The closest thing to a risk-free bet has resurfaced in the cryptocurrency market as traders bid up the price of futures in anticipation of the launch of the first bitcoin exchange traded fund
srcaccording to data from frnt financial the spread between bitcoin futures and the digital currencies price offers the highest annualized return in five months
this means that the so-called basis trade in which a speculator purchases bitcoin in the spot market and sells long dated futures in order to lock in the difference between the two prices has been reinstated and it's occurring
amid a bitcoin price surge fueled by optimism that the securities and exchange commission will soon approve the first u.s bitcoin futures etf it's a pattern that repeats itself in crypto
and is uncommon in other markets according to strahinger savage head of data and analytics at frnt financial individual investors are the primary drivers as they use futures to leverage
their positions and make price predictions crypto is unique in that it has a much higher retail participation rate than sophisticated institutional actors who typically reduce exaggerated
contango through arb's trade savage was referring to arbitration given the absence of those actors in comparison to other assets btc is prone to these aggressive contangos during bull markets
we believe this is an extremely undervalued and lucrative strategy in crypto futures typically trade at a discount to spot a condition known as contango contango and backwardation are
terms used to describe curve structures that represent traders estimates of how much a particular contract might be worth in the future contango denotes an upward slope whereas backwardation
denotes a downward slope because there is no cap on futures open interest futures in contango indicate that the supply of bitcoin is plentiful according to steve sosnick chief strategist at
interactive brokers as long as sufficient traders post sufficient margin with a clearinghouse any two counterparties can initiate a trade and create a new futures contract he
explained many traders may be betting right now that a futures-based etf will act as a significant forced buyer in the market whatever money flows into the product must be used to purchase futures
contracts the logic goes a well-hyped new asset class is contractually obligated to purchase these futures and traders are adjusting and front running accordingly he stated while it is
entirely possible that the market got ahead of itself which is a risk in the crypto space there is clearly a bet being made that new money will enter crypto via futures etfs to be sure more
traders may seek to profit from the spread implying that it may narrow according to jusu of hedge fund three arrows capital you're going to see a lot of capital flow into arbitrage because
it's going to become very attractive if you can earn six percent or ten percent on dollars there are a lot of guys who will cooperate and to do that the co-founder of the firm stated all it takes
is for one bank or one participant to invest a few billion dollars it's not going to be that bad if you zoom out though it collapsed earlier this year amid a sell-off in cryptocurrency prices
the basis trade has been one of the most prevalent in the crypto industry it is widely used by hedge funds due to its consistent ability to generate double-digit annual returns the future's price
is higher than the spot price and this is where the big boys engage in a lot of arbitrage according to howard greenberg president of the american blockchain and cryptocurrency association in washington
dc and cryptocurrency educator at prosper trading academy they'll play the spread they'll purchase the underlying asset at a discount bid up the futures and then sell into the market strength.