Benchmarking the Price of Bitcoin

In traditional markets, price benchmarks are used extensively for a variety of purposes,
from settling derivatives transactions, to determining Net Asset Value (NAV) for investment
funds amongst a host of use cases in institutional finance. One could almost go as far as
saying that the preponderance of the use of a benchmark is a hallmark of the degree to
which any market is institutional in nature. Certainly as asset classes like commodities saw
greater participation from financial institutions, so benchmarks such as the S&P GSCI
became more ubiquitous in that market. The market for Bitcoin trading has, since its
inception in 2010, been largely driven by individual investors with a small but increasing
stream of institutional participation since 2017, when the first regulated futures contracts
were launched by CME Group and CBOE Inc.

Today in 2023, there are regulated derivatives contracts from CME Group and Eurex AG as
well as a variety of regulated exchange traded products and funds in Canada, Brazil, Hong
Kong and Europe amongst others that are available to both institutional and individual
investors, where the bulk of the activity is driven by institutions. A market at this juncture
typically begins to exhibit increased benchmark usage that accelerates participation in the
markets for these products by institutions. Whilst Bitcoin is a novel asset, the requirements
of a benchmark price for Bitcoin are no different from those required of a benchmark price
for any asset. Whether it be Brent/WTI for crude oil, Term SOFR for money markets, or
EuroStoxx 50 for the European equity markets – all benchmarks need to be; representative
of the underlying market, resistant to manipulation and replicable by market participants
to be able to foster further institutional participation in the underlying market that is being
measured. This article seeks to understand whether this is being achieved by the most
widely used benchmark price for Bitcoin, the CME CF Bitcoin Reference Rate (BRR) that is
used to settle the Bitcoin-USD derivatives complex listed by CME Group, and which serves
as the NAV for exchange listed investment products from WisdomTree Europe, Evolve ETFs
and QR Asset Management.

The CME CF Bitcoin Reference Rate

The CME CF Bitcoin Reference Rate (BRR) is a once-a-day benchmark index price for
Bitcoin denominated in US Dollars. Input data is obtained from major cryptocurrency
exchanges that conform to the CME CF Constituent Exchange Criteria. Calculated every
day since its launch on 14th November 2016, the BRR is a regulated Benchmark under the
UK Benchmarks Regulation (BMR) regime.

Calculation Methodology
The BRR calculation methodology aggregates transactions of Bitcoins in U.S. dollars that
are only conducted on the most liquid markets for which data is publicly available and
operated by exchanges that meet the CME CF Constituent Exchange Criteria.

The list of Constituent Exchanges and information about changes to its composition are
available at the following URL:

CF Benchmarks is authorised and regulated by the UK Financial Conduct Authority as a Registered Benchmark Administrator
(FRN 847100) under the UK Benchmark Regulation.
https://docs.cfbenchmarks.com/CME%20CF%20Constituent%20Exchanges%20Criteria.pd
f

The full methodology is also available here:

https://docs.cfbenchmarks.com/CME%20CF%20Reference%20Rates%20Methodology.pdf

The methodology can be summarised thus:

● Transactions conducted on Constituent Exchanges are observed during a one-hour

window from 15.00 to 16.00 London Time
● The one-hour window is divided into 12 partitions of equal length (five minutes
each)
● For each partition, a volume-weighted median (VWM) is calculated
● The index value is expressed as the arithmetic mean of the 12 VWMs calculated in
the previous step

Timing of the Benchmark - Suitability of 16.00 London Time as calculation

time

The graph in Figure 1 illustrates the rationale of calculating the CME CF Bitcoin Reference
(BRR) rate at 16.00 London Time. For the data set illustrated, Bitcoin-U.S. dollar transaction
volumes on Constituent Exchanges were measured over an observation period of January
1st, 2022, to March 31st, 2023.
Figure 1

Unlike most traditional assets, Bitcoin can be traded at any time of the day. But the trading
data shown in the above graph clearly indicates that Bitcoin market participation volume

CF Benchmarks is authorised and regulated by the UK Financial Conduct Authority as a Registered Benchmark Administrator
(FRN 847100) under the UK Benchmark Regulation.
adheres quite closely to times when traditional markets tend to experience their own high
trading volumes.

