© Bloomberg. A pedestrian wearing a protective mask walks past a bitcoin automated teller machine (ATM) kiosk in Barcelona, Spain on Tuesday, February 23, 2021. Bitcoin has soared, aided by favorable comments from Cathie Wood of Ark Investment Management and news that Square Inc. has increased its stake in cryptocurrency.
(Bloomberg) – One of the most trusted cryptocurrency transactions has gone wrong.
Futures, which typically trade at a premium to the spot price, collapsed along the curve amid a sharp sell off of the world’s largest cryptocurrency. This erased what is known as basic trading, in which a trader would buy Bitcoin in the spot market today and sell long-term futures, locking in the spread between the two prices.
It’s a painful turning point for one of the most ubiquitous games in the crypto market. Hedge funds have built up in trading, which previously could reliably produce double-digit annual gains. Best of all, the arbitrage was virtually risk-free, given that CME Group Inc. (NASDAQ 🙂 was the counterparty. However, trading existed because long-term futures were more expensive than short-term contracts, given that Bitcoin is inherently scarce and is theoretically expected to rise – a structure known as contango. Breaking this momentum implies that the intrinsic uptrend gradually faded as prices fell.
“This is the very simple explanation, that the contango is usually indicative of an uptrend in the market and therefore, to the extent that market participants are pessimistic, it makes sense to me that it is down.” Castle Island Ventures founding partner Nic Carter said over the phone. “This could mean that part of the capital has just been structurally withdrawn from the market.”
Read more: MicroStrategy Leads Crypto Stocks Collapse As Bitcoin Rout Deepens
“We have been in decline for a few days – this is due to the current turbulence in the cash market,” said Wilfred Daye, CEO of Enigma Securities, which works with institutional and corporate clients to provide crypto services and liquidity solutions. tailored. “While leveraged futures / perps traders unwind their positions to respond to margin calls, that is, via back-up mechanisms on the exchanges, futures are trading below of the spot. ” This could persist as long as sentiment remains negative and deleveraging transactions continue, he said.
Contango and offset are names for curve structures that map traders’ assumptions about the value of a given contract in the future. Contango means it is an uphill slope, while the offset means down.
Bitcoin on Tuesday, in the midst of a drop that hit 12% at some point in the session, briefly erasing its 2021 gains. The pullback comes amid negative sentiment about its energy use, largely caused by Elon Musk of Tesla (NASDAQ 🙂 Inc., as well as a crackdown on China. The coin is now trading near the levels it started the year at – $ 29,000.
The demise of core trading is the latest foolproof crypto bet to backfire. The Grayscale Bitcoin Trust (ticker GBTC) swelled to a shocking 40% premium over its underlying holdings in late December amid a price rally and relentless demand for crypto exposure. Institutional investors were able to take advantage of this by depositing Bitcoin with Grayscale in exchange for GBTC shares, then selling those shares at a mark-up after a six-month lock-up period.
However, GBTC’s premium was dissolved at the end of February and the fund is currently trading at an 11% discount from the Bitcoin it holds.
“The curve is just flat and those kinds of opportunities are gone,” said Stéphane Ouellette, CEO and co-founder of FRNT Financial, whose company claims to offer the only regulated BTC product in the world. “The futures curve says it has no idea where the market is heading.”
(Updates with graph)
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