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Bitcoin’s Money-Printing Machine Breaks Down as Futures Collapse
Posted
June 22, 2021
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0:49
8:50Now PlayingOne 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 “It could mean that some capital has just been structurally withdrawn from the market.”
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