One of the most reliable trades in cryptocurrencies has gone awry.
Bitcoin futures, which typically trade at a premium to the spot price, have collapsed along the curve amid a brutal selloff in the world’s largest cryptocurrency. That’s obliterated what’s known as the basis trade, in which a trader would buy Bitcoin in the spot market today and sell long-dated futures, locking in the discrepancy between the two prices.
It’s a painful watershed for one of the crypto market’s most ubiquitous plays. Hedge funds piled into the trade, which could previously reliably produce double-digit annual gains. Even better, the arbitrage was virtually risk-free, given that CME Group Inc. is the counterparty. However, the trade existed because long-dated futures were more expensive than shorter-dated ones, given that Bitcoin is inherently scarce and theoretically should rise -- a structure known as contango. The breakdown of that dynamic implies that built-in bullishness has disappeared.
“That’s the very simple explanation, that contango is typically indicative of bullishness in the market and so to the extent that market participants are pessimistic, it makes sense to me that it’s broken down,” Nic Carter, founding partner at Castle Island Ventures, said by phone. “It could mean that some capital has just been structurally withdrawn from the market.”
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Bitcoin futures, which typically trade at a premium to the spot price, have collapsed along the curve amid a brutal selloff in the world’s largest cryptocurrency. That’s obliterated what’s known as the basis trade, in which a trader would buy Bitcoin in the spot market today and sell long-dated futures, locking in the discrepancy between the two prices.
It’s a painful watershed for one of the crypto market’s most ubiquitous plays. Hedge funds piled into the trade, which could previously reliably produce double-digit annual gains. Even better, the arbitrage was virtually risk-free, given that CME Group Inc. is the counterparty. However, the trade existed because long-dated futures were more expensive than shorter-dated ones, given that Bitcoin is inherently scarce and theoretically should rise -- a structure known as contango. The breakdown of that dynamic implies that built-in bullishness has disappeared.
“That’s the very simple explanation, that contango is typically indicative of bullishness in the market and so to the extent that market participants are pessimistic, it makes sense to me that it’s broken down,” Nic Carter, founding partner at Castle Island Ventures, said by phone. “It could mean that some capital has just been structurally withdrawn from the market.”
Subscribe to our YouTube channel: https://bit.ly/2TwO8Gm
Bloomberg Quicktake brings you live global news and original shows spanning business, technology, politics and culture. Make sense of the stories changing your business and your world.
To watch complete coverage on Bloomberg Quicktake 24/7, visit http://www.bloomberg.com/qt/live, or watch on Apple TV, Roku, Samsung Smart TV, Fire TV and Android TV on the Bloomberg app.
Connect with us on…
YouTube: https://www.youtube.com/user/Bloomberg
Breaking News on YouTube: https://www.youtube.com/c/BloombergQu...
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Francisco Gimeno - BC Analyst When con tango disappears from a market usually the mood is bearish. This is happening with BTC and BTC futures. Unfortunately the market is vary variable and wild. BTC can remain as it is or literally go to zero in one day. Let's hope Crypto.2 is coming soon with a more sensible framework.