First Mover: Collapsing Bitcoin Futures Premium Offers Glimpse of New Digital Money Market

Dollar-linked "stablecoins" are being used in exotic cryptocurrency trades, similar to the way money markets serve as liquidity on Wall Street.

AccessTimeIconAug 20, 2020 at 1:14 p.m. UTC
Updated Sep 14, 2021 at 9:46 a.m. UTC

Price Point

Bitcoin traded slightly higher early Thursday at $11,772 after falling for two straight days. 

The largest cryptocurrency by market capitalization has declined 1.3% this week as the U.S. dollar strengthened in foreign exchange markets. The greenback gained support Wednesday as the Federal Reserve said it wasn't immediately planning to implement a "yield curve control" program that probably would have brought an accelerated pace of money printing.

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"The corrective moves we witnessed are necessary for the market to cool down and catch a breath," Joe DiPasquale, CEO of the cryptocurrency investment firm BitBull Capital, told CoinDesk in an email. "Moving forward, we can expect the market to lean on the support zone between $11,000 and $11,500 to consolidate and try another push above $12,000."

Market Moves

Bitcoin's mini sell-off this week has revealed a key feature of fast-evolving cryptocurrency markets: How dollar-linked "stablecoins" are being used to fund exotic futures trades, similar to the way money markets serve as a vital lifeblood on Wall Street.

As flagged earlier this week by the Norwegian cryptocurrency-analysis firm Arcane Research, prices for bitcoin futures contracts on the Chicago-based CME exchange have been trading well above "spot" prices for the underlying security. That premium rose last week to 20%, the highest in five months, seen as a sign of just how bullish big investors have become on bitcoin. 

This week's retreat in prices below $12,000 has led to a squeeze for traders who were attempting a "cash and carry arbitrage," as reported Wednesday by CoinDesk's Omkar Godbole. It's a strategy in which traders buy bitcoin and then short futures contracts on the cryptocurrency, betting the prices will eventually converge and the premium will be pocketed as a profit

The annualized premium dropped to 14% in under 48 hours as prices slid, and some traders rushed to unwind their arbitrage trades. 

Premium of bitcoin futures over spot prices for the cryptocurrency.
Premium of bitcoin futures over spot prices for the cryptocurrency.

One lesson from the episode is that traders were apparently using stablecoins such as tether (USDT) to fund the trade, according to Godbole. 

“Stablecoins are widely used as funding currencies, and there has been a high demand for these dollar-backed cryptocurrencies from institutions,” Skew CEO Emmanuel Goh told Godbole in a Telegram chat.

Bitcoin Watch

Bitcoin price chart.
Bitcoin price chart.

Bitcoin’s recent price pullback may worsen as the U.S. dollar shows signs of life on the back of minutes released Wednesday from the Federal Reserve's meeting in July. 

  • The U.S. Dollar Index, which tracks the greenback's value against that of other reserve currencies, has jumped 1% to 93 in the past 24 hours, the biggest single-day rise in two months.
  • USD has picked up on the news the Fed is not planning on implementing controversial yield curve controls on bonds – something markets had been anticipating.
  • The correlation between bitcoin and the dollar is historically weak. But in the past month there has been a growing inverse relationship between the two as more investors look for alternatives to the U.S. currency. Analysts with Goldman Sachs and some investors have warned the greenback's reserve-currency status might be at risk
  • CoinDesk pricing data shows bitcoin rising from $9,000 to $12,400 in the four weeks through Aug. 17, just as the dollar index declined to 92 from 97.
  • But in the face of a strengthening dollar, bitcoin has fallen to around $11,780, down 5% from a 2020 high reached earlier this week.
  • Continued recovery in the dollar could yield further losses for bitcoin, but a sustained rebound in the U.S. currency still looks unlikely. Interest rates likely to remain close to zero to stimulate the economy, and inflation-adjusted yields are trading at negative levels; analysts at Deutsche Bank and elsewhere say the Fed might be forced to undertake more radical monetary measures.

– Omkar Godbole

Token Watch

Ren (REN) is benefiting from rising demand for tokenized bitcoin in DeFi: Prices for the Ren token have doubled in the past few days. Like other protcols designed to produce synthetic version of cryptocurrencies, RenVM takes bitcoins and produces an ERC-20 token called renBTC that can be used in Ethereum-based applications. More than 10,000 of the tokenized bitcoin, renBTC, were locked on Monday, according to DeFi Pulse. RenBTC currently represents about 21.7% of the tokenized bitcoin market, ranking it second behind wrapped bitcoin (WBTC).

Rates to borrow the Synthetix stablecoin sUSD monetarily spiked to almost 50% Wednesday on Aave's decentralized lending platform. The cause? According to Stani Kulechov, chief executive of Aave, users were clamoring for the dollar-linked sUSD tokens to send to Curve, so they could participate win that protocol's CRV tokens via "yield farming." Prices for CRV were trading at $4.35 at the time of writing, up 14.8% in the past 24 hours, according to CoinGecko. As Arcane Research put it earlier this week, it's a "summer of crazy returns" in " exuberant DeFi."  

Aave (LEND) is seeing a surge in transactions to go with its 2020 price jump: "Despite growing criticism  about the actual value locked being significantly smaller than reported in DeFi Pulse, on-chain activity for these protocols and their tokens demonstrate thriving activity," according to a post Wednesday by the crypto-intelligence firm IntoTheBlock on's blog . The decentralized lender's token is up 29-fold this year, for a market valuation of $700 million, inspiring incredulity. The bull case is that "there is no denying that these innovations have the potential to redefine finance as we know it," IntoTheBlock wrote. CoinDesk's Will Foxley reported last week that Aave plans to work the firm RealT to tokenize home mortgages

Transactions on Aave protocol.
Transactions on Aave protocol.

-Muyao Shen

Analogs - on the economy and traditional finance

Federal Reserve officials saw need for more stimulus at last month's meeting (Fed)

Asset bubble isn't really bubble; it's rational due to easy Fed monetary policy. (WSJ)

"Pandemic has ignited a Schumpeterian process of creative destruction." (FT)

Deutsche Bank, Citi, Other Big Banks Sitting on $250B of Murky Assets (Bloomberg)

Bitcoin outperforming Apple in 2020 as computer maker hits $2T market cap.

Bitcoin's year-to-date returns versus Apple stock.
Bitcoin's year-to-date returns versus Apple stock.

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– Sebastian Sinclair

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