December BTC futures cross $73,500 , so has everybody been going insanely optimistic?

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Bitcoin’s three-month futures premium hit a new peak of 50%, indicating market inefficiencies.

For over a month, Bitcoin (BTC) has been unable to break through the $60,000 barrier. Nonetheless, amid the impasse, BTC futures prices have never been more bullish. If standard spot exchanges are trading about $59,600, June BTC contracts are trading over $65,000.

Futures futures often sell at a premium, primarily in neutral-to-bullish markets, and this is true for all assets, including stocks, equities, indices, and currencies. A 50% annualised premium (basis) for contracts expiring in three months, on the other hand, is very rare.

BTC futures curve, in USD. Source: bitcoinfuturesinfo.com

These fixed-calendar futures, unlike the permanent contract or inverse swap, do not have a financing cost. As a result, their prices would be significantly different from those of standard spot markets. Fixed-calendar futures mitigate potential financing cost swings for investors, which can hit up to 43 percent a month.

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The seller, on the other hand, profits from a predictable premium, which normally locks in longer-term arbitrage strategies. By buying spot (regular) BTC and selling futures contracts at the same time, one gains a zero-risk exposure with a guaranteed gain. As a result, if stocks are bullish, the seller of futures contracts wants higher earnings (premium).

To justify locking in funds rather than promptly cashing out, three-month futures typically trade at a 10% to 20% discount to standard spot exchanges.

 

OKEx BTC 3-month futures annualized premium (basis). Source: Skew.com

The chart above indicates that even during the 250 percent recovery between March and June 2019, the futures basis remained below 25%. Such occurrences resurfaced only recently, in February 2021. Bitcoin increased by 135 percent in 60 days before the 3-month futures premium reached the 25% annualised mark on February 8, 2021.

Although specialist traders favour fixed-month calendar futures, retail traders prefer permanent contracts because they escape the inconvenience of expirations. Furthermore, retail traders deem it risky to pay nominal premiums of 10% or higher, even if permanent contracts (inverse swaps) are more expensive while the financing rate is considered.

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BTC coin-based perpetual futures funding rate. Source: Bybt.com

Although the latest 0.20 percent funding cost per 8-hour is exceptional, it is not unheard of in BTC markets. This fee is equal to 19.7 percent a month, although it only lasts longer than a few days.

Arbitrage desks participate when the financing cost is high, purchasing fixed-calendar contracts and selling perpetual futures. As a result, unsustainable retail long leverage typically pushes up futures base, rather than the other way around.

Inefficiencies can persist as long as crypto-derivatives markets are essentially unregulated. While a 50% basis premium can be unusual, keep in mind that retail traders have no other way to exploit their positions. As a result, transient distortions occur, which are not inherently concerning from a trading standpoint.

As long as exorbitant funding rate payments persist, leverage longs will be forced to close their positions due to the rising cost. As a result, the December contract price of $73,500 does not actually reflect investors’ preferences, and such a premium could decline.

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