Large returns on cash taking advantage of bitcoin's contango

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

Post by Cortopassi » Wed Mar 10, 2021 1:57 pm

I am interested, if for nothing else, to learn. Please start another thread. Thanks
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Kriegsspiel » Wed Mar 10, 2021 1:58 pm

vincent_c wrote:
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.
It sounds like this is a good something to know how to do, so yea man, bring it.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 2:32 pm

Going back to the main topic in this thread.

I know very few people are actually going to try this.

The only way I was able to actually arbitrage this was because I already had the actual BTC so that I could sell my BTC as I was buying the ETFs and you have to have a good idea of what the premium/discount of the ETF is intra day.

Once you have enough of the ETF then you can short the futures and buy back your actual BTC.

If you don't have the ability to do this then it means you will have to have a long or short position on BTC and actually introduce some market timing which is why I think this arbitrage opportunity still exists.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Cortopassi » Wed Mar 10, 2021 2:56 pm

So, then to be clear, are you saying on UB/ES/GC it is highly unlikely any arbitrage on a human timescale is likely not possible?

I certainly have long positions on all three in some fashion through physical/GLD, TLT and VTI.

Again, not that I'd do this without a 100% guarantee, which I know is not possible, so I wouldn't do it...
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 3:00 pm

Cortopassi wrote:
Wed Mar 10, 2021 2:56 pm
So, then to be clear, are you saying on UB/ES/GC it is highly unlikely any arbitrage on a human timescale is likely not possible?

I certainly have long positions on all three in some fashion through physical/GLD, TLT and VTI.

Again, not that I'd do this without a 100% guarantee, which I know is not possible, so I wouldn't do it...
I started a new topic for this.

Arbitrage is what keeps all markets in check but with the traditional markets the arbitrage is done by institutions so there are normally no opportunities for average investors to take advantage of.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by dualstow » Wed Mar 10, 2021 4:15 pm

bitcoininthevp wrote:
Wed Mar 10, 2021 8:08 am

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?
b,

Is this a loophole that is going to close soon if everyone does it? It just seems to be too good to be true. A free lunch.
True free lunches must be temporary.
But until expiry, isn’t there anything else that can go wrong? Not a a disaster, but severely mitigated profit potential?

Vincent, no loans for me.
traveling...
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Mark Leavy » Wed Mar 10, 2021 5:29 pm

I spent a few hours looking at this this afternoon and couldn't figure out a way to hold BTC in the same brokerage account as the future.

Barring that, the separate accounts have to assume you have huge exposure. One account has you long, and the other short.
In the OP's example, I would go long one BTC on Coinbase and short 1 future in my brokerage. No way in hell, I'm holding a short bitcoin future all by it's lonesome. A bitcoin spike and I'd be liquidated in a heartbeat.

For instance, using Interactive Brokers, I could go long GBTC and short the future (BRR) but GBTC doesn't track bitcoin well enough for my comfort.

IBKR doesn't seem to have any mechanism for going long the actual spot price of BTC - only futures.


What am I missing?
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 5:44 pm

It only works in my specific case
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 5:45 pm

dualstow wrote:
Wed Mar 10, 2021 4:15 pm
bitcoininthevp wrote:
Wed Mar 10, 2021 8:08 am

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?
b,

Is this a loophole that is going to close soon if everyone does it? It just seems to be too good to be true. A free lunch.
True free lunches must be temporary.
But until expiry, isn’t there anything else that can go wrong? Not a a disaster, but severely mitigated profit potential?

Vincent, no loans for me.
Profit is guaranteed at the end. As long as you can make the journey in between now and then.

Making sure you are not overleveraged in the trade and keep margin requirements with your broker/exchange and you should be good.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 5:49 pm

Mark Leavy wrote:
Wed Mar 10, 2021 5:29 pm
I spent a few hours looking at this this afternoon and couldn't figure out a way to hold BTC in the same brokerage account as the future.

Barring that, the separate accounts have to assume you have huge exposure. One account has you long, and the other short.
In the OP's example, I would go long one BTC on Coinbase and short 1 future in my brokerage. No way in hell, I'm holding a short bitcoin future all by it's lonesome. A bitcoin spike and I'd be liquidated in a heartbeat.

For instance, using Interactive Brokers, I could go long GBTC and short the future (BRR) but GBTC doesn't track bitcoin well enough for my comfort.

IBKR doesn't seem to have any mechanism for going long the actual spot price of BTC - only futures.


What am I missing?
Portfolio margin or something similar helps with the margins yes. But even if not, you can size this trade accordingly (small) with the different legs on different exchanges.

In your setup it sounds like you could short the future in your brokerage in small quantity and buy spot from coinbase (or wherever).

