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Bitcoin Futures (Dec 2023)

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BTCZ2023 trade ideas

Why all economists were wrong ? - Storytelling In the fading light of November 2022, a gloomy shadow loomed over the realm of economics. Pessimism blanketed the landscape like a heavy fog, stifling optimism and strangling hope. The majority of economists, revered for their astuteness and foresight, found themselves perplexed and uncertain. In a world where certainty had once reigned supreme, doubt had now taken its throne. Economists were not feeling optimistic. People who liked cryptocurrency waited for prices to drop to $10k before buying. Some bought when prices were low but sold cautiously when they reached 25K . Others decided to sell half of what they had to avoid losing too much money and keep cash for lower prices. On social media and TV shows, some economists were saying scary things like there might be a war or prices might go up too much , scaring people even more. Meanwhile, accumulation quietly began as the market lacked steam. Towards the end of 2023, prices suddenly went up a lot. Even then, some people thought it was just a small correction and that the fall was near. But as prices kept going up, more and more people started feeling hopeful about cryptocurrency. And so, the cycle repeated itself, a timeless dance between fear and greed, uncertainty and hope. For in the ever-shifting sands of the economic landscape, one thing remained certain: the only constant was change itself. And in the end, it was not the economists who were proven wrong, but rather the limitations of human perception and understanding.
CME:BTC1!
by Monstralian
🅱️ Bitcoin CME Futures 1h: Bear Volume ($29,845 Next)When Bitcoin produced the highest volume in months on 9-Jan. 2024, on the 1h timeframe, it signaled the start of a strong retrace. The highest volume in months came in 9-Jan. but the highest this year came in 11-Jan. 2024. ➖ Bitcoin moved from a high of 47,460 to a low of 38,540, a 22% drop. On the 28th of February 2024 at 13:00 Bitcoin produced the highest bearish volume bar on the 1h timeframe since 8-November 2022. Making this session the most bearish in years. There is another high bear volume session only a few hours later that is only matched by 3-4 sessions in a period of almost two years. As soon as this strong bear pressure came in, price action patterns changed completely and the more than one month long rising trend behaviour changed. This signal is telling me that Bitcoin's strong rise is coming to an end. 👉 The correction low should end between the 25,640 to 34,050 price range. Thank you for reading. Namaste.
CME:BTC1!Short
by AlanSantana
9
Silicon Valley's Lab RatCrypto is an experiment. A new way for illegal payments to be more accessible to the masses. Decentralization is a fancy way of saying that Bitcoin is digital black money. Black is the color banks are allergic to. Is Bitcoin strong enough to battle against Banks? To follow its paradigm, 23 thousand more coins have been opportunistically created. Each one of them attempts to get a piece of the black market pie. There is no law that forces Bitcoin to be an ever-growing commodity. There is no law that forces it to go to waste. The only law behind it is supply and demand. And if you have been paying attention, we haven't had much supply up here... If you want this coin to grow further, you must see where the majority of buyers are at. In this case, the buyers are quite lower. Now we are in a zone where the excitement of a Bitcoin ETF is clouding your judgement. If you clear your mind, you will realize that we are in the same story over and over again. An eternal attempt to trap buyers and sellers in the wrong place. The main chart calculates an extremely simple quantity: How much more expensive is the next contract than the current one? This is one of the ways to calculate bullishness/bearishness in market. Now it is in an all-time high. In similar levels to March of 2021. And boy this is bad news. Notice a similarity??? Let me explain further... No words need be spoken. A classic redistribution pattern appears in both cases. And the pattern is eerily similar. In the end, it is déjà vu. Further analysis: Human psychology is independent of instrument or timeframe. Déjà vu, over and over and over again... Bitcoin may be Silicon Valley's Lab Rat. Don't be Bitcoin's Lab Rat. A serious trader must be neither excited nor fearful. Tread lightly, for this is hallowed ground. -Father Grigori
CME:BTC2!
by akikostas
30
BITCOIN BEFORE THE HALVING My logarithmic to daily 4hr charts is here! we might see 57-58k as I predicted my previous post, this valid once price keep pushing upto 55000 level zone. If this is a distributions we might not see 55000 level, see the arrow . But for my view price might test that 57-58000 level before incoming month of march. Im expecting a month of upside before the halving and I will be updating this idea once this complete. The second arrow is Small distribution after those upthrust moves of price at 53000 level. The other arrow is for the higher context of distributing its price on higher supply at 57-58000 level. this moves might goes a higher EUphoria level same on the 64-69000 last time. so becareful alway buy low and stack harder! Follow for more!
