Bitcoin Futures ETFs May Boost Cash and Carry Yields

These ETFs could prompt more investors to buy futures. That would drive the futures curve further into contango.

Oct 17, 2021 at 4:54 p.m. UTC
Updated Oct 18, 2021 at 2:30 p.m. UTC

Omkar Godbole is the senior reporter on CoinDesk's Markets team.

Several bitcoin futures-based exchange-traded funds (ETF) may debut in the U.S. in the coming weeks. These products may revive interest in the famed “cash and carry” arbitrage strategy, which in turn would bring more buying pressure to the spot market.

The ETFs would buy bitcoin futures contracts, primarily front-month trading on a regulated venue like the Chicago Mercantile Exchange (CME), in a bid to mimic the cryptocurrency’s price performance instead of purchasing actual coins.

Assuming Wall Street embraces these ETFs, the futures premium, or the spread between futures prices and spot prices, would rise significantly, boosting yields from cash and carry strategy, which involves buying the asset in the spot market and simultaneously selling futures contracts. Carry trades are direction-neutral and profit from an eventual convergence of the two prices. (Futures price converges with the spot price on expiry).

“If the futures ETF comes out, there will be more inflows into buying futures. That would drive the futures curve further into contango [a situation where the futures contracts trade at a premium to the spot price], offering a strong incentive to carry traders,” said Ilan Solot, global market strategist at Brown Brothers Harriman. “They would start the trade by buying BTC in the spot market, creating an initial push up in spot prices.”

Cash and carry arbitrage was a big hit among institutions early this year as futures premium spiked to 20% or more on the CME and other exchanges alongside bitcoin’s price rise. So, several firms could lock in annualized returns of over 20% by selling front month or three-month futures contracts and buying the cryptocurrency in the spot market. Premiums, however, fell to single digits following bitcoin’s 35% sell-off in May and as major exchanges like Binance and FTX cut back on leverage.

Premiums have risen sharply this month with the return of the bull to the crypto market. On the CME, the front-month contract is currently trading at an annualized premium of 16% versus a discount of -0.4% at the end of September, according to data provided by the crypto derivatives research firm Skew. With futures-based ETFs likely coming soon in the U.S., double-digit futures premiums appear sustainable.

“One key effect of a futures-based ETF is the possible increase in yield in the space,” QCP Capital said in its Telegram channel on Friday. “With the ETF funds forced to buy futures instead of spot, the futures premium would be driven higher. A ‘risk-free’ rate [cash and carry yield] of 10-20% could be the new norm.”

On Friday, the U.S. Securities and Exchange Commission (SEC) opened the doors for the masses to invest in bitcoin with its tacit approval of a futures-based bitcoin ETF. ProShares may be the first to launch next week, although it may not begin trading immediately.

In the week gone by, crypto lender BlockFi and Cathie Wood’s Ark Investment Management put their names on applications for futures-backed bitcoin ETFs. Meanwhile, Valkyrie Investments updated its futures-backed ETF prospectus with the ticker BTF, hinting at a possible launch. Per Bloomberg Intelligence, the regulators were considering nine bitcoin futures ETF applications at the beginning of the month.

The consensus is that the futures-based ETFs would bring more mainstream investors to the crypto market. However, these products are vulnerable to contango bleed and usually underperform the underlying asset.

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Omkar Godbole is the senior reporter on CoinDesk's Markets team.

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Omkar Godbole is the senior reporter on CoinDesk's Markets team.

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