Normally, I would advice people to run in the other direction if someone tells them they can make a profit with no risk, but this time around, I’m telling them exactly that. Except instead of asking them to send me their money, I would teach them how to do it themselves.
9% returns in less than a quarter of a trading year translates to roughly 40% annualised returns. That is far better than the annual market average of around 5–7% in developed economies and 8–10% in developing economies. That is also far better than most hedge funds are able to accomplish for their investors. The fact that investors have to take on a significant amount of risk in pursuit of those returns often goes unsaid. For similar levels of risk, investors and organisations buy government bonds. Compared to them, the returns are multifold.
The trick of the trade is called Cash and Carry Arbitrage. It involves opening a futures and spot position at the same time.
For those unaware, futures are contracts offered by derivatives exchanges where you bet on the price of an asset in the future. You do not own the actual asset, but most exchanges back up their futures contracts with the actual underlying assets. They are usually settled quarterly, although perpetual futures exist. Futures allow you to bet on an asset going down, called shorting an asset.
You probably guessed it already, but the asset in question here today in Bitcoin. The recent surge in prices, with new all time highs being hit frequently, has caused the prices of the futures contracts expiring in June 2021 to trade at an 8–9% premium compared to the actual current prices.
This has opened up some unique and interesting opportunities for savvy traders. Futures contracts are settled at the same price as spot when their expiry date comes. Which means on June 25th, the day when June 2021 bitcoin futures contracts expire, the price would be the exact same as the spot price. Doesn’t matter if it’s down 99%, or if it’s up 9999%, prices would be the same for the futures contracts and spot both, and that’s what we’re concerned with here today.
This is where the trading strategy called Cash and Carry Arbitrage comes in handy. It’s a market-neutral strategy aimed to profit from price discrepancies in one or more markets.
It’s usage today involves opening a short position for the June 2021 futures, and buying the same amount of Bitcoin on spot. This cancels out any risk because you have a long and short position of the same size open. However, the 8–9% premium that June 2021 futures are currently attracting, would steadily decay down to 0% on or before the date of the futures contracts expiring. That means that your short position would have gains of 8–9% over whatever price fluctuations happen in that time, any profit or loss apart from that 8–9% would get cancelled out by your spot long position.
This would leave us with a straight 8–9% profit with absolutely no risk. A lot of finance firms are adopting this strategy right now. “That’s what we initiated today,” Patrick Heusser, head of trading at the Swiss-based Crypto Finance AG, said in a Telegram chat, adding that the widening of the basis indicates bitcoin’s latest breakout above $60,000 is derivatives driven.
Anyone can use this strategy to lock in their profits for the time period. Arbitrage traders are plenty and are an important part of the financial markets in order to fix anomalies in the ecosystem.