Bitcoin (BTC) fought to break the $ 60,000 resistance for about a month. But despite the dead end, bitcoin futures markets have never been so optimistic. While regular spot exchanges trade for around $ 59,600, BTC contracts with maturities in June trade over $ 65,000.
Futures tend to trade at a premium, especially in markets that are neutral to bullish, and this happens with all assets, including commodities, stocks, indices and currencies. However, the annual (base) premium of 50% for contracts expiring after three months is very rare.
BTC Forward Dollar Curve. Source: bitcoinfuturesinfo.com
Unlike a standing contract or a reverse exchange, these fixed calendar futures contracts do not contain a financing interest rate. Thus, the price will vary significantly from the regular spot exchange. Fixed calendar futures compensate for the final jump in financing prices from the buyer’s perspective, which can be as high as 43% per month.
On the other hand, the seller receives a predictable premium and usually follows long-term arbitrage strategies. By buying spot (regular) bitcoins and selling futures contracts at the same time, a person gets zero risk exposure with a predetermined return. Thus, the seller of the futures contract demands a higher profit (premium) when the markets tend to be bullish.
Typically, 3-month futures contracts are traded at prices ranging from 10% to 20% over regular spot exchanges to justify blocking funds rather than redeeming them immediately.
OKEx BTC 3-month deferred annual premium (basis). Source: Skew.com
The chart above shows that even during the 250% rally from March to June 2019, the futures base was below 25%. Such phenomena appeared quite recently, in February 2021. Bitcoin increased 135% in 60 days before the 3-month futures premium exceeded 25% annual interest rate on February 8, 2021.
While professional traders tend to prefer futures contracts for a tight monthly calendar, segmentation over fixed contracts avoids the hassle of expiration. Furthermore, retailers find it expensive to pay 10% or more of nominal fees, although standing contracts (reverse swaps) are more expensive when looking at financing rates.
Constant future financing rate based on BTC. Source: Bybt.com
While the recent financing rate of 0.20% in 8 hours is unusual, it is certainly not uncommon in the bitcoin markets. This commission is 19.7% per month, but rarely lasts more than two days.
The high level of financing forces arbitrage firms to enter into, buy fixed-price contracts and sell perpetual futures contracts. Thus, long-term leverage is usually paid on the basis of a futures contract and not the other way around.
With the cryptocurrency derivatives markets largely unregulated, the shortcomings will continue to prevail. So while 50% base rating seems out of the ordinary, keep in mind that retailers have no other way to make money on their positions. This in turn causes temporary distortions, but not necessarily a business concern.
Although the fees for financing interest rates remain prohibitive, long-term positions have to be closed due to their increased value. Thus, the $ 75,500 December contract does not necessarily reflect the investor’s expectations, and this premium should be reduced.