19 Oct 2021 · 2 min read

‘Risk-Free’ Trade Makes Comeback as Bitcoin ETF Fuels Futures Premiums

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The closest thing to a "risk-free" trade in the crypto market has once again appeared back on the radar for many traders, after the introduction of exchange-traded funds (ETF) backed by bitcoin (BTC) futures contracts have pushed price premiums on regulated bitcoin futures higher.

The trade, often called the basis trade, is essentially a spot to futures market arbitrage opportunity that has to a varying extent been possible to take advantage of since regulated bitcoin futures were first introduced on the Chicago Mercantile Exchange (CME) on December 17, 2017.

The opportunity arises because bitcoin typically trades at a higher price on CME than it does on the spot market, partly because futures has been the only way some institutional traders could get exposure to bitcoin. The phenomenon is known as contango and is especially prevalent in bullish market conditions.

To take advantage of the price difference, a trader would simply sell – or short – a bitcoin futures contract that is trading at a premium on CME, and simultaneously buy the equivalent amount of bitcoin on the spot market. Having one short and one long position means that the trader will remain unaffected by volatility in the bitcoin price, and thus be able to pocket the difference in price between the two markets.

Naturally, the arbitrage opportunity becomes more interesting the bigger the price difference between spot and futures is. And it seems that the trade is now back in fashion in a big way after the premiums on bitcoin futures again have risen.

“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 [arbitrage] trades,” Strahinja Savic, head of data and analytics at derivatives provider FRNT Financial, told Bloomberg.

She added that because of the relatively low level of institutional participation in the space, bitcoin is particularly prone to “aggressive contangos” in bull markets. 

Meanwhile, Steve Sosnick, Chief Strategist at the US-based financial brokerage firm Interactive Brokers, tied the currently high futures premiums to traders betting that new bitcoin futures-backed ETFs will become large buyers in the futures market.

“There is a well-hyped new asset class that has to contractually buy these futures, and traders are adjusting and front-running accordingly,” Sosnick was quoted as saying. He also warned that “it’s quite possible that the market got ahead of itself, which is certainly a risk in the crypto space.”

The first bitcoin futures-backed ETF, issued by ProShares under the ticker BITO, launched on the NYSE Arca exchange today, October 19. At 11:42 UTC, CME’s bitcoin futures contract expiring in October traded at USD 62,615, nearly USD 400 more than CoinGecko’s spot price of USD 62,226.
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