The recent approval of Bitcoin spot ETFs also brings the cash and carry trade strategy to the table. This strategy only works if there’s a futures product available. Once the Ethereum spot ETF starts trading, we may see more cash and carry trading there as well. This trading strategy offers arbitrage options.
So, let’s find out more about the cash and carry trade.
What Is the Cash and Carry Trade?
In a cash and carry trade, an investor makes money by means of arbitrage. Now, arbitrage is when you take advantage of a price difference of the same product. For example, you buy $BTC for $70,000 on a US based exchange. As fast as you can, you sell this $BTC for $70,500 on an Asian or European based exchange.
However, the cash and carry trade uses the spot and futures market. So, your crypto asset needs to be available in the futures market. That’s a prerequisite. Otherwise, you can’t use this strategy. Now, both $BTC and $ETH have futures markets. On the other hand, $SOL doesn’t have a futures market in the US.
This cash and carry trade is often used with crypto spot ETFs. It functions as a hedge against market volatility for an asset. So, this is what happens. Traders or $BTC spot ETFs firms, buy $BTC at spot prices. However, they also immediately sell Bitcoin futures. This has an interesting result. Namely, it reduces an immediate upward pressure on the spot price. This would happen if you only bought the asset at spot price.
You can trade these futures at the CME or Chicago Mercantile Exchange. So, a future is a bet between two traders who bet on the future price of an asset. The big advantage of this strategy is that you have crypto exposure, however, without having to buy it. There are long and short positions. In a long position, you expect or bet that the price will increase. In a short position, it’s the opposite. You expect or bet that the asset price will decrease.
Source: Binance Futures Trading
What Role Spot and Futures Markets Play in This?
As already explained, the role of spot and future markets is significant in this strategy. The cash and carry trade needs both markets. The cash and carry trade is also known as the basis trade. The basis being the difference between spot and futures markets.
So, why do we call it the cash and carry trade? Well, a trader keeps carrying a position forward. That is, until a futures contract matures. In the meantime, he keeps holding the spot position. You can read our previous coverage on what a crypto Futures contract is here.
It’s also a market-neutral position. The term for this is delta-neutral. This means that it offers diversification benefits. You reduce exposure to the general market risk. That’s why many hedge funds use this strategy. One of the newer plays is the Bitcoin spot ETF. For example, they have a long bitcoin position. For this, they use Bitcoin spot ETFs. At the same time, they get a shorting Bitcoin future position. As mentioned, through the CME Bitcoin Future.
The current $BTC price is $67,667. The current $BTC Future price is $67,974. That’s a $307 or 0.5% gain for doing nothing. These differences can go up to 1%. So, although it doesn’t sound like much, it’s pretty much free money.
Now, not all markets are suitable to accommodate cash and carry trading. A market needs to have enough liquidity. So, many exchanges offer futures trading, like Binance, BYDFi, or Bybit. Bitcoin and Ethereum have enough liquidity, but smaller coins may not. But, it still allows you to cash and carry trade on BYDFi.
Folks seem extremely confused by the #Bitcoin cash and carry trade, and how it affects market structure.
It is the same mechanism in calendar expiring futures and perpetual swap funding rates, and it is a delta neutral strategy.
Let me explain how this works:
– Funding rates… pic.twitter.com/sW0QFhqwfh— _Checkmate
(@_Checkmatey_) June 10, 2024
What Is Contango and Backwardation?
Contango and backwardation are terms that fit into this trading strategy. It describes the relationship between an asset’s futures price on one side. On the other side is the expected future spot price. These terms originate from the commodities market. However, you can also use them in other markets, like crypto. So, let’s take a look at both these terms. Both deal with the situation when a futures contract matures.
What Is Contango?
When an asset’s future price is higher than the expected spot price. Here’s a sample. Let’s assume that the current $BTC price is $68,000. However, the Bitcoin futures contracts for delivery in three months goes for $68,500. So, in this situation, the futures contract trades at a premium to the current market price.
Contango can happen because of various reasons. For example, a future marker price increase. Real-world assets like crude oil or corn have more costs. For example, you may also have carrying and storage costs.
Now, Bitcoin has very low storage costs. However, you can still experience contango. For example, when the market is bullish. Like, when institutional adoption increases or other positive news.
What Is Backwardation?
Backwardation is the opposite of contango. The futures price of a commodity is lower than the expected spot price. So, a futures contract trades at a discount to the current market price. Now we assume that current $BTC price is still $68,000. However, the Bitcoin futures contracts for delivery in three months now goes for $67,500.
There are also various reasons for backwardation. For instance,
- Immediate demand.
- Supply shortages.
- Regulatory changes.
I was curious why on such high vols in crypto, we still have contango curves with long dated vol above short dated most of the time. Douglas explains that it has a lot to do with the high vol in the forwards… pic.twitter.com/ZemfukhE5P
— Imran Lakha | Options Insight (@options_insight) June 12, 2024
To sum up, the current state of Bitcoin is good for the cash and carry trade strategy. Many hedge funds use various strategies. The cash and carry trade is one of them. This strategy works especially well with Bitcoin spot ETFs.
Disclaimer
The information discussed by Altcoin Buzz is not financial advice. This is for educational, entertainment and informational purposes only. Any information or strategies are thoughts and opinions relevant to accepted levels of risk tolerance of the writer/reviewers, and their risk tolerance may be different from yours.
We are not responsible for any losses that you may incur as a result of any investments directly or indirectly related to the information provided. Bitcoin and other cryptocurrencies are high-risk investments, so please do your due diligence.
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