Bitcoin is a headache to store, and that’s created an investment opportunity that could theoretically pay determined traders big risk-free returns by December | Currency News | Financial and Business News

Bitcoin climbed Thursday morning

  • Bitcoin futures are in contango, which is a potentially risk-free, high-return opportunity.
  • The so-called basic trading exploits the discrepancy between Bitcoin spot and futures prices.
  • Experts explain why this arbitrage opportunity exists and is unlikely to go away anytime soon.
  • You can find more articles on Insider’s business page.

For what is known as a digital store of value, Bitcoin itself is a problem with storage.

Stories of lost, forgotten, or stolen passwords holding holders of their Bitcoin assets off have kept some institutions on the sidelines and deterred other more traditional investors.

The lack of an ideal institutional custody solution for Bitcoin has also contributed to a steep futures curve.

This means that Bitcoin’s futures price is higher than the spot price. In commodities language, Bitcoin is in contango, and this is a situation where savvy traders can use arbitrage to generate potentially fat but risk-free returns.

Trading itself is simple enough: Long Spot Bitcoin, the December future for short, wait for them to converge and then pocket the spread as a payout.

“Bitcoin futures have been in contango for as long as I can remember,” said Noelle Acheson, research director at CoinDesk, in an interview. “Basic trading, as they call it, is a well-known tactic for many institutions to make a profit.”

Because trading causes investors to be long and short an asset at the same time, it is fully hedged and essentially risk-free. Additionally, it has the potential to generate fat returns.

For example, at the close of trading on April 9, the Bitcoin spot was just above $ 58,300, while the CME contract was above $ 63,000 in December 2021. A trader who opts for long spot Bitcoin and short December futures at these levels could theoretically get an 8% return if the two prices converged, according to Bloomberg.

Some investors might say the 8% return pales in comparison to Bitcoin’s over 800% return last year, but the focus here is on the near-risk-free nature of trading. Compared to the average traditional savings account in the US, which offers a paltry 0.04% annual rate of interest, the 8% risk-free profit is 200 times cheaper.

Why is the Bitcoin futures curve so steep?

With Bitcoin continuing to attract institutional inflows, it’s no surprise that BTC futures are in high demand. However, experts agree that the steepness of the curve is not only determined by an optimistic mood.

Currently, $ 20 trillion in Bitcoin futures products are traded in a “highly fragmented ecosystem” of nearly 30 active venues, with only 15% of total open positions at large, regulated venues like CME, Josh Younger, derivatives strategists are listed at JPMorgan, said in a research report on Friday.

Basic trading delivers even higher returns when investors switch to less regulated exchanges like FTX, Huobi, and Binance, where investors earned 40% returns, according to CoinDesk.

In the meantime, speculative investors have continued to build economic exposure to Bitcoin through futures. Citing data from the Commodity Futures Trading Commission, Younger found that leveraged traders have increasingly turned to net short exposures in BTC futures in recent months, while smaller funds and retail investors take the long side of the bet.

These leveraged traders, who are mostly hedge funds, also do the basic trades but need the money to buy spot bitcoin. Because the spread is so attractive and the trading is virtually risk-free, they are sometimes willing to pay a double-digit interest rate on a loan from crypto lending companies.

This dynamic has allowed crypto lenders like BlockFi and Genesis to offer double-digit rates to their depositors due to a lack of cash and credit in the market, according to Bloomberg.

The volatility of trading

With Coinbase’s IPO this week, Bitcoin broke another record high of $ 64,000, but the spread between the digital token spot and futures prices has narrowed.

As of 6/15/41 local time on Tuesday, the December 2021 CME contract was $ 64,865 while the spot price was $ 63,176, meaning the risk-free return would have been 2.7%, down from 8% traders would be blocked last Friday.

But Bitcoin watchers are familiar with the notorious volatility of the token, which is now part of the trade as well. For example, the spread was 11% on March 25th when the bitcoin spot was trading at around $ 52,001 and the December contract was $ 57,685.

Entrepreneurial investors can theoretically wait for the spread to widen and determine the most profitable Bitcoin spot and futures prices. There is only one complication for US-based merchants.

While some traditional banks in the US have dipped their toes in Bitcoin, most are still cautious about lending customers cash for crypto trading.

“For US-based retail investors, it’s more complicated, but not impossible,” said Acheson of CoinDesk. “It’s pretty easy for retail investors based outside of the US, but they have access to much higher potential returns on the leverage they get on the derivatives exchanges. They are more likely to be more likely to pay the leverage and be long.”

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