The most liquid time of the day for Constituent Exchange volumes, together with the
typical 4pm traditional market closing time of several large European cities, points to an
optimal time of 15.00 to 16.00 London Time to measure transactions for a daily benchmark
price of Bitcoin.

Benchmark validity and volume sufficiency

A valid and robust benchmark needs to be calculated from input data of sufficient volume
so that it is representative of the market it seeks to measure. From a practical perspective,
volume sufficiency is also key in order for the benchmark to be replicated by institutional
market participants and product providers that need to warehouse price risk. To
understand how the BRR measures up, data summarising a total number of transactions
and an average number of transactions per day observed each month during the
observation window (figures represent both Trade Count and Bitcoin Volume) are
presented in Figure 2.
Figure 2

Average Daily Trading Volume Used in the Calculation of the BRR

120 3,500

100 3,000

2,500
80

No. of Bitcoins
2,000
$ Millions

60
1,500
40
1,000

20 500

0 0
2

3
2
2

3
22

2
2

22
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22

23
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Avg. No. of Bitcoins Avg $ Value Traded

Note: LMAX Digital was added as a Constituent Exchange from May 2022

As can be seen between January 1st, 2022, and March 31st, 2023, on average 2,325.11
Bitcoins, or $59M were traded during each daily observation window between 15.00 and
16.00 London Time. Whilst trading activity exhibits volatility, this volatility is not
substantially different from that shown in traditional asset markets. In conclusion, the
volume observed and the reliability of that volume is clearly evident to be sufficient for the
calculation of a robust and reliable benchmark.

CF Benchmarks is authorised and regulated by the UK Financial Conduct Authority as a Registered Benchmark Administrator
(FRN 847100) under the UK Benchmark Regulation.
Resistance to Manipulation – Benchmark
Integrity
This section will address the question of whether the BRR is possessed of integrity in the
specific sense applied by securities regulation. The practical imperative is that a
benchmark requires integrity because it will be used for a wide range of activities such as
asset valuation, settlement of financial risk, risk management, NAV calculation, unit
creation and unit redemption. Specifically, the benchmark must both be shown to be free
of manipulation and furthermore, it must be administered and calculated in a manner that
deters and impedes manipulation.

Deterring and Impeding Manipulation

The methodological design underlying the CME CF Bitcoin Reference Rate and its system
of administration incorporate measures that promote integrity as outlined in the sub-
sections below.

Impeding Manipulation by Input Data selection

CF Benchmarks exclusively sources input data from Constituent Exchanges that meet
published criteria as set out in its Constituent Exchanges Criteria. The criteria are available
at this link:
https://docs.cfbenchmarks.com/CME%20CF%20Constituent%20Exchanges%20Criteria.pd
f. Particular attention is drawn to the following statement from the Constituent Exchanges
Criteria document (part 2 of Section 3, page 4: ‘Eligibility Criteria’):

“The venue has policies to ensure fair and transparent market conditions at all times and
has processes in place to identify and impede illegal, unfair or manipulative trading
practices.”

CF Benchmarks ascertains the presence of fair and transparent market conditions and
processes to identify and impede illegal, unfair or manipulative practices by conducting a
thorough review of any exchange under consideration for inclusion as a Constituent
Exchange. The arrangements of all Constituent Exchanges are reviewed annually to ensure
that they continue to meet all criteria specified within “Constituent Exchange Criteria”. This
due diligence is documented, and the information is distributed to CF Benchmarks’
oversight organs to consider. The deliberations of oversight organs are conducted during
regular meetings, minutes of such meetings are publicly available, being published by the
Administrator on its website.

Manipulation resistance by design

Resistance to manipulation is a priority aim of the design methodology underlying the CME
CF Bitcoin Reference Rate. The methodology takes an observation period and divides it
into equal partitions of time. The volume-weighted median of all transactions within each
partition is then calculated. The benchmark index value is determined from the arithmetic

CF Benchmarks is authorised and regulated by the UK Financial Conduct Authority as a Registered Benchmark Administrator
(FRN 847100) under the UK Benchmark Regulation.
mean of the volume-weighted medians, equally weighted. The benefits of this process with
respect to achieving manipulation resistance are outlined below.

● Use of partitions
Individual trades of large size have limited effect on the Index level as they only influence
the level of the volume-weighted median for that specific partition.

