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Traders Opting for Cash and Carry Strategy as Bitcoin's 'Contango' Widens
Cash and carry traders seek to profit from the spread between bitcoin's price in futures and spot markets.
Updated Sep 14, 2021, 12:38 p.m. Published Apr 10, 2021, 7:31 p.m.
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Savvy traders are locking returns of over 40% in the wake of bitcoin's widening contango – the spread between prices in futures and spot markets, also known as futures basis/premium.
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"With the premium on bitcoin futures expanding to as high as 40% per annum for the June expiry, there is a lot of interest from cash and carry traders to arbitrage the premium and lock-in risk-free gains," Pankaj Balani, co-founder and CEO of the Singapore-based Delta Exchange, told CoinDesk in a WhatsApp chat.
Cash and carry arbitrage is a market-neutral strategy aimed to profit from price discrepancies in one or more markets.
It involves buying an asset in the spot market against a short position in the futures market when the futures draw a significant premium relative to the spot price. That way, traders pocket a fixed return, as the premium decays over time and converges with the spot price on the expiry date.
According to data source Skew, bitcoin's June expiry futures listed on major exchanges such as Binance, Huobi, OKEx, BitMEX and Deribit are currently drawing an annualized premium of 44% to 48%. Meanwhile, those listed on the Delta Exchange are trading at a premium of 30%.
So, a carry trade taken now will yield an annualized return of 44% to 48% – a number significantly higher than interest rates on crypto deposits offered by lending platforms such as Genesis and BlockFi or government bond yields in emerging economies.
"That's what we initiated today," Patrick Heusser, head of trading at the Swiss-based Crypto Finance AG, said in a Telegram chat, adding that the widening of the basis indicates bitcoin's latest breakout above $60,000 is derivatives driven.
CoinDesk 20 data shows bitcoin broke out of a multi-week consolidation early Saturday with a sudden $3,000 rise to $61,065. Futures premium on major exchanges increased along with the spot market price, rising from roughly 32% to over 40%.
Some analysts are now eyeing the weekly close (Sunday, 23:59 UTC). "BTC is back over $60,000! If we can close the week above here, then moon time," analyst Lark Davis tweeted early today.
However, market chatter shows growing concerns regarding the uptick in perpetual futures funding rate – the cost of holding long positions calculated and paid every eight hours. As such, the cryptocurrency may have a tough time securing a daily or weekly close above $60,000.
At press time, bitcoin is changing hands near $59,700.
Also read: Bitcoin Price Shoots Past $60K, Ether Hits New All-Time High in Early Saturday Trading
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