Large returns on cash taking advantage of bitcoin's contango

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bitcoininthevp
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Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 8:08 am

The futures market for bitcoin is in contango. It almost always is. See here for the futures price of a bitcoin in September.

https://www.deribit.com/main#/futures?tab=BTC-24SEP21

Currently the futures premium is 22% annualized. That means while a bitcoin today is worth $55,000 a bitcoin in September is worth $63,000.

How can someone in cash take advantage of this premium, generate ~20% returns on cash, without any of Bitcoin's price volatility?

- Buy 1 bitcoin on Coinbase (-$55,000)
- Sell 1 September future on the CME (+$63,000)
- Hold until September future expires (you make $8,000)
- Sell back the bitcoin

You make $8000 "risk free" here:

- If bitcoin goes to $0, your futures position makes $63,000 and you lose $55,000 on your purchased bitcoin. Net: $8000.
- If bitcoin goes to $1,000,000, your futures position loses $937,000 and your purchased bitcoin is worth $1,000,000. Net: $8000.

Wait, but why the quotes around "risk free".

There is some risk of course:

- You could lose your bitcoin somehow
- CME could default or explode somehow
- Margin considerations on the CME futures position

But these are either remote risks or something that can be easily mitigated.

Wait, but why isnt everyone doing this?

The same reason you are reading this post with extreme skepticism is the same reason this arbitrage opportunity continues to persist.

So maybe use some small portion of that large cash position in your PP to earn sick margins?
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Kriegsspiel » Wed Mar 10, 2021 8:25 am

bitcoininthevp wrote:
Wed Mar 10, 2021 8:08 am
The futures market for bitcoin is in contango. It almost always is. See here for the futures price of a bitcoin in September.

https://www.deribit.com/main#/futures?tab=BTC-24SEP21

Wait, but why the quotes around "risk free".

There is some risk of course:

- You could lose your bitcoin somehow
- CME could default or explode somehow
- Margin considerations on the CME futures position

But these are either remote risks or something that can be easily mitigated.
PARIS (Reuters) - A fire destroyed some servers and temporarily shutdown others at OVHcloud on Wednesday, just two days after the French cloud computing firm kicked off plans for an initial public offering. Europe’s largest cloud services provider told clients including the French government, the Centre Pompidou and cryptocurrency exchange Deribit to activate their disaster recovery plans following the blaze in Strasbourg, east France.

Cryptocurrency exchange Deribit said its blog was down but that trading had not been impacted
link
Phew, close call.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 9:40 am

Kriegsspiel wrote:
Wed Mar 10, 2021 8:25 am
bitcoininthevp wrote:
Wed Mar 10, 2021 8:08 am
The futures market for bitcoin is in contango. It almost always is. See here for the futures price of a bitcoin in September.

https://www.deribit.com/main#/futures?tab=BTC-24SEP21

Wait, but why the quotes around "risk free".

There is some risk of course:

- You could lose your bitcoin somehow
- CME could default or explode somehow
- Margin considerations on the CME futures position

But these are either remote risks or something that can be easily mitigated.
PARIS (Reuters) - A fire destroyed some servers and temporarily shutdown others at OVHcloud on Wednesday, just two days after the French cloud computing firm kicked off plans for an initial public offering. Europe’s largest cloud services provider told clients including the French government, the Centre Pompidou and cryptocurrency exchange Deribit to activate their disaster recovery plans following the blaze in Strasbourg, east France.

Cryptocurrency exchange Deribit said its blog was down but that trading had not been impacted
link
Phew, close call.
Funny, but to be fair, deribit was just a site I used that shows 24/7 futures pricing. No part of this potential trade.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 10:28 am

I just started doing this.

But not using bitcoin but I took a risk and used one of the newer ETFs.

The logic behind it is I have fully funded futures contracts where I have nowhere to invest my collateral that is less than the risk free rate + X% implied financing rate on futures without actually losing money.

But if I do bitcoins future arbitrage I can hopefully monitor it and actually get higher interest on my cash collateral.

Most people cannot actually do this with real bitcoin because the on and off ramps can bleed up to 3% if you want to convert it back to fiat terms. If BTC goes up and your futures lose, you have more crypto but your fiat brokerage account loses money and you have less collateral in fiat.

The real risk is what happened with gold spot and futures prices in march where futures prices did not drop as much as spot prices but this is less likely to happen because the BRR is actually based on the price of BTC traded on the exchanges.