A cluster of trades in a short period of time will also only influence the volume-weighted
median of the partition or partitions they were conducted in.

● Use of volume-weighted medians

Use of volume-weighted medians as opposed to volume-weighted means ensures that
transactions conducted at outlying prices do not have an undue effect on the value of a
specific partition.

● Equal weighting of partitions

By not volume weighting partitions, trades of large size or clusters of trades over a short
period of time will not have an undue influence on the index level.

● Equal weighting of constituent exchanges

CF Benchmarks applies equal weight to transactions observed from CME CF Constituent
Exchanges. With no pre-set weights, potential manipulators cannot target one platform for
the conduct of manipulative trades.

● Use of arithmetic mean of partitions

Using the arithmetic mean of partitions of equal weight further denudes the effect of
trades of large size at prices that deviate from the prevailing price having undue influence
on the benchmark level.

Manipulation resistance by exclusion of input data

A specific procedure for dealing with potentially erroneous data is incorporated into the
methodology of the CME CF BRR. Although volume-weighted medians of transaction
prices from individual data sources are not part of the benchmark determination process,
they are calculated as a means of quality control and manipulation resistance.

In the event of an instance of index calculation in which a Constituent Exchange’s volume-

weighted median transaction price exhibits an absolute percentage deviation from the
volume-weighted median price of other Constituent Exchange transactions greater than
the potentially erroneous data parameter (10%), then transactions from that Constituent
Exchange are deemed potentially erroneous and excluded from the index calculation. All
instances of data excluded from a calculation trigger a Benchmark Surveillance Alert that is
investigated.

Between January 1st, 2022, and March 31st,2023, the potentially erroneous data parameter
of the methodology for the CME CF Bitcoin Reference Rate has never been triggered.
Analysis of the MAX volume-weighted median per exchange during the observation period

CF Benchmarks is authorised and regulated by the UK Financial Conduct Authority as a Registered Benchmark Administrator
(FRN 847100) under the UK Benchmark Regulation.
produced the results in Table 1. The results illustrate that during the observation period, no
Constituent Exchange’s input data needed to be excluded due to exhibiting potential
manipulation and indeed no individual cryptocurrency exchange exhibits a deviation
percentage above 4.59% during this period.

Table 1

Max volume weighted median deviation per exchange (%)

Max in
Month
Bitstamp Coinbase Gemini itBit Kraken LMAX Digital

Jan-2022 0.38% 0.48% 0.54% 0.91% 0.56% N/A

Feb-2022 0.17% 0.10% 0.20% 0.52% 0.91% N/A

Mar-2022 0.52% 0.38% 0.27% 0.84% 1.10% N/A

Apr-2022 0.37% 0.51% 0.72% 0.42% 0.46% N/A

May-2022 0.67% 0.46% 0.87% 0.44% 0.64% 0.38%

Jun-2022 0.49% 0.43% 0.57% 1.67% 0.69% 0.56%

Jul-2022 0.73% 0.50% 0.62% 0.59% 0.77% 0.62%

Aug-2022 0.31% 0.31% 0.38% 0.61% 0.70% 0.34%

Sep-2022 0.67% 0.51% 0.56% 0.71% 0.21% 0.48%

Oct-2022 0.29% 0.32% 0.25% 0.40% 0.41% 0.15%

Nov-2022 0.38% 0.33% 0.44% 0.33% 0.45% 0.69%

Dec-2022 0.17% 0.07% 0.43% 0.22% 0.13% 0.14%

Jan-2023 0.23% 0.09% 0.54% 0.27% 0.42% 0.32%

Feb-2023 0.44% 0.73% 0.70% 0.48% 0.35% 0.25%

Mar-2023 0.28% 0.10% 4.59% 0.43% 0.26% 0.27%

Benchmark Surveillance
Although a series of measures have been undertaken to mitigate the risk of benchmark
manipulation, CF Benchmarks remains vigilant against attempted benchmark manipulation
and monitors input data continuously. To that end, CF Benchmarks has implemented a
benchmark surveillance programme for the investigation of alerts. Instances of suspected
benchmark manipulation are escalated through appropriate regulatory channels in
accordance with CF Benchmarks’ obligations under the UK Benchmarks Regulation (UK
BMR). Regarding benchmark manipulation, Article 14 of the UK BMR, Reporting of
Infringements, states:

CF Benchmarks is authorised and regulated by the UK Financial Conduct Authority as a Registered Benchmark Administrator
(FRN 847100) under the UK Benchmark Regulation.
1. An administrator shall establish adequate systems and effective controls to ensure
the integrity of input data in order to be able to identify and report to the competent
authority any conduct that may involve manipulation or attempted manipulation of a
benchmark, under Regulation (EU) No 596/2014.