CME:BTC1!Long
by keno1989
BTC LONG Speculation, no major corrections until 75k-80k?Since the ETF, it seems to have been a sell the news, followed by buying the dip event at the 100D MA. Dips since the start of the bull run, even before the launch of the BTC ETF, have averaged ~20% followed by a continued massive bull run. Some, including myself, speculated a break of this trend of 20% dips (breaking 38k) followed by a continued sell-off into 34k or even 30k. The ETF launch was a perfect event to sell along with outflows from the GBTC takeover until recently. Assuming this pattern of 100% returns after a 20% dip, technically BTC can reach ~80k. Considering the shortened duration to reach such returns, we may reach 80k sooner than expected in this cycle. Note that we have recently (in the past few weeks) broken a multi-cycle trendline that acted as resistance roughly two months before the FTX collapse. So it could validate prices rising on top of ETF inflows increasing. Note that upon reaching 74k-80k, it is likely a significant pullback within 30k-40k will occur, given the lack of test of structure that BTC normally does pre-halving. This idea is invalidated with a daily close under 49.5k. Closing over 59k will likely have the rally continue toward 74k, with any price beyond it being risky to hold without selling, likely maxing out at 80k roughly the end of March. Closing under 44k would be bearish enough to consider going to 30k. Overall, this idea is very speculative and assumes a trend continuation that breaks BTC's normal patterns/expectations of price movement. Upward price movement is 34%-44% toward 74k and 80k, with a downward price movement of 42+% toward 31k, so entering now is dabbling more in the middle, slightly favoring bears in the long run. This is likely all that's left for BTC to continue the rally past ATHs assuming it can hold 50k before a significant correction. You could even argue of strong resistance ~57k-59k, but inflows are too strong, as is the narrative of RWA and the Tokenization of Financial Assets . Be weary that there are still other risks (cyber pandemic, bank runs, civil unrest, real estate, labor market participation/retraining, shipping routes in the Middle East, control of rare earth minerals/semiconductors) that have been deferred thanks to speculation/attention of tech around AI, and may conveniently come back. I'm not sure when, but I'd speculate starting the second half of 2025 to 2026. Trades: Long 55k SL 49.5k TP 74k (close or by the end of March) Short 77k SL 85k TP 60k, 45k, 35k (close)
CME:BTC1!Long
by linebands
Bitcoin to continue outshining Gold In 2024Bitcoin (“BTC”) – the millennial gold - continues to outshine traditional gold. BTC prices have climbed higher after the listing of spot ETFs. A wider bull rally in the cryptocurrency markets is also underway. ETH touched its highest level since 2022. The total cryptocurrency market cap is 14% higher YTD. A diverging outlook between BTC and Gold is emerging. After reaching all-time-high in December 2023, gold prices have pulled back this year. Stronger dollar fuelled by delayed rate cut expectations are taking shine off gold. Halving event and bullishness from spot ETFs make for shining prospects ahead for BTC. In sharp contrast, macro backdrop dragging gold down leading to potentially lacklustre price performance. Collectively, this makes for a compelling spread positioning comprising long BTC and short Gold. BTC RALLY HAS MORE STEAM BTC is 12% higher YTD. It has marched higher with solid momentum post the spot ETF launch. Multiple factors point to further gains in store. For one, sustained net inflows to spot ETFs signal strong demand from US investors for BTC. Volumes in spot ETFs reached its highest level since its launch on 21 February 2024. Participation was broad across several investors with 32,000 individual trades (sixty times the average), indicating widespread demand across investors. BTC halving is due in a little less than a month, fuelling additional bullish sentiment. Lower supply of newly mined coins is expected to drive prices even higher. BTC is currently trading 15% below its production cost, calculated by Capriole Investment using power consumption figures from the Cambridge Bitcoin Electricity Consumption Index . This index has served as a strong price floor over several years. Miners are unlikely to sell their BTC holdings below their cost of production, consequently reducing selling pressure below this key support level. While BTC production cost acts as an indicative support level, BTC may continue to trade below this level. For one, miners have built up BTC holdings over the past year, which they can opt to sell for a substantial profit below the new production cost. The surge in BTC over 2023 has started