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18 April 2021

A Deep Dive Into Bitcoin’s Contango

A Deep Dive Into Bitcoin’s Contango

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Currently, the spot price (market price for bitcoin on exchanges) trades lower than futures prices.

The spread for the June futures contract is more than 25 percent annualized on most major exchanges.

This means that anyone can buy bitcoin and use that bitcoin as collateral to sell the June futures contract.

The contango exists due to how profitable it is to leverage long bitcoin (and the amount of capital willing to go leverage long versus leverage short).

In a way, it is basically a futures contract that is only eight hours in duration and it always rolls over.

This funding rate is the longs paying the shorts (because more capital is naturally going to be long bitcoin, especially when the price is going up).

So, if you want to go leverage long for an extended amount of time, and the perpetual swap funding rate is high, then you’re much better off going leverage long on a futures contract that may only be trading at a 23 percent annualized premium.

If there’s an incentive to purchase billions of dollars’ of bitcoin and you know bitcoin is the world’s hardest monetary good, you likely aren’t going to accept the “risk-free” more than 20 percent because you know bitcoin will outperform that over the long run.

Since the futures contango is driven by more money wanting to leverage long than leverage short, this dynamic would need to flip, meaning more capital would need to be going leverage short than leverage long for bitcoin to switch from contango to backwardation.

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