Here's How the Archegos Debacle May Have Spilled Over to Bitcoin

The difference between bitcoin futures premium on CME and other crypto exchanges has widened since the end of March, when Bill Hwang’s troubles surfaced.

Apr 7, 2021 at 7:56 p.m. UTC
Updated Sep 14, 2021 at 12:37 p.m. UTC

There is a small ripple effect from the multibillion-dollar Archegos Capital fallout to the crypto world, which is reflected on the bitcoin futures premium on CME. But the crypto market is largely unaffected.

The latest crisis on Wall Street involves a rapid de-risking triggered by the trading crisis at Archegos Capital, a family office managing at least $10 billion that bet $50 billion-$80 billion on leverage that led to nearly $5 billion of losses for Switzerland’s Credit Suisse and the departure this week of its investment-banking chief

Chicago-based CME, which offers traditional finance players bitcoin exposure with its popular futures contract, may have been slightly affected, as seen in its CME futures premium, or the price reflected in futures contracts minus the current spot price. That premium has lagged behind the equivalent gauge at popular retail-focused exchanges including Binance, Deribit, FTX and OKEx.

According to a top crypto-industry investor, the discrepancy might reflect the Wall Street deleveraging.

“We are seeing everywhere de-leveraging in the traditional financial space,” Jeff Dorman, chief investment officer at the digital-asset investment firm Arca Funds, told CoinDesk in a phone interview. “The CME mostly serves your typical big hedge funds, big mutual funds, and the leverage is less than it was because of this leverage crackdown from the prime brokers and from the exchanges” in traditional markets. 

On the CME, the annualized bitcoin futures premium rate, the gap between bitcoin’s long-term futures contract prices and the current spot market price, is, on average, at 8.67%. That compares with a range of 27%-31% on crypto exchanges including FTX, Deribit, Binance, and OKEx, according to crypto derivatives data provider Skew.

The difference between bitcoin futures premium on CME and other crypto exchanges has widened since the end of March, when the troubles surfaced at Bill Hwang’s Archegos Capital.

Patrick Heusser, a senior cryptocurrency trader at Zurich-based Crypto Broker AG, explained the futures premium is sometimes a function of the demand for leverage by traders on an exchange. 

In a bull market like right now, “the traders who look to go long on leverage are willing to pay the premium, the cost for the leverage,” Heusser said. Because "there is not much leverage you can take on the CME, the future premium is not that steep or big” compared with other platforms.

In theory, the futures premium on CME should be lower than it is on other crypto exchanges due to its more restrictive trading rules and limited leverage positions, Heusser added.

Another explanation is the premium has been rising on crypto exchanges since the end of March because of traders’ bullish views on bitcoin.

There are “more overly confident traders and more leveraged longs probably,” says Bendik Norheim Schei, head of research at Arcane Research. “Traders are expecting higher prices and taking on long positions.”

Traders on retail-focused crypto-derivatives exchanges “are already in the crypto ecosystem,” Dorman said. “It’s just a completely different investor base and completely different leverage base. So what was happening is you still have really aggressive investors in the crypto world who are levering up to buy as much risk as they can.”

DISCLOSURE

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.