to spill over to other digital assets. A broader digital asset rally is under play with ETH retesting its highest level since 2022 this month. The potential for further appreciation in BTC is high if markets are currently at the cusp of a wider crypto rally. Finally, traders have been avoiding substantial short positions. As Bitfinex highlighted , the short-squeeze ratio is lower this year, compared to previous years which suggests large whale investors have not been taking substantial short positions. However, institutional positioning in CME BTC futures paints a contrasting picture. Asset managers have built up record long positioning while leveraged funds have built up record short positioning on CME BTC futures. DELAYED RATE CUTS TAKING SHINE OFF GOLD Delayed rate cut expectations have led to a resurgence in the dollar causing a pull-back in gold prices. Gold faces a double whammy in terms of asset rotation as both equities and the dollar remain strong. RECESSION IS OFF THE CARDS Mint Finance described gold performance during recessions and soft-landings in a previous paper . In summary, while gold prices rally sharply during recessions, performance is flat during soft landings, a situation where inflation subsides, and economic growth remains resilient. Over the past two soft landings, gold delivered flat returns. While a soft landing is yet to be realized as both inflation and rate outlook for 2024 remains uncertain, a recession in the US has become a remote possibility. In fact, the Consumer Board has abandoned its long-running call for a recession in the US. Consumer Board’s (“CB”) Leading Economic Indicator (LEI) signals turning points in business cycles and near term economic outlook. Since July 2022, the LEI signalled a US recession with the LEI in decline. LEI fell to 102.7 in January 2024, its lowest level since 2020, yet CB has stated that it no longer anticipates a recession in the US. CB still anticipates a slowdown this year with growth expected to be near zero in Q2 and Q3. Yet several LEI components have turned positive over the last six months, including equity performance. An overly hawkish Fed makes the much expected Fed pivot less likely, for now, but the strength in the broader economy across businesses and consumers makes a slowdown unlikely. FUND FLOWS – TALE OF TWO ETFs Fund flows for BTC and Gold ETFs also suggest a vastly diverging picture. Investors have responded exceedingly well to spot ETFs. Cumulative flows for spot ETFs have exceeded USD 3 billion in a month. For reference, it took GLD - the first Gold ETF - two years to get to this point. Though, as a counterpoint, the ETF market and money supply are much larger now compared to when GLD was launched. Net fund flows for BTC ETFs were close to zero for the first few days after launch as GBTC outflows shifted towards lower-cost ETFs. Since February, inflows to spot ETFs (excluding GBTC) have accelerated while GBTC outflows have slowed. The result is sharp growth in net inflows suggesting strong and positive investor response to spot ETFs. Data Source: TradingView and ETFDB While BTC Spot ETFs has been enjoying consistent net inflows, Gold ETFs have been awash with fund withdrawals and redemptions. Data Source: TradingView Contrasting cumulative net flows into BTC ETFs & Gold ETFs shows a stark divergence in expectations ahead for the price of these two similar assets. Data Source: TradingView and ETFDB Outflows from gold ETF’s represent asset rotation out of gold with some of those assets going towards equities and bonds. HYPOTHETICAL TRADE SETUP An unfavorable macro outlook is weighing on gold while BTC faces a positive outlook with tailwinds likely to push prices higher. A position combining a long position in BTC and a short position in Gold benefits from both rising BTC and falling gold prices. This spread does not compromise on performance as past rallies have yielded similar performance in the BTC/Gold ratio. BTC/Gold spread has not been an effective hedge as the ratio does not perform better during downturns. A hypothetical spread trade consists of long four lots of Micro Bitcoin futures (MBTH2024) and short one lot of Micro Gold futures (MGCJ2024). This position requires margin of 4 x USD 1,120 (=USD 4,480) on the BTC leg and USD 830 on the gold leg: • Entry: 25.32 • Target: 30.60 • Stop Loss: 21.30 • Profit at Target: USD 4,310 • Loss at Stop: USD 3,285 • Reward/Risk: 1.3x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Editors' picks
CME:BTC1!Long
by mintdotfinance
6
