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‘Risk-free’ trading i.e. buying bitcoin and selling long-dated futures in the spot market, ahead of the first bitcoin exchange-traded fund

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Futures typically trade at a premium to the spot, a development known as contango.

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 on the price of futures. According to data from FRNT Financial, the gap between bitcoin futures and the price of the digital currency provides comprehensive annual returns over the five months. This means that so-called base trading, whereby a speculator buys bitcoin in the spot market and sells long futures to close the discrepancy between the two prices, has turned back. And this is happening amid a price increase in bitcoin that has been fueled by optimism, with the Securities and Exchange Commission set to allow the first US bitcoin futures ETF to begin trading soon.

According to Strahinja Savic, Head of Data and Analytics at FRNT Financial, this is a dynamic that comes up frequently in crypto and is rarely seen in other markets. It is 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 involvement than sophisticated institutional actors who typically take down exaggerated contango through arb trades,” said Mr. Savic, referring to the arbitrage. “Given the lack of participation from those actors, relative to other assets, BTC is prone to these aggressive protests in bull markets – we see an opportunity like this to become an extremely underrated and attractive strategy in crypto.”

Futures typically trade at a premium to the spot, a development known as contango. Contango and backwardation are terms for curve structures that allow traders to speculate about what a given contract might be worth in the future. Contango means it is inclined upward, while backward means it is downward.

Steve Sosnick, chief strategist at Interactive Brokers, says futures in Contango indicate that the supply of bitcoin is plentiful as there is no cap on futures open interest. He said that as long as enough traders post sufficient margin with the clearinghouse, any two counterparties can create a new futures contract by initiating the trade. Right now, many traders can bet that futures-based ETFs will be a major forced buyer in the market. Whatever money flows into the product will have to be employed to buy the futures contract, the thinking goes.

“There is a well-publicized new asset class that has to buy these futures contractually, and traders are adjusting and moving accordingly,” he said. “It is quite possible for the market to overtake itself, which is certainly a risk in the crypto space, but clearly a bet is being made that new money will come into crypto through futures ETFs.”

Of course, more traders can take advantage of the spread, which means it could shrink, says Zhu Su from hedge fund, Three Arrows Capital.

“You’ll have a lot of capital going into arbitrage because it gets to the point where it’s very attractive. If you can get 6 percent, 10 percent on the dollar there are a lot of people who would like to do that,” the firm’s co. – said the founder. “There comes a bank or a participant with a few billion dollars in it. If you zoom out, it won’t be that bad.”

Although it was broken at the beginning of the year amid a sell-off in crypto prices, base trading has been one of the most widespread in the crypto industry. It is known to be widely used by hedge funds because of its ability to reliably generate double-digit annual profits.

“Future price is higher than the spot market and this is where we see a lot of arbitrage drama from the big boys,” said Howard Greenberg, president of the American Blockchain and Cryptocurrency Association in DC and cryptocurrency educator at Prosper Trading Academy. . by phone. “They would play up that spread – they would buy the underlying asset at a less expensive price and then bid up the futures, and they would sell at the strength of the market.”

(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)

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