An exchange like deribit makes that easy as you deposit Bitcoin and short the future against that deposited Bitcoin.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Mark Leavy » Wed Mar 10, 2021 5:55 pm

bitcoininthevp wrote:
Wed Mar 10, 2021 5:49 pm
Mark Leavy wrote:
Wed Mar 10, 2021 5:29 pm


What am I missing?
Portfolio margin or something similar helps with the margins yes. But even if not, you can size this trade accordingly (small) with the different legs on different exchanges.

In your setup it sounds like you could short the future in your brokerage in small quantity and buy spot from coinbase (or wherever).

An exchange like deribit makes that easy as you deposit Bitcoin and short the future against that deposited Bitcoin.
Okay, but if that is the only way to do it, it is far from "risk free". The frequent small profits are adequate compensation for the tail risk of this trade blowing up on you in an overnight BTC spike.

Edit: Okay, I just saw that you referenced deribit as a possible way to hold both the long and the short in the same account. I don't know anything about it. I'll look at it. But, it becomes less attractive if I have to move large amounts of cash into some lower tier broker.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 6:04 pm

Proper Bitcoin futures require 100% margin to short at least at IBKR.

I was curious as well when b said you can size this to what you want. Then maybe’s he is referring to futures on a crypto exchange.

By the way, a contract size is 5 BTC so take that into consideration for smaller accounts.
Last edited by vincent_c on Wed Mar 10, 2021 6:09 pm, edited 1 time in total.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 6:08 pm

I’ve noted “Margin considerations on the CME futures position” as a consideration in the original post. This really is the only concern and can be solved by sizing the trade smaller.

This is not a new trade. Cash and carry has been around forever and traditional finance talks about it as basically risk free. In fact the downsides they note that you can’t find any cash and carry opportunities in markets these days because it gets arbitraged away.

Deribit is more of a crypto native exchange (no dollars) so proceed with caution there, you’re entering the Wild West and exchange risk much higher than CME or other traditional.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 6:09 pm

bitcoininthevp wrote:
Wed Mar 10, 2021 6:08 pm
I’ve noted “Margin considerations on the CME futures position” as a consideration in the original post. This really is the only concern and can be solved by sizing the trade smaller.

This is not a new trade. Cash and carry has been around forever and traditional finance talks about it as basically risk free. In fact the downsides they note that you can’t find any cash and carry opportunities in markets these days because it gets arbitraged away.

Deribit is more of a crypto native exchange (no dollars) so proceed with caution there, you’re entering the Wild West and exchange risk much higher than CME or other traditional.

Contract size is 5 BTC
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 6:11 pm

vincent_c wrote:
Wed Mar 10, 2021 6:04 pm
Proper Bitcoin futures require 100% margin to short at least at IBKR.

I was curious as well when b said you can size this to what you want. Then maybe’s he is referring to futures on a crypto exchange.
Just size the trade as a few % of your account. Bitcoin would have to 50x to blow your margins. And even when getting close you could close the position and/or use the profits from the spot BTC to balance back.

Or find a broker with portfolio margining options.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 6:12 pm

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

Post by bitcoininthevp » Wed Mar 10, 2021 6:24 pm

If 5 BTC is the minimum and that too big and you can’t portfolio margin or find a broker or another exchange that will help then I guess it won’t work for you.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Mark Leavy » Wed Mar 10, 2021 6:31 pm

Deribit is restricted in the USA.
Deribit Restricted Countries

The access or use of our Platform and the services we offer is not available if you are located, incorporated or otherwise established in, or a citizen or resident of any of the countries in the overview below.

Cuba;
Guam;
Iran;
Iraq;
Japan;
Democratic People's Republic of Korea;
Panama;
Puerto Rico;
Samoa;
Sudan;
Syrian Arab Republic;
United States;
Virgin Islands (U.S.).
I'm sure I could get around that, but let's just say it doesn't give me the warm and fuzzies.

And yes, someone could make it work by sizing the trade smaller. As pointed above, one future is 5 bitcoins, so 'small' is relative.
The risk / reward calculation is still the same however. With a smaller trade, (in reference to your margin) you have less likelihood of blowing up and you make less return on your assets. It is exactly the same risk reward calculation. You can still blow up, you are just accepting less profit to blow up less often.

I say the profits are fairly priced for the risk. This is not a free lunch and not the sort of asymmetric bets I enjoy.

Best of luck to anyone who wants to try this. You'll probably make money almost every time :)
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Mark Leavy » Wed Mar 10, 2021 6:38 pm

bitcoininthevp wrote:
Wed Mar 10, 2021 6:24 pm
If 5 BTC is the minimum and that too big and you can’t portfolio margin or find a broker or another exchange that will help then I guess it won’t work for you.
Portfolio Margin only works if you can hold the long and the short in the same portfolio. I haven't seen a way to do that in the USA.
And, to be clear, I wouldn't have any issue with the trade if you could do it this way. I would probably try it.
Last edited by Mark Leavy on Wed Mar 10, 2021 6:40 pm, edited 1 time in total.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 6:40 pm

The trade remains a risk free arbitrage. Just because your current jurisdiction and exchanges rules make it hard for you doesn’t change the fundamentals here. There are other venues with other requirements or better flexibility.