Edit: it's not completely risk free as you need to manage the trade into the ETF and then quickly hedge it with the futures position. I justify it as taking a trade on top of the arbitrage trade.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 11:14 am

Coinbase fees are .5% for the lowest denomination ($10k or under).
https://help.coinbase.com/en/pro/tradin ... -fees/fees

Much less for even modestly higher volumes.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 11:17 am

vincent_c wrote:
Wed Mar 10, 2021 10:28 am
The real risk is what happened with gold spot and futures prices in march where futures prices did not drop as much as spot prices but this is less likely to happen because the BRR is actually based on the price of BTC traded on the exchanges.
Not really* an issue if the prices between spot and future do diverge. At expiry of the futures position, the future will equal the spot price.

* margin/collateral concerns aside
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 11:32 am

My broker doesn’t allow physical delivery (Ibkr)
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Kriegsspiel » Wed Mar 10, 2021 12:57 pm

bitcoininthevp wrote:
Wed Mar 10, 2021 9:40 am
Funny, but to be fair, deribit was just a site I used that shows 24/7 futures pricing. No part of this potential trade.
Stipulated.

I'm sure it was funnier to me, because I had just read that article maybe 2 minutes before I read your post. I started grinning at the link, then laughed at the bullet.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by dualstow » Wed Mar 10, 2021 1:01 pm

Fascinating! I have have never bought or sold futures of anything, and I don't plan to. I'd love to see a report from anyone who gives this a shot.
Meanwhile, very happy to have let the bulk of my BTC ride.
traveling...
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Cortopassi » Wed Mar 10, 2021 1:07 pm

I would love to see a report as well. i think contango is discussed a lot in oil markets if I recall, but these arbitrage situations are usually killed quickly by the machines. To have such a potentially big one sit available for humans to actually trade and profit from it, I am interested.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Kriegsspiel » Wed Mar 10, 2021 1:12 pm

I understand the concept of a covered call, but I don't know the mechanics of options trading. That's my "why isn't everyone doing this."

EDIT: I'm wondering why the financiers, like Pal et al, that are heavily into crypto aren't arbitraging this away?
Last edited by Kriegsspiel on Wed Mar 10, 2021 1:15 pm, edited 2 times in total.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 1:12 pm

dualstow wrote:
Wed Mar 10, 2021 1:01 pm
Fascinating! I have have never bought or sold futures of anything, and I don't plan to. I'd love to see a report from anyone who gives this a shot.
Meanwhile, very happy to have let the bulk of my BTC ride.


If you have any kind of variable rate loan + an unlevered PP, then you should consider using futures (or options in a synthetic long position) to obtain the cheapest possible borrowing rate. No need to qualify for it and only the PP has all the assets that allow you to do this.

UB, GC, ES.

If you need smaller sizes you can go with MGC and MES for gold and stocks.

For the bonds, it's trickier you can use ZB but then you run into negative convexity issues. You can also use ZT if you want to diversify your yield curve exposure. In the end it's likely that you will have to use some TLT or EDV.

The thing is UB is the only bond futures that doesn't have a negative convexity issue and properly tracks TLT. This means that if you have any bond exposure but can also get FDIC rates then any deep cash should take advantage of the arbitrage between the lowest implied financing on treasury futures and essentially a government subsidized savings rate.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 1:18 pm

Kriegsspiel wrote:
Wed Mar 10, 2021 1:12 pm
I understand the concept of a covered call, but I don't know the mechanics of options trading. That's my "why isn't everyone doing this."
There is no option involved in this trade.

Simple cash and carry strategy.

Im thinking it might be a lack of bitcoin understanding by the finance folks and a lack of finance understanding by the bitcoin folks which results in this premium sitting on the table.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 1:21 pm

vincent_c wrote:
Wed Mar 10, 2021 1:12 pm
dualstow wrote:
Wed Mar 10, 2021 1:01 pm
Fascinating! I have have never bought or sold futures of anything, and I don't plan to. I'd love to see a report from anyone who gives this a shot.
Meanwhile, very happy to have let the bulk of my BTC ride.


If you have any kind of variable rate loan + an unlevered PP, then you should consider using futures (or options in a synthetic long position) to obtain the cheapest possible borrowing rate. No need to qualify for it and only the PP has all the assets that allow you to do this.

UB, GC, ES.

If you need smaller sizes you can go with MGC and MES for gold and stocks.

For the bonds, it's trickier you can use ZB but then you run into negative convexity issues. You can also use ZT if you want to diversify your yield curve exposure. In the end it's likely that you will have to use some TLT or EDV.

