trading is a breeding ground for the worst events in the cryptocurrency space. Not long ago, on October 10, the most severe liquidation event in cryptocurrency history wiped out $19 billion. If leveraged trading could be shifted to platforms centered on monitoring, margin discipline, and clearing, it could at least improve transparency. You would no longer face opaque offshore clearing but would have transparent margins, known counterparties, and rules that won’t change arbitrarily.
This update even prompts cryptocurrency platforms to commit to treating retail and large traders fairly.
Soon, the U.S.-regulated derivatives exchange Bitnomial claimed it would provide “equal and fair treatment” for retail and institutional orders, without prioritizing routing.
Considering all factors, the CFTC’s move seems promising, as it could make spot cryptocurrency trading easier and more trustworthy, something that previously only the flow of large capital could achieve.
The CFTC’s statement will not turn the CME into a mature spot cryptocurrency exchange overnight. Even if the market moves in that direction, the initial version may be conservatively designed, with fewer trading varieties, strict definitions of leverage terms, and trading channels conducted through existing intermediaries in the CME ecosystem.
This is because building trust has always been a slow and gradual process. Historically, trust has been established through various safeguards rather than through a random tweet about X.
This in-depth analysis concludes here; see you in the next article.
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