$BTC extreme bullish sentiment & most orderly movementAs stated before, there's extreme bullishness on $BTC. Every influencer's excited & media is plastering a bull take. They can be right but more often than not they are wrong and can be used as a contrarian indicator. Things to notice: #BTC shorts are @ their LOWEST in a year! Money Flow is lessening. Decent sell volume at the moment. ---------------------- Let's look at weekly data, chart shown. Weekly CRYPTOCAP:BTC shows that indicators are weakening. (Indicators aren't primary means of trading but are used for HELP) Let's compare #BTC to other time periods, shall we? Are we more like early or late 21? This is most orderly run since the introduction of derivatives. Looks almost like an Index, interesting, sarcasm. #Bitcoin #bitcoinhalving #ETF
CME:BTC1!
by ROYAL_OAK_INC
BTC Uncharted territory I spent some time analyzing the post-ETF Bitcoin charts today and came up with some rough price predictions for the next 3 months. Currently the ETF inflows lead to a 2% increase in price per day, which is about $1000 per day. Most of the increase is taking place during the settlement period before US market opening. It seems to me that you can trade that ‘market inefficiency’. More important, I believe you can predict this daily price increase by looking at the inflows that are announced a few hours before that. At current prices inflows are 10-12 times of newly created BTC, meaning that people have to sell their BTC in order to fill the ETF orders. They will only do that at higher prices, because hardly anybody who looks at this market would think BTC is peaking. Higher prices lead to more FOMO among ETF investors, leading to more demand and even higher prices. Two other events that will happen in the next 3 months are important: 1) The halving of the BTC mining rewards in mid April. Right now 900 BTC are produced per day, but after that only 450 new coins are mined. This will add to the supply shock and will lead to even higher prices 2) Many financial advisors can only start selling a new ETF after 90 days of trading (to minimize the risk that an ETF they sell will fail), meaning by early May demand should start picking up even more. What will this mean for the price? I think we are in uncharted territory here, but I believe an average increase of $1000 per trading day over the next weeks is very likely. After the 2 events above this could even be substantially higher. This means that unless there is a black swan event we will see a new all time high (> SWB:69K ) before the halving and we could possibly hit $100K in the next 2-3 months already.
CME:BTC1!Long
by dbr
A Bitcoin Bull Run?CME: Micro BTC Futures ( CME:MBT1! ), Micro ETH Futures ( CME:MET1! ) This Monday, bitcoin jumped above $49,000 for the first time in a year, and quickly extended its gains and broke through the $50,000 level. By Wednesday, bitcoin shot up again, pushing above $52,000 in morning session. In the past few months, the benchmark cryptocurrency has experienced a “Buying the Rumor and Selling the News” phenomenon. In anticipation of the SEC approval of spot bitcoin ETFs, bitcoin nearly doubled in a matter of just three months, rising from $24,830 in early September to $48,960 in mid-January. On January 15th, when the SEC finally approved the listing of 11 bitcoin ETFs, a huge selloff followed. Bitcoin had gained 156% in 2023 and rose 16% further in January. Instead of riding higher with the good news, investors chose to sell and book profits. Bitcoin tumbled 21% from its recent peak and touched $38,530 on January 24th. My recent trade idea, “BTC: Buy the Rumor and Sell the News”, observed three such occurrences in bitcoin’s brief history. After the dust was settled, cyclical volatility gave way to secular growth. Economic fundamentals are at work here: when it comes to Bitcoin, there is finite supply and a growing demand. At the daily high of $52,079 on Wednesday, bitcoin has already bounced back 35% within a month. Cathie Wood, whose ARK 21Shares Bitcoin ETF is among the 11 approved ETFs, predicted that Bitcoin prices would reach $600K by 2030. While this lofty price level may sound far-fetched now, I think it is entirely plausible for bitcoin to revisit its all-time-high of $68,982.20. It would not surprise me to see a new all-time high (ATH) record in the next few months. Key Drivers for Bitcoin’s Long-term Rise In my opinion, a secular long-term bull market for cryptocurrencies has already emerged. The case for rising bitcoin prices is supported by solid fundamental strength: Firstly, there is a limited supply of bitcoins with a total cap of 21 million. Currently, around 19 million bitcoins have been mined and are in circulation, leaving approximately 2 million left to be mined. This makes bitcoin superior to fiat currencies, whose supply could be increased by central banks, with or without limits. Secondly, the demand for crypto investment could increase substantially. With bitcoin now a SEC-regulated investment asset, the biggest hurdle for participation has