The CME Bitcoin Gap (also known as the CMG gap) is the difference between the closing price of CME Bitcoin futures contracts on Friday and the opening price on Sunday. It is a crucial indicator for many Bitcoin traders, and a great tool for improving profitability.
Generally, you can also improve your cryptocurrency trading efficiency by learning to use gaps as an indicator. It is essential to start with the basics when learning about CME gaps. This includes getting to know what gaps are and their types.
What Are Gaps?
A gap is created when the price of an asset opens above or below the previous day’s close with no recorded price movement in between. In simple terms, the space created on the price chart as a result of the above scenario is the Gap.
One of the responsible factors for this kind of move is news. Most times when the market is closed and positive or negative news drops, price movements are not recorded, creating a gap. Most times, these gaps show the end or beginning of a market trend.
There are different types of gaps. These are Common gaps, Breakaway gaps, Runaway gaps, and Exhaustion gaps.
As the name implies, these gaps happen often and are quickly filled. There are no notable occurrences that may trigger this sort of gap as they are often triggered by normal market force. Common gaps are also known as area gaps or trading gaps.
Breakaway gaps occur when prices break an established chart pattern. It normally appears out of chart patterns like; a triangle, head and shoulder, cup and handle, a wedge.
The runaway gap happens when the price movement skips a laid-out price point. Runaway gaps are triggered by intense investor interest and happen often when there is an exchange in the ownership of an asset.
This sort of gap is marked by a space lower in price after a fast rise in the price of an asset through several weeks. This gap shows or signals the end of an upward trend.
With a basic knowledge of gaps, let’s talk about the Chicago Mercantile Exchange (CME).
An Introduction to the CME
The Chicago Mercantile Exchange (CME) is the world’s largest derivatives trading exchange. CME offers futures and options contracts on any imaginable asset. These assets range from agricultural products to different commodities, cryptocurrencies, stocks, energy, and even forex.
The CME began offering Bitcoin futures on December 18,2017. In terms of volume, CME is the largest U.S. regulated trading venue for trading Bitcoin futures contracts, making it a key price discovery machine for investors.
Understanding Bitcoin Futures Contracts
In its simplest form, Bitcoin futures contracts are derivatives that allow a buyer and seller to determine the future price at which an asset will be exchanged.
For instance, an investor can choose to enter a contract to buy Bitcoin at $40,000 by the end of the month, even though the current market price is $50,000. The buyer pays a small premium to open this contract and reserves the right to make or not make the purchase if the price of Bitcoin drops to $40,000 on the said date. If the price of Bitcoin fails to hit the strike price on the expiry date, then the contract expires and the contract buyer only loses the small amount paid as premium.
Bitcoin futures contracts are ideal as they allow investors to profit from an increase or decrease in the price of Bitcoin, without holding the underlying bitcoin. It also provides a sort of hedge for long-term investors, as they can get exposure to price action without selling their long-term holdings.
Bitcoin CME Gap Explained
You can trade cryptocurrencies from any unrestricted area around the clock. However, traditional assets do not trade 24/7 around the clock. For most traditional exchanges, there is a set time to open and close and CME also follows this normal rule.
What time is CME Gap?
CME trading hours close every week on Friday at 5:45 PM Eastern Standard Time (EST) or (10:45 PM London Time). The exchange resumes trading on Sunday at 6:00 PM EST (11:00 PM London Time).
Since CME Bitcoin futures contracts stops trading on Friday to reopen on Sunday, there is always a price difference when it reopens. The price difference is the Bitcoin CME gap.
To illustrate this, take Binance for example. You can trade on Binance at any you want; it does not have a fixed time to open or close. CME, on the other hand, has a fixed time to open or close.
When CME closes, the price of Bitcoin continues to appreciate or depreciate. Due to the close of the market, the price movement is not recorded on the price chart, so when CME opens on Sunday the price continues with the same price as the spot market creating a gap on the price chart, which needs to be filled.
How Does The Bitcoin CME Gap Affect BTC Price?
As explained above, when CME’s Bitcoin futures contracts close every week, a gap is created. These gaps often fill in the sense that the spot price of BTC will go back to the CME closing price.
So let’s imagine CME closed at $50,200 and opens at $53,000. There is a gap of $2,800 in between that was not recorded on the price chart. So when CME resumes, depending on the type of gap, there is the likelihood of prices reverting to the close to filling that gap.
Bitcoin CME gaps typically occur over the weekend or during public holidays.
How to Make Money with the Bitcoin CME Gap
CME’s Bitcoin prices may close at a high price and open at a low. When this sort of situation happens, the spot price will usually rise to fill the CME gap that was created. However, if the opening price after a weekend is higher than the closing price on Friday, then there’s a high chance that the spot price will correct within 24 hours after the market reopens.
Using this information, you can make decisions that will make your trading more profitable.
For example, let’s assume that a common gap appears on a price chart and BTC CME closed at $46,000 and opens at $43,700. It’s easy to predict what will happen as you’ve recognized what kind of gap it is and you know that prices will likely pump to fill the gap.
When there is a breakaway gap, you know that the end of a price pattern is close, and depending on the pattern, you can foresee what will transpire later on and make your trading decisions accordingly.
How accurate are the CME Bitcoin Gaps?
Historically, the percentage of CME gaps that get filled is between 60-80%. Hence, using it as an indicator provides you with a degree of accuracy. A review of previous events could shade more light on this claim.
CME Bitcoin Gap: Example 1
The image above shows a common gap. On Dec 31, 2020, CME’s Bitcoin futures closed at a $29,410 price. However, the spot price of Bitcoin went up to around $33,050 when CME opened on Jan, 3.
So, although CME reopened at around $33k after the celebration, it is almost impossible not to notice on the first chart that as soon as the market reopened, the current Bitcoin CME gap filled within 12 hours; the price dipped to the point it closed on December 31.
CME Bitcoin Gap: Example 2
Another small common gap is seen in the image above. This gap was created from Friday, March 12 through Sunday, March 14. Trading closed at $57,515 and opened at $58,695 to match the increase in spot BTC price during the weekend.
A small gap worth $1050 was filled the following day.
It is worth noting that CME Bitcoin gaps are not created equal as some gaps are wider than others. Also, while most Bitcoin CME gaps historically fill up within 24 hours, some take several days, and may not fill at all. For instance, there were Bitcoin CME Gaps created in 2020 when the asset was still trading around $10,000. There are also historical gaps between $8000-$24,000 which may never get filed,
Why do CME Gaps get filled?
CME Gaps get filled because of the consensus effect. Since most Bitcoin traders assume that the gap will get filled, they place trades with the gap in mind. This affects the general market price movement and ensures that the CME gaps get filled as predicted. It is worth noting that this stance may change as Bitcoin continues to mature as an asset class.
In this article, we have seen what gaps are and their different types. We also discussed the responsible factors for the Bitcoin CME gap. Various charts were also shown to visualize the CME gap meaning and how traders can profit from it.
In the concluding part of the article, we discussed the reason why CME gaps provide up to 60-80% accuracy by providing different examples, showing how they formed and how they filled. As an exercise, you can try pulling up the spot Bitcoin price over the weekend and compare it with CME Bitcoin opening and closing prices.
In summary, the CME Bitcoin gap is another interesting indicator for every trader to consider.