Maybe this is part the reason the trade remains.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 6:40 pm

Mark Leavy wrote:
Wed Mar 10, 2021 6:38 pm
bitcoininthevp wrote:
Wed Mar 10, 2021 6:24 pm
If 5 BTC is the minimum and that too big and you can’t portfolio margin or find a broker or another exchange that will help then I guess it won’t work for you.
Portfolio Margin only works if you can hold the long and the short in the same portfolio. I haven't seen a way to do that in the USA.
Mark, have you read how I am doing this
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by bitcoininthevp » Wed Mar 10, 2021 6:41 pm

Mark Leavy wrote:
Wed Mar 10, 2021 6:38 pm
bitcoininthevp wrote:
Wed Mar 10, 2021 6:24 pm
If 5 BTC is the minimum and that too big and you can’t portfolio margin or find a broker or another exchange that will help then I guess it won’t work for you.
Portfolio Margin only works if you can hold the long and the short in the same portfolio. I haven't seen a way to do that in the USA.
And, to be clear, I wouldn't have any issue with the trade if you could do it this way. I would probably try it.
I think there are some brokers on the CME and bakkt that provide a way of margining this sort of thing.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by Mark Leavy » Wed Mar 10, 2021 6:45 pm

vincent_c wrote:
Wed Mar 10, 2021 6:40 pm
Mark Leavy wrote:
Wed Mar 10, 2021 6:38 pm
bitcoininthevp wrote:
Wed Mar 10, 2021 6:24 pm
If 5 BTC is the minimum and that too big and you can’t portfolio margin or find a broker or another exchange that will help then I guess it won’t work for you.
Portfolio Margin only works if you can hold the long and the short in the same portfolio. I haven't seen a way to do that in the USA.
Mark, have you read how I am doing this
No, I saw your reference to using futures for a synthetic PP, but I didn't connect the dots to the bitcoin arbitrage.

Edit: Okay, I went back and read your posts and it appears that you are taking a long position with a bitcoin ETF and then shorting a BRR future. Do you mind sharing which ETF? I looked at doing this with GBTC and the tracking error could easily wipe out the profits.
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Re: Large returns on cash taking advantage of bitcoin's contango

Post by vincent_c » Wed Mar 10, 2021 7:38 pm

Mark Leavy wrote:
Wed Mar 10, 2021 6:45 pm
Do you mind sharing which ETF? I looked at doing this with GBTC and the tracking error could easily wipe out the profits.
Mark,

So obviously with IBKR your short position has to be fully collateralized.

The reason I can do this is because I normally run a fully funded futures PP portfolio which means I invest in futures but they are fully backed by cash invested in something like SHV. Because right now with rates so low and zero return on SHV I needed to get creative.

So essentially I have a huge amount of cash collateral sitting in my brokerage account.

I also had over 5 BTC in my crypto accounts (this is key).

The ETF that I used I had to track for a week to make sure it got to decent tracking hence I just started this. I'm happy to share the ETF it is ticker BTCC from Purpose.

The problem is that to buy 250k+ of the ETF I would have moved the markets as it represented 5% of daily volume on these ETF at times. So basically I needed to be patient I set limit orders on the ETF that when they hit I would sell my physical BTC to neutralize my position. I also had to try to make sure the ETF was trading at a discount not a premium but I couldn't guarantee this (it is a risk) and ultimately it worked out ok.

Once I had my BTC exposure in ETF, I shorted the BRR futures on CME and I immediately bought back my physical BTC at spot.

Any other way I think is too risky and that's why I think it only works in my specific case.
Last edited by vincent_c on Wed Mar 10, 2021 7:42 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 7:40 pm

bitcoininthevp wrote:
Wed Mar 10, 2021 6:41 pm
Mark Leavy wrote:
Wed Mar 10, 2021 6:38 pm
bitcoininthevp wrote:
Wed Mar 10, 2021 6:24 pm
If 5 BTC is the minimum and that too big and you can’t portfolio margin or find a broker or another exchange that will help then I guess it won’t work for you.
Portfolio Margin only works if you can hold the long and the short in the same portfolio. I haven't seen a way to do that in the USA.
And, to be clear, I wouldn't have any issue with the trade if you could do it this way. I would probably try it.
I think there are some brokers on the CME and bakkt that provide a way of margining this sort of thing.
Honestly with respect I am not following what you are saying here. The CME margin requirements are clear for long positions and short positions your broker decides.
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