Hello! Welcome back to Distributed Ledger. I’m Frances Yue, crypto reporter at MarketWatch.
The launch of bitcoin ETFs in January helped make one of the most popular trades in crypto even more popular. The so-called basis trade, sometimes known as the cash-and-carry trade, is a market-neutral strategy aimed at exploiting the price discrepancy between an asset and its corresponding derivatives.
In the case of bitcoin, traders buy bitcoin, or bitcoin ETFs, and short bitcoin futures as they wait for the cash and futures prices to converge. They hold the bitcoin or bitcoin ETFs through the futures delivery date and use it to cover their short obligations.
While bitcoin futures were launched in December 2017, some institutions were reluctant to participate in the basis trade due to their aversion to holding bitcoin directly or a lack of the necessary infrastructure to participate in such trades, according to Alexander Blume, chief executive at Two Blume.
Find me on X to share your thoughts on the basis trade.
Basis trades with bitcoin ETFs
The popularity of basis trades may also given the impression that investors are more bullish on bitcoin prices than they actually are, Blume said in a phone interview.
In other words, a portion of the bitcoin ETF inflows come from market participants putting on the basis trade, a bet that cash and futures prices will converge rather than an outright bet on a rise in the cash bitcoin price.
While bitcoin ETFs saw five consecutive weekly inflows as of the end of last week, there was also a record number of bitcoin futures being shorted by hedge funds. Leveraged fund net short positions hit 18,175 as of June 4, according to Commodity Futures Trading Commission commitments-of-traders data. That’s a record high, according to analysts.
Still, the basis trade is not as attractive as it was a few months ago, noted Greg Magadini, director of derivatives at Amberdata.
The basis, or the price difference between bitcoin and bitcoin futures, was in the range of 25% to 30% when bitcoin ETFs were launched in January. However, the basis now stands in the range of 7% and 9%.
Bitcoin futures for July delivery BTCN24, +0.39% were trading at around $70,675 on CME on Wednesday, while bitcoin was trading at around $69,600, according to FactSet.
With the one-month Treasury rate BX:TMUBMUSD01M standing at around 5.4%, the basis trade offers only a roughly 2% premium that adjusts for counterparty risks, noted Magadini.
It is also difficult for retail traders to buy bitcoin ETFs and sell bitcoin futures on CME, as such products usually don’t provide cross-margin, which would allow traders to transfer excess margin from one account to another to meet margin requirements, noted Magadini.
Where are the ether ETFs?
Arguably the most bullish catalyst crypto investors got over the past month was the positive news from regulators about the ether ETFs, which led to a spike in the ether price, and a jump in the open interest of ether futures.
Last month, the U.S. Securities and Exchange Commission took a major step forward, approving filings from some major stock exchanges requesting rule changes that would enable them to list spot ether ETFs.
However, the SEC still hasn’t approved the registration statements from issuers, including VanEck, Fidelity, BlackRock, Grayscale, Franklin Templeton, 21Shares and Invesco/Galaxy.
That could spell trouble for crypto prices, noted Amberdata’s Magadini.
“To me, this excess buildup in futures can easily be reversed back down. Everyone who got long after the news event might become short term sellers with any weakness,” Magadini said.
Crypto in a snap
Bitcoin BTCUSD, 0.09% fell 2.5% over the past seven days to around $69,503, about 6% away from its record high at $73,798 reached in March. Ether ETHUSD, 0.35% fell 6.2% during the past seven days to around $3,626, according to Dow Jones Market Data.