Re: Everything you wanted to know about BTC futures but were afraid to ask!
A few days ago PlanB made the following statement.
What does it means?
Is it really possible to profit from this situation?
Let's proceed in order and see what the facts are, concentrating only on BAkkt, for the sake of simplicity and because more similar to thread analysiss, but the reasoning is the same for every other future
From the Bakkt website we gather the information on the prices of the futures currently traded.
I carefully selected a time where the last contract, the less liquid has the same timestamp of the first, so we have some reliable quotation for the examples. Others contract have a slightly different timestamps, so the calculation won't be actually very reliable, but it is something we must cope with until liquidity is good on all the instruments.
At the time of trading the Spot price, (I used the CME Real Time Index, it's the bitcoin priced used by CME futures) was trading at $ 9,310.
So the situation was the following one:
or graphically:
We can see the future term structure exhibit a nice upward slowing curve: that is a contango: as explained in the op that is the situation when future price are above the forward price.
So the idea is to profit from this situation selling a future, while at the same time buying a bitcoin on the spot market, to be held it until future expiry.
In this way at the expiry you will have a bitcoin to be sold to your conterpart. Having bought the bitcoin at a lower price, you are actualy locking in the price difference you executed your trades.
Let's see in the details
Buy 1 BTC SPOT@9,310 USD
Sell 1 BTC MAR20 Future @9,610 USD
On 20 March 20 you will have to sell your Bitcoin to you counterpart at 9,610 USD. Having bought that bitcoin at 9,310 USD, wou are actually cashing in 300 USD as a pofit.
300 USD profit on a 9,610 investment, is 2,70% return. a 2,70% return over 135 days is roughly 8,70 on a yearly basis.
This is pretty consistent with PlanB numbers.
Please note that:
Quote
Verification of what I said before: #bitcoin cash & carry (spot buying btc and simultaneously future selling for delivery in 1-6 months) will net you 7-10% annualized return .. almost risk free.
@stephanlivera
and I talk about this in the podcast that will be out later today.
Cash & carry strategies can return up to 10% annualised
➡️ Live curve on http://skew.com
Disclaimer: Not investment advice
https://twitter.com/100trillionUSD/status/1191293123298832386?s=20@stephanlivera
and I talk about this in the podcast that will be out later today.
Quote
Cash & carry strategies can return up to 10% annualised
➡️ Live curve on http://skew.com
Disclaimer: Not investment advice
What does it means?
Is it really possible to profit from this situation?
Let's proceed in order and see what the facts are, concentrating only on BAkkt, for the sake of simplicity and because more similar to thread analysiss, but the reasoning is the same for every other future
From the Bakkt website we gather the information on the prices of the futures currently traded.
I carefully selected a time where the last contract, the less liquid has the same timestamp of the first, so we have some reliable quotation for the examples. Others contract have a slightly different timestamps, so the calculation won't be actually very reliable, but it is something we must cope with until liquidity is good on all the instruments.
At the time of trading the Spot price, (I used the CME Real Time Index, it's the bitcoin priced used by CME futures) was trading at $ 9,310.
So the situation was the following one:
| Expiry | Date | Price |
| SPOT | 06 Nov 2019 | $9,310 |
| NOV19 | 15 Nov 2019 | $9,360 |
| DEC19 | 20 Dec 2019 | $9,435 |
| JAN20 | 17 Jan 2020 | $9,485 |
| MAR20 | 20 Mar 2020 | $9,610 |
or graphically:
We can see the future term structure exhibit a nice upward slowing curve: that is a contango: as explained in the op that is the situation when future price are above the forward price.
So the idea is to profit from this situation selling a future, while at the same time buying a bitcoin on the spot market, to be held it until future expiry.
In this way at the expiry you will have a bitcoin to be sold to your conterpart. Having bought the bitcoin at a lower price, you are actualy locking in the price difference you executed your trades.
Let's see in the details
Buy 1 BTC SPOT@9,310 USD
Sell 1 BTC MAR20 Future @9,610 USD
On 20 March 20 you will have to sell your Bitcoin to you counterpart at 9,610 USD. Having bought that bitcoin at 9,310 USD, wou are actually cashing in 300 USD as a pofit.
300 USD profit on a 9,610 investment, is 2,70% return. a 2,70% return over 135 days is roughly 8,70 on a yearly basis.
This is pretty consistent with PlanB numbers.
Please note that:
- This is a market neutral strategy: you are not exposed to market risks, bitcoin can go up to 30,000 USD or crash to 1,000 SUD and your profit will stay the same, as you are buying and selling a bitcoin at the same time.
- We are neglecting the cost of carry: or the cost of holding a bitcoin untily trade expiry. I think this cost is pretty limited, you might considering insuring your investment, or you can even deposit your bitcoin in the BAKKT warehouse, that might charge you a cost for that.
- You are actually exposed to a credit risk versus the exchange: if the exchange defaults, you are holding a bitcoin versus nothing (in case you didn't deposit it in the warewhouse,, but this is adding another layer of complextiy not worth analysing here. Regulated exchanges are amongst the most liquid institutions in the financial markets as they carry very little risks due to margining of their positions.
- We didn't account for financing, margining and managing cash positions. Again I don't think they are goind to add much to this analyis.