The thing is UB is the only bond futures that doesn't have a negative convexity issue and properly tracks TLT. This means that if you have any bond exposure but can also get FDIC rates then any deep cash should take advantage of the arbitrage between the lowest implied financing on treasury futures and essentially a government subsidized savings rate.
Im not sure what any of this means. Is it relevant to the topic of garnering risk free yield on cash using a cash and carry bitcoin strategy?

If not, I think you’re confusing an already potentially confusing topic.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Kriegsspiel » Wed Mar 10, 2021 1:23 pm

bitcoininthevp wrote:
Wed Mar 10, 2021 1:18 pm
Kriegsspiel wrote:
Wed Mar 10, 2021 1:12 pm
I understand the concept of a covered call, but I don't know the mechanics of options trading. That's my "why isn't everyone doing this."
There is no option involved in this trade.

Simple cash and carry strategy.
I'm open to being schooled, but AFAIK what you described is a basic covered call option trade.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 1:24 pm

bitcoininthevp wrote:
Wed Mar 10, 2021 1:21 pm
vincent_c wrote:
Wed Mar 10, 2021 1:12 pm
dualstow wrote:
Wed Mar 10, 2021 1:01 pm
Fascinating! I have have never bought or sold futures of anything, and I don't plan to. I'd love to see a report from anyone who gives this a shot.
Meanwhile, very happy to have let the bulk of my BTC ride.


If you have any kind of variable rate loan + an unlevered PP, then you should consider using futures (or options in a synthetic long position) to obtain the cheapest possible borrowing rate. No need to qualify for it and only the PP has all the assets that allow you to do this.

UB, GC, ES.

If you need smaller sizes you can go with MGC and MES for gold and stocks.

For the bonds, it's trickier you can use ZB but then you run into negative convexity issues. You can also use ZT if you want to diversify your yield curve exposure. In the end it's likely that you will have to use some TLT or EDV.

The thing is UB is the only bond futures that doesn't have a negative convexity issue and properly tracks TLT. This means that if you have any bond exposure but can also get FDIC rates then any deep cash should take advantage of the arbitrage between the lowest implied financing on treasury futures and essentially a government subsidized savings rate.
Im not sure what any of this means. Is it relevant to the topic of garnering risk free yield on cash using a cash and carry bitcoin strategy?

If not, I think you’re confusing an already potentially confusing topic.
Well you need a primer into how futures can tie into the PP for those who might want to dip their toes. Look if you ultimately don't understand it then you're out of your depth. Nothing wrong with ETFs, but knowledge is power in finance.
Last edited by vincent_c on Wed Mar 10, 2021 1:26 pm, edited 1 time in total.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 1:25 pm

Kriegsspiel wrote:
Wed Mar 10, 2021 1:23 pm
bitcoininthevp wrote:
Wed Mar 10, 2021 1:18 pm
Kriegsspiel wrote:
Wed Mar 10, 2021 1:12 pm
I understand the concept of a covered call, but I don't know the mechanics of options trading. That's my "why isn't everyone doing this."
There is no option involved in this trade.

Simple cash and carry strategy.
I'm open to being schooled, but AFAIK what you described is a basic covered call option trade.
Nope, you're going to be schooled here.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Kriegsspiel » Wed Mar 10, 2021 1:32 pm

vincent_c wrote:
Wed Mar 10, 2021 1:25 pm
Kriegsspiel wrote:
Wed Mar 10, 2021 1:23 pm
bitcoininthevp wrote:
Wed Mar 10, 2021 1:18 pm
Kriegsspiel wrote:
Wed Mar 10, 2021 1:12 pm
I understand the concept of a covered call, but I don't know the mechanics of options trading. That's my "why isn't everyone doing this."
There is no option involved in this trade.

Simple cash and carry strategy.
I'm open to being schooled, but AFAIK what you described is a basic covered call option trade.
Nope, you're going to be schooled here.
IS

THIS

SARCASM

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Re: Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 1:34 pm

Kriegsspiel wrote:
Wed Mar 10, 2021 1:23 pm
bitcoininthevp wrote:
Wed Mar 10, 2021 1:18 pm
Kriegsspiel wrote:
Wed Mar 10, 2021 1:12 pm
I understand the concept of a covered call, but I don't know the mechanics of options trading. That's my "why isn't everyone doing this."
There is no option involved in this trade.

Simple cash and carry strategy.
I'm open to being schooled, but AFAIK what you described is a basic covered call option trade.
Covered call:
- 1x long stock (spot)
- 1x short call (say, I sell a $100,000 call for $1000)

Example: I buy 1 bitcoin ($55,000) and sell 1x 100,000 call against it. I profit up to 100k then my profit stops. I also make the premium on selling the call option. So at a $100,000 price, Profit= $45,000+$1000 = Gain $46,000.

