'Risk-Free' Trade Is Back Ahead Of First Bitcoin Exchange-Traded Fund
NDTV
The so-called basis trade, whereby a speculator buys Bitcoin in the spot market and sells long-dated futures to lock in the discrepancy between the two prices, has turned back on
The closest thing to a risk-free bet has re-emerged in the cryptocurrency market as traders -- awaiting the launch of the first Bitcoin exchange-traded fund -- bid up the price of futures. The spread between Bitcoin futures and the digital currency's price offers the widest annualized return in five months, according to data from FRNT Financial. That means the so-called basis trade, whereby a speculator buys Bitcoin in the spot market and sells long-dated futures to lock in the discrepancy between the two prices, has turned back on. And it's happening amid a price surge in Bitcoin that's been bolstered by optimism the Securities and Exchange Commission is poised to allow the first U.S. Bitcoin futures ETF to begin trading soon.
It's a dynamic that comes back again and again in crypto and is one that is rarely seen in other markets, according to Strahinja Savic, head of data and analytics at FRNT Financial. It's primarily driven by individual investors, who are using futures for leverage and to make price predictions.
"Crypto is unique in that it has a much higher retail participation versus sophisticated institutional actors, who would normally drive down the exaggerated contango via arbs trades," said Mr Savic, referring to arbitrage. "Considering the lack of those actors' participation, relative to other assets, BTC is prone to these aggressive contangos in bull markets -- we find this kind of an opportunity to be an extremely underrated and lucrative strategy in crypto."
Futures typically trade at a premium to spot, a development referred to as contango. Contango and backwardation are terms for curve structures that map traders' guesses about what a given contract could be worth in the future. Contango means it's upward sloping, while backwardation means downward.