2. An administrator shall monitor input data and contributors in order to be able to

notify the competent authority and provide all relevant information where the administrator
suspects that, in relation to a benchmark, any conduct has taken place that may involve
manipulation or attempted manipulation of the benchmark, under Regulation (EU) No
596/2014, including collusion to do so.”

As a regulated Benchmark Administrator, CF Benchmarks is subject to supervision by the

UK FCA. Furthermore, CF Benchmarks’ Control Procedures with respect to compliance
with the UK BMR have been audited by ‘Big Four’ accountancy firm Deloitte. The
Independent Assurance Report on Control Procedures Noted by CF Benchmarks Regarding
Compliance with the UK Benchmarks Regulation as of 12 September 2022 is available at
the following link:

https://docs.cfbenchmarks.com/Deloitte_CF%20Benchmarks%20SOC1%20Audit%20Repor
t.pdf

This further verification of CF Benchmarks’ compliance with the UK BMR places the CME
CF Bitcoin Reference Rate on the same level of scrutiny applied to widely used traditional
financial benchmarks like ICE SWAP, SONIA and RONIA.

Assessing CME CF BRR values and input data for signs of manipulation

Whilst the CME CF BRR was designed and is administered to the highest standards,
including efforts to uphold provisions of the UK BMR, the proof of the pudding is in the
eating and further analysis of the data is required.

Were there to be a lack of integrity in the input data that could in turn affect the integrity of
the benchmark, one would expect to see one of a number of phenomena reflected in the
input data provided by Constituent Exchanges. One potential example would be significant
price dislocations between Constituent Exchanges.

How well correlated are Constituent Exchange prices?

An analysis was undertaken of the pair-wise correlation of prices from Constituent

Exchanges on a per-minute basis (the price difference between transactions for each
minute at each exchange) during the observation period. The results of this analysis are
shown in Table 2.

CF Benchmarks is authorised and regulated by the UK Financial Conduct Authority as a Registered Benchmark Administrator
(FRN 847100) under the UK Benchmark Regulation.
Table 2

Pair-Wise Correlation of Constituent Exchanges to BRR

Constituent Pair Platform Mean Correlation % Median Correlation % Standard Deviation

Bitstamp-Coinbase 98.27% 99.01% 2.82%

Bitstamp-Gemini 96.60% 98.65% 10.09%

Bitstamp-itBit 97.69% 98.78% 3.62%

Bitstamp-Kraken 97.33% 98.67% 4.15%

Bitstamp-LMAX Digital* 97.24% 98.38% 3.83%

Coinbase-Gemini 96.86% 98.92% 9.99%

Coinbase-itBit 97.57% 98.95% 4.75%

Coinbase-Kraken 97.28% 98.61% 4.63%

Coinbase-LMAX Digital* 97.51% 98.68% 3.41%

Gemini-itBit 96.63% 98.95% 9.96%

Gemini-Kraken 96.42% 98.62% 9.01%

Gemini-LMAX Digital* 95.14% 98.10% 12.06%

itBit-Kraken 97.85% 98.93% 3.69%

itBit-LMAX Digital* 96.90% 98.52% 5.34%

Kraken-LMAX Digital* 96.67% 98.26% 5.07%

*LMAX Digital became a constituent exchange since 03 May 2022

To illustrate the data analysed in Table 2 in graphical form, Figure 3 (below) displays the full
data set. The clustering towards correlation coefficients of 1.00 and the fact that on less
than 1% of days any exchange had a correlation with another exchange below 0.5
demonstrate strong price correlation between the Constituent Exchanges and point
towards fair and orderly markets. The pattern is understandably broken around the time of
the FTX bankruptcy (Nov-Dec 2022) given the extreme volatility this event precipitated.