been removed. Investors may now buy spot bitcoin, bitcoin futures, bitcoin options, and bitcoin ETFs from their brokerage accounts and trade on regulated US Exchanges. Outstanding performance of both Bitcoin and Ethereum could speed up the asset rotation. Thirdly, an excessive dollar supply could help raise bitcoin prices. This is an important point and deserves a thorough explanation. The US Federal Government is currently running a budget deficit to the tune of $1.5-2.0 trillion a year. By borrowing, it is injecting vast amounts of new dollars into the financial system. In boom time, these dollars will flow to businesses and households in the forms of new investment and new consumption. However, as the economy slows down and the cost of borrowing remains high, they are reluctant to incur more debt. Commercial banks are left holding excessive cash in their books. Facing reduced loan interest income, they would seek to boost investment returns. As conservative investors, banks typically put money in Treasury bonds, high-grade corporate bonds, and Blue-Chip stocks. Now that Bitcoin is sanctioned by the SEC, banks could legally invest in the spot ETFs offered by top-rated asset managers. Although the bank purchases bitcoin indirectly through an ETF, it would pass through to spot bitcoin. With the sheer size of bank assets, a small percentage of asset allocation could increase bitcoin demand substantially. Trading with Micro BTC and ETH Futures In my opinion, both Bitcoin and Ethereum are set up for a long-term marathon bull run. Just like commercial banks, individual investors could consider adding Bitcoin and Ethereum (or the spot ETFs) to their long-term investment portfolio. Speculative traders share my view. “Leveraged Funds” had total long positions of 7,120 on bitcoin futures, vs. 3,147 short positions, in the week of February 6th, according to the Commitment of Trader (COT) report published by the U.S. Commodity Futures Trading Commission (CFTC). The 2.3-to-1 long/short ratio indicates bullish sentiment. There is a problem: with bitcoin already tripling in prices, the price increases going forward do not offer the same level of return dollar-for-dollar. Hypothetically, if bitcoin rises to SWB:69K from GETTEX:52K , the $17,000 gain would equal to 33% in return. If you bought bitcoin for $17K in December 2022, the same dollar gain would be 100% in return. To counter the effect of higher prices, investors could consider using leverage. CME Micro BTC futures ( PSE:MBT ) provide leverage and capital efficiency. The contract notional is 1/10 of 1 BTC. Initial margin is $980. The June contract (MBTM4) was last quoted at $53,575. At current price there is a 5.5 times leverage built in the contract, which is the ratio of 5,357.5 (1/10 of 1 BTC) divided by 980. If the futures price touches the previous ATH at approximately $69,000, a long futures position would gain $1,542 (= 6900-5358), and the return would be a 157% return, using the $980 margin as a cost base. For a comparison, investing in 1/10 of a spot bitcoin or bitcoin ETF would gain $1,700 (= 6900-5200), but the return would be 33% only (= 1700/5200), without the leverage. Similarly, CME Micro Ether futures ( NYSE:MET ) also provide leverage and capital efficiency. The contract notional is 1/10 of 1 ETH. Initial margin is $62. The April contract (METJ4) was last quoted at $2,802. At the current price there is a 4.5 times leverage built in the contract, which is the ratio of 280 (1/10 of 1 ETH) divided by 62. If the futures price touches 3,500, a long futures position would gain $70 (= 350-280), and the return would be a 113% return, using the $62 margin as a cost base. For a comparison, investing in 1/10 of a spot Ethereum would gain $75 (= 350-275), but the return would be 27% only (= 86/267), without the leverage. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
CME:MBT1!Long
by JimHuangChicago
2
Bitcoin Next MoveCME:BTC1! CRYPTOCAP:BTC needs to hold 45.6k for bullish sentiment to challenge all time highs. Currently CRYPTOCAP:BTC has broken GETTEX:52K and if a retest hold's at 48.5k this would be extremely bullish for Targets to 58k, 65k and ATH 69355. While this is the larger picture, there are moves on smaller time frames allowing entry for trades or building positions. Should support zones not hold, shorting CRYPTOCAP:BTC to areas of value is an option but you need to be slick on entries via multi-time frame analysis. If you appreciate my efforts, spend half a second and give me a Boost! Thanks!! Always having Plan A and Plan B scenarios so we can react once the markets provide an opportunity to execute our edge. If you liked this idea or if you have your own opinion about it, write in the comments. The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations.
