Bitcoin is in Backwardation... and it may help you make some money!
Bitcoin may be offering an arbitrage opportunity to savvy investors.
Bitcoin is currently in a state known as "backwardation".
Cool, what's that?
Backwardation occurs then prices in the futures markets are trading lower for later months than the spot price is currently.
An example might be if bitcoin were trading at $4,000 in the spot markets and the February futures contract was trading for $3,975.
That would mean that futures traders are expecting prices of bitcoin to fall as we go forward.
This backwardation is taking place for the next several months of futures contracts on the CBOE bitcoin futures exchange.
This might seem like a bearish occurrence, so how can it help me?
I am glad you asked!
In many cases this type of event is likely forecasting that prices are going to go down in the near future, at least that is what investors/traders in the futures markets are expecting.
However, bitcoin is such a new market that is mostly traded by retail traders, who may not have as good of read on things as other commodity markets.
Given the current price discrepancy between spot prices and futures markets, it makes a lot of sense for someone to just buy the futures contract and sit on it till expiration.
If bitcoin just goes sideways or up, you will make money as the futures contract goes up to the spot price at expiration.
If the price of bitcoin goes down like the futures markets are projecting you will lose money, but potentially not as much as you would have had you just bought the spot price outright.
Now for the arbitrage part...
There is a second option, and this is where the arbitrage comes in, if you were to short the spot price and then buy the futures contract, you could end up making the difference between the spot and futures prices basically no matter which direction it goes.
A nice little arbitrage opportunity for yourself!
Which means, shorting bitcoin in the spot markets via bitmex, or any other exchange that allows shorting, while buying the futures contract may yield some risk free profit!
This is a recent example of the CBOE futures contract prices for bitcoin:
(Source: https://www.ccn.com/dow-futures-rise-but-bitcoin-wrestles-with-backwardation/)
As you can see prices are currently lower than spot and are decreasing month by month, which may provide a great arbitrage opportunity for the savvy traders/investors out there.
*Disclaimer: I haven't fully tried this yet myself to know for sure if it will work out like I am projecting, but given the context, I am fully expecting it will.
Let me know if you give a try and how it works for you, also if you know of any exchanges in the US that allow short selling of bitcoin let me know.
Stay informed my friends.
Image Source:
https://hacked.com/bitcoin-in-backwardation-this-is-fine/
Follow me: @jrcornel
I've been thinking of getting into some BTC futures at some point. What do you recommend as the best way to get them for someone in the US?
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I know Etrade offers Futures products and they have bitcoin futures. I have used them before and tend to like them. Though I haven't used many others to compare. They get my vote. :)
It just makes sense if you can buy a long term contract below the spot price... ya know?
Oh, lol I forgot that BTC futures are a traditional financial product so I never even thought to look on ETrade. I used to use them all the time when I was in stocks and then pulled my money out when i got into crypto. Maybe i'll put some back in here. Thanks!
Yep, and remember, you have to open a futures specific account on etrade. It's not just their regular equities account.
Broker Dealers are the best way to go. However, not all are providing the product to clients. TD Ameritrade and E-Trade are the ones I know that have them available online.
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Come on @jrcornel! Roll the dice and then tell us how it worked 😂😂😂
Do I always have to be the guinea pig?! :)
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I've never tried shorting myself before...should probably look into it, as there are likely to be times in the future much like the time in the past, where it could be potentially very lucrative.
Yep, I would like to find some reputable exchanges to do that on myself.
I'm too much of a bull to use the futures market or to short Bitcoin. QQ.
The good news is that even if it runs, you end up making even more on the futures contract because you bought it below the spot price. So, either way you make more money by going this route.
This does sound like a good plan, but how to implement remains yet to be seen. I want to bring this to a friend to see what he thinks.
Do you know any good exchanges to short BTC on?