10% Return on Market-Neutral Bitcoin Bets as BTC Surpasses $41K: Analysts' Insight

• Bitcoin Basis Trade Offers Attractive Double-Digit Returns
• Rise in Bitcoin Value
• Bitcoin Cash and Carry Arbitrage
• Strategy Details
• Current Futures Contracts and Returns
• Comparison with Risk-Free Rate and Future Projections
• Reasons for Futures Premium and Future Prospects

Bitcoin Basis Trade Offers Attractive Double-Digit Returns

As the futures premium surpasses 10%, the market-neutral Bitcoin$42,260 -0.64% basis trade currently offers an annualized double-digit return. The attraction of this strategy could potentially increase with the introduction of spot ETFs in the coming year, according to an analyst.

Rise in Bitcoin Value

Bitcoin (BTC), the cryptocurrency with the highest market value, recently crossed the $41,000 mark, a feat not seen since April 2022. This surge is certainly a boon for directional traders. However, market-neutral traders looking forward to stable returns, regardless of price trends, also have something to cheer about as returns on such strategies are steadily increasing.

Bitcoin Cash and Carry Arbitrage

This is seen in the bitcoin cash and carry arbitrage, also referred to as the basis trade. This market-neutral strategy seeks to profit from discrepancies in the spot and futures market. Current data from the crypto derivatives exchange, Deribit, reveals that this strategy now provides at least a 10% annualized return. The basis is the disparity between futures prices and the spot price of the asset in question.

Strategy Details

The strategy works by taking a long position in the spot market and selling futures concurrently when these are trading at a premium to the spot price. Setting these counter positions allows traders to earn a fixed return as the premium diminishes over time, eventually aligning with the spot price on the expiration date of the futures contract, irrespective of the spot market trend.

Current Futures Contracts and Returns

At the time of reporting, front-month, three-month, and longer-dated futures contracts listed on Deribit traded at an annualized premium of 8% to 12%. This implies that a trader implementing a cash and carry strategy today could anticipate an 8% to 12% return (excluding trading costs) due to the mispricing in the two markets.

According to crypto quant researcher Samneet Chepal, The cash-carry basis trade, which was a highlight in the 2020/2021 bull market, is showing signs of a comeback. Currently, the futures basis is hovering near YTD highs, around 10%.

Comparison with Risk-Free Rate and Future Projections

The return from the basis trade is notably higher than the so-called risk-free rate of 4.2% offered by the U.S. 10-year Treasury note. However, the yield spread between the basis trade and the 10-year note is nowhere near what was seen in early 2021 when three-month BTC futures traded at a premium of 40% and the 10-year note yielded around 1.5%. Assuming that BTC continues its recent bull run, things could improve.

As Chepal further added, This could be just the beginning. With ETF news expected in early Q1 next year, we might see these numbers climb even higher, potentially surpassing previous cycle highs.

Reasons for Futures Premium and Future Prospects

Generally, futures contracts trade at a premium to the spot price, especially during bull runs. Since October 1, Bitcoin has seen a 54% rise, due to several reasons including the anticipated launch of one or more spot-based exchange-traded funds in the U.S.

This increase is attributed to a combination of factors, including widespread optimism due to the upcoming ETF decision, easing concerns following the settlement of legal issues by Binance, escalating geopolitical tensions, and a steady increase in institutional engagement. As Luuk Strijers, Chief Commercial Officer of Deribit stated, Another supporting sign is the futures basis rising beyond 10%, a strong indicator of current market sentiment."

Edited by Jonathan Stoker