Bitcoin ETFs Could Boost Cash and Carry Returns

In the coming weeks, many bitcoin futures-based exchange-traded funds (ETFs) may make their debut in the United States. These products could reignite interest in the well-known “cash and carry” arbitrage method. Putting further purchasing pressure on the spot market.

Instead of buying actual bitcoins, the ETFs would buy bitcoin futures contracts, mostly front-month trading on a regulated exchange. Like the Chicago Mercantile Exchange (CME) to mirror the cryptocurrency’s price performance. If Wall Street welcomes these ETFs, the futures premium, or the difference between futures and spot prices. It would climb dramatically, boosting cash and carry yields. Cash and carry entails buying an asset in the current market while simultaneously selling futures contracts. Carry trades are direction-neutral and profit from the two prices eventually converge. (At expiration, the futures price converges with the spot price.)

“There will be greater inflows into buying futures if the futures ETF is released.” This would push the futures curve even deeper into contango [a condition in which futures contracts trade at a premium to spot prices], providing a strong incentive for carry traders, according to Ilan Solot, global market strategist at Brown Brothers Harriman. “They’d begin the deal by purchasing BTC on the spot market, causing a spike in spot prices.”

The Future Premium Update

Early this year, when futures premiums on the CME and other exchanges surged to 20%. Also, more in tandem with bitcoin’s price climb cash and carry arbitrage a major hit with institutions. So, by selling front-month or three-month futures contracts and buying bitcoin in the spot market, numerous corporations could lock in yearly gains of over 20%. Premiums, on the other hand, have fallen to single digits as a result of bitcoin’s 35% drop in May and as big exchanges like Binance and FTX have reduced leverage.

With the return of the bull to the crypto market, premiums have climbed dramatically this month. According to statistics from the crypto derivatives research firm Skew, the front-month contract on the CME is currently trading at an annualized premium of 16 percent versus a discount of -0.4 percent at the end of September. Double-digit futures premiums appear to be sustainable, especially with futures-based ETFs on the way.

“A potential increase in yield in the space is one of the primary effects of a futures-based ETF,” QCP Capital noted in a Telegram message on Friday. “If ETF funds are obliged to buy futures rather than spot, the futures premium will rise.” A 10-to-20 percent ‘risk-free’ rate [cash and carry yield] could become the new standard.” With its tacit approval of a futures-based bitcoin ETF on Friday, the US Securities and Exchange Commission (SEC) opened the door for the general public to invest in bitcoin. ProShares could be the first to go live next week, though it may not start trading right away.

Other Cryptocurrency Ledger

BlockFi, a cryptocurrency lender, and Cathie Wood’s Ark Investment Management both put their names on applications for futures-backed Bitcoin ETFs this week. Meanwhile, Valkyrie Investments amended the prospectus for its futures-backed ETF with the symbol BTF, implying a launch. At the start of the month, authorities were reviewing nine bitcoin futures ETF applications, according to Bloomberg Intelligence.

Futures-based ETFs expected to attract more mainstream investors to the crypto market. These instruments, on the other hand, are prone to contango bleed and typically underperform the underlying asset.

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