CME:BTC1!
by imr4nkh8n
Extracting Arbitrage Yields In Bitcoin Carry TradeBitcoin is known as digital gold. It is treasured as an investment asset. Much like the famous yellow metal, bitcoin (“BTC”) does not offer income through dividends or interest. This poses a challenge for investors seeking regular cashflows and income. One strategy that skilled investors use to turn BTC into an income generating asset is the cash and carry trade (“carry trade”). This paper describes mechanics of carry trade and the attendant risks. It also highlights that the introduction of spot ETFs has created a secure infrastructure for harvesting carry yields using a regulated platforms such as the CME. INTRODUCTION TO THE CARRY TRADE The carry trade is an arbitrage strategy that benefits from the differences in futures and spot price of an asset. It is a delta neutral strategy. In other words, the returns are not price dependent once the carry trade is profitably set up. To illustrate, consider the forward curve of CME Bitcoin futures which shows futures prices at different expiries. Bitcoin futures with later expiries trade at a premium to near term ones and this type of market structure is referred to as contango. In a trade that involves simultaneous acquisition of BTC and selling a BTC futures contract expiring later, investors can lock in the price difference as profits. Once established, this trade’s profit is unaffected by price moves enabling investors to harvest carry yield at the futures expiry. The pay-off from this trade is driven by convergence of futures and spot prices. Convergence is the movement of a futures price closer to spot price at expiry. Once futures and spot price are sufficiently close, the trade can be unwound by simultaneously exiting both positions. For CME Bitcoin and Micro Bitcoin futures, convergence occurs because the futures contracts settle to a robust price benchmark known as the CF Bitcoin Reference Rate (“BRR”) which includes price quotes from major crypto exchanges. BTC FUTURES CONTANGO TERM STRUCTURE AND PREVALANCE OF CARRY TRADE Carry trades can be executed in both contango and backwardation term structures. While the carry trade can technically be executed in backwardation (where later expiries are cheaper), doing so involves high borrowing costs for the short spot leg. Hence, BTC’s contango term structure is beneficial for extracting arbitrage yields from carry trade. Factors driving BTC contango term structure are multi-faceted. Simply put, during bull runs, investors anticipate higher prices for contracts maturing later. Furthermore, high demand for spot BTC and limited availability on the sell-side can exacerbate forward premiums. Additional factors resulting in contango include cost of funds, insurance premiums, and custodial charges that are higher for later expiries, and a convenience yield of holding BTC. Convenience yield represents returns from holding BTC through activities such as lending. BTC futures term structure has shown both contango and backwardation during different periods. Current term structure indicates bullish sentiment fuelled by spot BTC approval in January and the next halving event expected in April. Term structure shifts can result in outsized returns at times. Notably, the switch from contango to backwardation can offer outsized returns on the carry trade, exceeding the difference between futures and spot price as observed at trade inception. The carry trade has been a popular strategy, especially during periods of significant volatility and during bull markets when BTC contango structure widens. Even sell-offs provide compelling trading opportunities as the carry trade is directionally neutral. Carry trades have lower risk relative to an outright long position. For reference , during 2021, LedgerPrime’s quant fund was able to beat BTC returns using, among others, the carry trade during a large selloff. RISKS OF THE CARRY TRADE The carry trade neutralises market