CF Benchmarks is authorised and regulated by the UK Financial Conduct Authority as a Registered Benchmark Administrator
(FRN 847100) under the UK Benchmark Regulation.
Figure 3

CF Benchmarks is authorised and regulated by the UK Financial Conduct Authority as a Registered Benchmark Administrator
(FRN 847100) under the UK Benchmark Regulation.
Replicability and Implementation
The final characteristic of the BRR that this paper will examine with respect to its merits as
a benchmark price is its replicability. In other words, that the BRR benchmark price can be
transacted in practice on any given day without undue risks.

Buying and selling large amounts of Bitcoins at BRR

To begin demonstrating the replicability—or to use another term, the achievability—of the
strategy presented in this paper for purchasing Bitcoin ‘at scale’, observations taken whilst
modelling the purchase or sale of a notional large amount of Bitcoin are presented below.
It was decided that the purchase or sale of 85 Bitcoins (c. $2.5M at prevailing prices) was at
an adequate scale to represent a large Bitcoin trade of the kind that institutional traders
might need to undertake for a client, or that an issuer of a financial product (such as an ETF
or a derivative) would be required to execute on any given day, in order to facilitate trading
of that product. A simple replication simulation was thereby conducted to demonstrate the
extent of slippage that implementation of the BRR would probably encounter. Given the
purpose is to demonstrate institutionally sized liquidity, the simulation was conducted for
weekdays only.

Simulation Methodology
● Trades are executed on n (5) Constituent Exchanges, during a 3,600-second
window
● One trade is executed every second and the price achieved is assumed to be the
last execution price observed in that second. Its associated volume is assumed to
be the volume executed during that second
● If no trade is completed in any single-second period, then the price achieved is
assumed to be the price achieved in the previous second, but the associated
volume from the previous second is not added to the volume executed in the latest
second

It is worth noting that in the ‘real world’, institutions deploy algorithmic systems to execute
large-scale asset purchases. It is highly probable that conducting the exercise presented
here by means of algorithmic systems would have produced outcomes that are even more
favourable. For research purposes, a simplified simulation methodology was favoured to
demonstrate the replicability properties of the BRR.

The results of this exercise are displayed in Figure 4 and summary data provided in Table 3.
As can be seen, the BRR can be replicated with a high degree of confidence and usually
with slippage of no more than 1 basis point. Indeed, even on the most volatile of days
slippage was only 12 basis points. Furthermore, in the 15 month period under observation
only twice would slippage have been in double-digit basis points.

CF Benchmarks is authorised and regulated by the UK Financial Conduct Authority as a Registered Benchmark Administrator
(FRN 847100) under the UK Benchmark Regulation.
Table 3

Slippage Encountered %
MAX 0.122
MIN 0.000
MEDIAN 0.015
MEAN 0.011
STD. DEV. 0.000153

Figure 4

Slippage encountered replicating the BRR to 85 Bitcoins

0.250%

0.200%

0.150%

0.100%

0.050%

0.000%
1/3/2022 4/3/2022 7/3/2022 10/3/2022 1/3/2023

CF Benchmarks is authorised and regulated by the UK Financial Conduct Authority as a Registered Benchmark Administrator
(FRN 847100) under the UK Benchmark Regulation.
Conclusion
From the analysis conducted it is quite clear that the CME CF Bitcoin Reference Rate
exhibits all the key properties required of a benchmark.

Representative: Bitcoin-USD markets that are operated by the CME CF Constituent

Exchanges during 1500 to 1600 London time are liquid, with sufficient volume of trading to
represent the market in a robust manner.

Resistant to Manipulation: Its Constituent Exchange Criteria ensures that it takes input
data only from cryptocurrency exchanges that exhibit fair and orderly behaviour, where
trading shows strong price correlations amongst each other. On top of this, the
methodology the BRR employs nullifies effects of any manipulation, and the
Administrator’s policies and processes regarding surveillance ensure that any manipulation
is detected.

Replicable: Its methodology promotes replicability, allowing users to replicate the

benchmark simply and without undue risks.

cfbenchmarks.com

Email
[email protected]
[email protected]

CF Benchmarks is authorised and regulated by the UK Financial Conduct Authority as a Registered Benchmark Administrator
(FRN 847100) under the UK Benchmark Regulation.