Bitcoin’s December futures saw an upward trend where they recorder a high of 50%, which makes crypto enthusiasts wonder if everyone is flipping ultra-bullish. This might also be a signal of the market having inefficiencies within itself.
For almost a month now, Bitcoin (BTC) has seen the $60,000 mark acting as its unbreakable resistance point. However, despite this, the BTC futures market has been on an unrivalled uptrend. Comparing the BTC contracts set to mature in June with the regular spot exchanges, the former re trading above $65,000 while the latter are trading near $59,600.
It is common for futures contracts to go above and beyond and this is typical in neutral-to-bullish markets. This trading at a premium is commonplace on every asset may it be a digital asset, the currencies, indexes, equities, and commodities. However, what BTC December futures has revealed is highly uncommon; a 50% annualized premium for contracts expiring in three months has not happened in any other asset.
The chart below shows the BTC futures curve.
BTC futures curve, in USD. Obtained from: bitcoinfuturesinfo.com
How These Futures Work
Contrary to inverse swap or the perpetual contract, funding rates are not common in the fixed-calendar futures. This means that their price differs by a great deal when compared to that of regular spot exchanges. What the fixed-calendar futures do is the elimination of spikes emanating from funding rates from the perspective of the buyers that can go up to 43% in a month.
Also, a seller can lean towards longer-term arbitrage strategies because these exchanges provide a predictable premium. One can simultaneously buy the spot BTC and sell its futures contracts thereby gaining zero risk exposure and have a predetermined gain to look forward to. This means that for a futures contract seller, whenever the markets leans bullish, they can demand higher profits.
The chart below from skewTrading shows how three-month futures usually maintain the 10%-20% range as opposed to regular spot exchanges that might go above 40% in a month. This 10%-20% range justifies locking one’s funds rather than an immediate cash-out. The chart also reveals that even in the uptrend season between March and June 2019 that saw the 250% rally, the futures held below 25%.
OKEx BTC 3-month futures annualized premium (basis). Source: skewTrading
Are there Inefficiencies in the Market?
The high funding-rate synonymous with fixed-calendar futures causes arbitrage desks to intervene by buying the fixed-calendar contracts and selling their unending futures. With this excessive retail long leverage, the futures then go up above their norm.
The fact that crypto derivatives markets stay predominantly unregulated means that inefficiencies will not cease to exist. This goes to show that even if this 50% basis premium seems to step out of the pattern, one has to contend with the fact that retail traders do not have an array of options for leveraging their positions. This is what results in temporary distortions from the norm the system is used to.
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