Bitcoin’s 3-month futures premium reached a staggering high of 50% which might signal market inefficiencies. Bitcoin (BTC) has been struggling to break the $60,000 resistance for nearly a month. But despite this impasse, BTC futures markets have never been quite bullish.
While the regular spot exchanges are trading at above $59,600, the BTC contracts maturing in June are now trading above $65,000. The futures contracts seem to trade a premium, primarily on neutral-to-bullish markets, and this occurs on every asset, including indexes, commodities, currencies, and equities.
Nevertheless, a 50% annualized premium (basis) for contracts expiring within three months is quite rare.
Unlike the perpetual contract or inverse swap, the fixed-calendar futures do not have a funding rate. Therefore, their price will majorly differ from the regular spot exchanges. Fixed-calendar futures eliminates eventual funding rates’ spikes from the buyers’ perspective that can reach up to 43% per month.
On the flip side, the seller usually benefits from a predictable premium, locking longer-term arbitrage strategies. By concurrently buying the spot (regular) bitcoin and selling the futures contracts, an investor gains a zero-risk exposure with a predetermined gain. Hence, the futures contracts seller demands a higher premium (profits) whenever markets lean bullish.
The 3-month futures normally trade with a 10% to 20% compared to regular spot exchanges to validate locking the funds instead of cashing out instantly.
Market charts show that even during the 250% rally between March and June 2019, the futures’ basis remained below 25%. It was only in February 2021 when this phenomenon reemerged. BTC gained 135% in 60 days before the three-month futures premium exceeded the 25% annualized level on February 8, 2021.
While professional traders seem to prefer the fixed-month calendar futures, retail dominates perpetual contracts, avoiding the expiries’ hassle. Additionally, the retail traders consider it expensive to pay 10% or bigger nominal premiums, although the perpetual contracts (inverse swaps) are more expensive when taking the funding rate into context.
Bitcoin Market Funding Rate
While the recent 0.20% funding rate per 8-hour is exceptional, it is quite unusual for the bitcoin markets. This fee is equivalent to 19.7% per month but rarely lasts more than just several days.
A high funding rate makes the arbitrage desks to intervene, buying fixed-calendar contracts and then selling the perpetual futures. Therefore, excessive retail long leverage normally pushes the futures’ basis up, not the other way around.
As the crypto-derivatives markets remain majorly unregulated, inefficiencies might continue to prevail. Hence, while a 50% basis premium appears out of the norm, one must remember that the retail traders do not have any other means to leverage their positions. In turn, it causes temporary distortions, even though not necessarily worrisome from a trading perspective.
While exorbitant funding rate fees remain, leverage longs will be compelled to close their positions as a result of growing costs. It means that December’s $73,500 contract does not generally reflect investors’ expectations, and such a premium should recede.