For many people, crypto is a risky investment. However, that can’t be further from the truth.
Here’s the easiest Bitcoin trade I can identify at the moment.
Dear traditional Wall Street looking for USD denominated returns. Here is a free game plan.
Step #1: Buy/Borrow physical Bitcoin.
Step #2: Sell Bitcoin Futures.
Step #3: You are now market neutral earning a "risk free" 15%+ annually. pic.twitter.com/RFiCVlWKyU
— Joe Burnett (🔑)³ (@IIICapital) February 11, 2021
What we are doing here is making use of the futures market and executing a cash and carry trade.
This trade has been mentioned several times by the popular Twitter user planB, and you can hear him talk about it on Stefan Livera’s podcast here.
Here’s how it works:
We build up a LONG position in Bitcoin (essentially purchasing Bitcoin), while establishing a SHORT Bitcoin futures position (agreeing to sell at a specific future date). This is considered a risk-free trade as from a fiat currency (USD/EUR) perspective, we would be market neutral. The price fluctuation of Bitcoin would not affect us as we have already agreed to sell at a higher price in the future.
This is a very important point, because this premium allows investors to make 20% risk free: you buy BTC at spot and sell a future at same time, you’ll make 20% annualised upon delivery. We live in a crazy financial world. https://t.co/ZmXRwYoM0U
— Marc van der Chijs (@marcvanderchijs) January 18, 2021
In the futures market, this is a situation called contango. Contango is a situation where the futures price of a commodity is higher than the spot price.
In all futures market scenarios, the futures prices will usually converge toward the spot prices as the contracts approach expiration.
More coins getting locked-up in derivative contracts for people trying to capture "risk-free" spreads. Here's my question: who's going to step in front of this #Bitcoin freight-train & go net-short without first bidding the underlying to write the 100% escrowed contracts?! pic.twitter.com/ctbBcovJZM
— Preston Pysh (@PrestonPysh) February 15, 2021
This might not make any sense to a beginner, but it’s most definitely a real strategy that is used by advanced traders.
Essentially, you are being paid to hold Bitcoin for a certain amount of time. Your only risk is that of losing your private keys and hence your Bitcoin (arguable a serious responsibility to shoulder, and perhaps the main reason for this significant contango). You might also have some transactional costs to cover if you are delegating custody to a third party (a debatable choice in any case).
A worked example of how such a trade would work and what returns are possible is available here.
Bullish investors who might not have the money right away to buy Bitcoin, would be keen to lock in a price that is just a bit higher than the current price at a future date where they anticipate having the necessary fiat to be able to make a Bitcoin purchase. In simple terms, if the current price of Bitcoin is $50,000, and you think it will be $100,000 in 6 months’ time (but you don’t have the cash right now to buy) it’s an easy choice to establish a futures contract to buy Bitcoin in 6 months’ time, at say a price of $60,000.
You can use a platform like Deribit or Binance to execute this strategy. I also have a guide on Bitcoin futures as well as Bitcoin options that should be useful if you are not familiar with the futures market.