Is Bitcoin price out of the woods? Derivatives traders bet on massive rally in BTC

  • Bitcoin price is back above $22,600 after sideways price action all week, options traders bet on a massive rally in BTC. 
  • Bitcoin futures curve data suggests that BTC market is in a state of Contango. 
  • Derivatives traders trading physically settled futures contracts expect Bitcoin price to rise in the future.

Bitcoin future curve data from leading exchanges like Binance, Bybit, Deribit, Kraken and OKX suggests that futures traders are betting on the rise in Bitcoin’s price by June 2023. Traders in the physically settled Bitcoin futures market have displayed a bullish bias on BTC prices. 

Also read: Coinbase CEO warns the SEC may consider Ethereum a security, here’s what to expect

Bitcoin futures market is in a state of Contango, here’s what this means

Data from Bitcoin futures exchanges suggests that the BTC market is in a state of Contango- a situation where the futures price of a commodity is higher than the spot price. The “Contango” state generally presents itself when markets expect the price of an asset to rise in the future, when futures traders have a bullish bias. 

As seen in the chart below, all Bitcoin futures contracts that are physically settled have over $1 million in open interest:

Bitcoin Futures Term Structure till June 30, 2023

Bitcoin Futures Term Structure till June 30, 2023

Futures curve data from exchanges Binance, Bybit, Deribit, Kraken and OKX reveals optimism among futures traders. On the futures curve diagram above, the price in US dollars is on the Y axis and the date of expiry is on the X axis. Each point represents a contract available on exchanges and carries a premium because of the cost-of-carry. 

The collapse of Samuel Bankman-Fried’s FTX exchange from late 2022 showed traders that trading with an exchange is risky and stored funds can be lost to hacks or similar incidents. Therefore committing to a contract that is physically settled and delivers BTC in the future may come with a premium that investors are willing to pay, to forego the cost of carry associated with holding, storing or carrying Bitcoin. 

Crypto traders’ speculation that Bitcoin price will rise in the future, based on current and future developments is another reason for Contango. This implies two things: the sentiment among market participants is positive and Bitcoin has a history of consistent price gain over time, fueling a bullish narrative among BTC holders. 

In traditional financial products, over time the futures price converges closer to the spot as the date of expiry draws close. If traders take a long position in the future in this situation, it would result in a loss. 

Bitcoin’s holder composition, a mix of retail and institutional traders protects investors. In the crypto market, there are relatively more retail players than institutional players and not enough capital in most instances, to bridge the gap between the futures price and the asset’s spot price. This safeguards investors from losses. 

The Contango arbitrage trade opportunity in Bitcoin

In Contango, there is an opportunity to make a cash and carry arbitrage trade. Traders can buy Bitcoin on the spot market, take a long position and sell BTC at a predetermined date (short position). This is a market-neutral strategy. Irrespective of whether the price of BTC moves up or down, the arbitrage trader nets a profit. 

For example, if an arbitrage trader observes the current Contango in Bitcoin futures, she will purchase BTC on a spot exchange at $22,683 and sell futures expiring in October 2023 on Deribit, for $24,200. 

  • If Bitcoin price plummets, the short future turns profitable
  • If Bitcoin price rises, the spot position will pay a profit

The bigger the gap between the spot and futures price of the asset, the higher the profit margin for an arbitrage trader. Contango and the high volatility of Bitcoin imply that there is an excellent opportunity to generate arbitrage profits through cash and carry trades. 

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