risk but is still subject to counterparty risks and liquidity risks when spreads diverge and tear. Largest risk factors associated with the carry trade is the counterparty risk . While CME futures are regulated by the CFTC, spot crypto exchanges are not subject to similar regulations. This poses significant risk for investors if they opt to hold their BTC on such unregulated exchanges. Such risks arising from trading on unregulated platforms is most exemplified by the collapse of FTX. FTX was a popular exchange for executing carry trades as it offered dated futures, perps, and spot BTC on its platform. The dramatic collapse of FTX highlighted counterparty risk as a major concern. Self-custody of spot BTC has its own risks including transfer costs and cybersecurity risks. Another risk factor is early liquidation. As the futures leg of the trade is a short position, where prices rally sharply, the short position may be at risk of liquidation despite a proportional gain on the long leg of the carry trade. SPOT BTC ETF HELPS REDUCE COUNTERPARTY RISKS The rollout of spot BTC ETFs reduces counterparty risk. Unlike unregulated crypto exchanges, spot ETFs are regulated by the SEC, listed on regulated exchanges with investor protection. With both the futures and spot leg now available through regulated platforms, investors have access to secure infrastructure for executing the carry trade. The table below provides details of approved spot ETFs including AUM, expense ratio, and the benchmark index. Carry trade using spot ETFs with CME CF Bitcoin Reference Rate (CME BRR) enables greater precision in extracting arbitrage yields. Seven of the eleven approved spot BTC ETFs use the CME BRR. Still, there are downside to using spot ETFs for long BTC exposure in carry trades. For one, ETFs are only tradeable during market hours (9:30AM to 4:00PM US Eastern Time not including extended trading hours) whereas cryptocurrency exchanges and even CME futures trade for longer hours. Moreover, expense ratios and premium/discount to NAV for ETFs will erode already thin profits. Spot BTC ETFs are currently offering discounts on expense ratio for a fixed period. CARRY TRADE ILLUSTRATION To illustrate a hypothetical carry trade, consider the following setup comprising long BITB ETF and short CME Bitcoin futures (BTCH2024). BITB references the same CME CF Bitcoin Reference Rate as CME futures and its premium/discount of -0.07% (as of 09/Feb) offers a beneficial entry point for this trade. Moreover, the premium/discount on the ETF has been tight. Source: Bitwise The premium for MBTH2024 over spot reference rate as of close on 9/Feb was 2.83%. Taking seven basis point discount to NAV, this results in total return of 2.90% over 48 days resulting in an annualized arbitrage return of 22%. As the trade is required to be directionally neutral, notional value on both legs needs to be balanced. CME Micro Bitcoin futures (“MBT”) offers exposure to 0.1 BTC. Notional on short BTCH2024 futures leg: 0.1 BTC As of close 09/Feb, BITB market price: USD 25.95 CME CF Benchmark BTC price: USD 47,614 Each share of BITB offers exposure to 0.000545 BTC 184 shares of BITB provide exposure to 0.000545 x 184 = 0.100280 BTC The payoff from the trade consisting of 184 x long BITB and 1 x short MBTH2024 would be 2.9% of notional value = 2.9% x (0.1 x 47,614 USD/BTC) = USD 138. The trade requires margin of USD 980 on the short futures leg and notional of USD 4,775 on the long leg for a total capital requirement of USD 5,755 (as of Feb 2023) which translates into ROI of 2.4%. Still, as mentioned, liquidation risk remains a concern. Hence, it is prudent to maintain higher margin on the short futures leg which would lower the ROI. Note that timing this trade better can improve the odds and in case Bitcoin’s term structure switches from contango to backwardation, payoff would be higher. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CME:BTC2!Education
by mintdotfinance