Same example above, different outcome: if bitcoin goes to $0, I lose all the value that was in the bitcoin (-$55,000), and I keep whatever premium I sold the call for ($1000). I lost $54,000.

Cash and carry:
- 1x long stock (spot)
- 1x short future

Example: I buy 1 bitcoin (say $55,000) and sell 1x September future ($63,000) against it. I will eventually profit from the spread between the spot price of BTC and the futures price ($8000). See my original post for other outcomes, which all end at $8000 profit.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 1:38 pm

bitcoininthevp wrote:
Wed Mar 10, 2021 1:34 pm
Kriegsspiel wrote:
Wed Mar 10, 2021 1:23 pm
bitcoininthevp wrote:
Wed Mar 10, 2021 1:18 pm
Kriegsspiel wrote:
Wed Mar 10, 2021 1:12 pm
I understand the concept of a covered call, but I don't know the mechanics of options trading. That's my "why isn't everyone doing this."
There is no option involved in this trade.

Simple cash and carry strategy.
I'm open to being schooled, but AFAIK what you described is a basic covered call option trade.
Covered call:
- 1x long stock (spot)
- 1x short call (say, I sell a $100,000 call for $1000)

Example: I buy 1 bitcoin ($55,000) and sell 1x 100,000 call against it. I profit up to 100k then my profit stops. I also make the premium on selling the call option. So at a $100,000 price, Profit= $45,000+$1000 = Gain $46,000.

Same example above, different outcome: if bitcoin goes to $0, I lose all the value that was in the bitcoin (-$55,000), and I keep whatever premium I sold the call for ($1000). I lost $54,000.

Cash and carry:
- 1x long stock (spot)
- 1x short future

Example: I buy 1 bitcoin (say $55,000) and sell 1x September future ($63,000) against it. I will eventually profit from the spread between the spot price of BTC and the futures price ($8000). See my original post for other outcomes, which all end at $8000 profit.
Long stock and short futures is completely covered.

Covered call you have downside because you start losing when the stock price falls below the option premium received.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Kriegsspiel » Wed Mar 10, 2021 1:39 pm

Ah, makes sense now.

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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Cortopassi » Wed Mar 10, 2021 1:43 pm

In the buying bitcoin and selling the future scenario, I wasn't clear, are one of you actually doing this currently or this is all on paper?

And in the bitcoin example, you are trying to profit from the arbitrage, right?

In the other ES type examples, are you saying there is profit opportunity there as well, or you are showing a hedging example? If just hedging, you are giving away some % to be protected, like a married put, right? And in an environment where the PP doesn't give massive profit % anyway, that hedging % could eat up a significant amount of your profit?
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 1:47 pm

Cortopassi wrote:
Wed Mar 10, 2021 1:43 pm
In the buying bitcoin and selling the future scenario, I wasn't clear, are one of you actually doing this currently or this is all on paper?
No comment personally, but does the proposed trade at least make sense to you?

https://www.investopedia.com/terms/c/ca ... action.asp

Yes, profiting from the arbitrage. (not "trying"! :) )
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 1:49 pm

Cortopassi wrote:
Wed Mar 10, 2021 1:43 pm
In the buying bitcoin and selling the future scenario, I wasn't clear, are one of you actually doing this currently or this is all on paper?

And in the bitcoin example, you are trying to profit from the arbitrage, right?

In the other ES type examples, are you saying there is profit opportunity there as well, or you are showing a hedging example? If just hedging, you are giving away some % to be protected, like a married put, right? And in an environment where the PP doesn't give massive profit % anyway, that hedging % could eat up a significant amount of your profit?
I'm doing this right now.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 1:51 pm

Cortopassi wrote:
Wed Mar 10, 2021 1:43 pm
In the buying bitcoin and selling the future scenario, I wasn't clear, are one of you actually doing this currently or this is all on paper?

And in the bitcoin example, you are trying to profit from the arbitrage, right?

In the other ES type examples, are you saying there is profit opportunity there as well, or you are showing a hedging example? If just hedging, you are giving away some % to be protected, like a married put, right? And in an environment where the PP doesn't give massive profit % anyway, that hedging % could eat up a significant amount of your profit?
We can start another thread for how to replicate the PP using futures contracts. I was pointing out to dualstow because he said that he doesn't plan to buy or sell futures that there are certain situations that it makes a lot of sense to use futures as a tool. The PP is a unique portfolio which allows you to take advantage.
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