Soon, traders will be able to bet on BTC volatility, not just price, on CME

To most people, trading in cryptocurrencies like bitcoin BTC$80,373.17, boils down to a simple question: Will prices go up or down?

But there’s another dimension to trading, which is volatility, a measure of how volatile prices could be regardless of direction. It’s already a hugely popular trade in stock markets, and now CME wants to bring it to bitcoin.

The world’s leading derivatives marketplace announced this week its plan to debut Bitcoin volatility futures on June 1, pending regulatory approval.

Unlike traditional bitcoin futures, the new contracts will not track the cryptocurrency’s price directly. Instead, they will refer to the CME CF Bitcoin Volatility Index (BVX), which represents the market’s expectations for bitcoin volatility over the next 4 weeks.

In simple terms, traders will be able to bet on whether bitcoin markets are about to become more chaotic or more stable, without necessarily taking a view on whether prices themselves are heading higher or lower.

“Crypto market participants are seeking regulated products that provide opportunities to gain digital assets exposure when markets move,” Giovanni Vicioso, global head of cryptocurrency products at CME Group, said in the press release. “With our new Bitcoin volatility futures, traders will be able to invest or hedge against the future volatility of bitcoin, allowing them to access a critical new layer of risk management.

Note that offshore exchanges such as Deribit offer futures tied to their own bitcoin volatility indices, but these volatility markets remain relatively small and outside the scope of participation for most U.S. institutions. Moreover, the onshore crypto market still lacks a mature, CME-style bitcoin volatility futures product, so volatility exposure and hedging is primarily achieved through options and other synthetic structures.

CME’s latest offering will expand the exchange’s existing product suite, which includes bitcoin futures and options. Futures went live in December 2017 and have since become the preferred instrument for institutions seeking directional exposure and arbitrage opportunities. They have generated billions in trading volume and open interest, even surpassing offshore giant Binance at one point last year.

This trend of the institutionalization of bitcoin accelerated with the debut of 11 spot-listed bitcoin ETFs in January 2024, and the subsequent debut and rapid rise in popularity of options tied to BlackRock’s IBIT.

So, CME’s volatility futures seem like the next logical step, helping institutions manage risk beyond price direction into volatility itself, according to Sam Gaer, chief investment officer of Monarq Asset Management’s Directional Fund.

“IBIT options open interest surpassing Deribit is a clear signal of institutional demand, and vol futures are the natural next step,” Gaer told CoinDesk in a Telegram message.

Gaer pointed to the way volatility trading evolved in traditional markets, noting that the CBOE Volatility Index, VIX, also known as the fear gauge, didn’t become a deeply liquid asset class on its own. Instead, liquidity accelerated only after exchange-traded funds and broader structured products built around VIX futures created a self-reinforcing ecosystem.

In other words, the growth in volatility trading was driven by derivatives linked to the spot VIX index. Once those products existed, volume attracted more volume, eventually turning volatility into a standalone market in its own right.

“VIX futures did not reach escape velocity until the ETF ecosystem developed around the futures (not the spot index, notably), and the same flywheel dynamic applies here. Volume begets volume. If CME’s product construction and composition are clearly defined and easily disseminated, this has the potential to be a watershed moment for Bitcoin volatility as an asset class,” Gaer said.