Institutions Eyeing High Yield Through Bitcoin Futures Trading at a “Very Steep Contango,” JPMorgan Report
JPMorgan Chase has released its new weekly report on Bitcoin, highlighting its steep futures curve.
The big banks are reportedly eyeing Bitcoins’ contango, a situation where the futures price of an asset is higher than the spot price. As Su Zhu, the CEO of Three Arrows Capital, put it, “Bankers coming for that juicy yield.”
“As of this writing, the June CME Bitcoin contract offers ~25% annualized slide relative to spot. The richness of futures is even more acute if we broaden our view to include unrelated exchanges, where carry can be as high as 40+%,” stated JPM analysts.
According to the JPMorgan report, the growth and gradual maturation of the crypto market has generated interest in derivatives and other sources of leverage. The trillion-dollar asset naturally dominates the crypto futures space.
The spread in the price on the spot market and futures market is because the latter is “out growing the pace of money willing to come in to arbitrage this spread. the market has grown super fast,” with open interest (OI) soaring to $25 billion which was mere $2 billion a year ago, explained trader CL.
“The growth has largely been demand for going long, thus they push up the premium.”
Also, this yield implied by Bitcoin futures is substantially higher than all the major currencies across developed as well as emerging markets. “The situation is even more pronounced on offshore exchanges,” JPM added.
This is the reason hedge funds continue to be record short on Bitcoin while being long on the spot.
According to JPMorgan strategists, this attractive pricing hasn’t been arbitraged away because of counterparty and repatriation risk in offshore markets. Additionally, traditional players don't really have ways to gain spot BTC exposure except for GBTC, which is the primary source but has its own set of premium issues. This premium has been negative for more than a month now.
This is where the Bitcoin exchange-traded fund in the US comes into the picture, as a “key” to normalize the price of Bitcoin futures, wrote the analysts.
Interestingly, GBTC premium went negative not long after several Bitcoin ETFs started trading in Canada, with the first one, the Purpose BItcoin ETF (BTCC), accumulating 17,013 BTC in less than two months.
While reducing barriers to entry and bringing new potential demand into the asset class, JPMorgan says the risk factor worth considering here is that “it would also make basis trading much more efficient and attractive at current pricing, particularly if those ETFs can be purchased on margin. We would expect that to bring more basis demand into futures markets, especially the CME but also potentially other onshore exchanges.”
This will normalize the funding spreads and can broaden the base of participants in BTC derivatives more generally, given that people are already willing to pay 30-40% annually to source levered long exposure, it added.