Topic: BTC basis trade - What happens if the futures spread blows out on the upside? (Read 121 times)

Assume you buy 1 BTC spot at $10k and lodge it with Binance/Bitmex etc

June futures are trading at $11k so you sell short $11k (the extra 10% due to the 10% basis).

P&L for the futures is settled in BTC and not USDt.

With this trade there's zero risk towards the price of Bitcoin as you're perfectly hedged 1:1. The trade is all about picking up that 10% premium as it will shrink to near enough zero when the June futures expire.

But sometimes crypto can and does do very strange things.

So what I can't work out re real-time margining is if the spread temporarily blows out on the UPSIDE. Perhaps due to some strange event Spot doesn't move too much but the futures blow out to a 120% premium (would probably be only be for a few mins).

Does anyone know what would happen to the position in such a situation, could the whole trade be in doubt and the Exchange seizes all or part of the physical Bitcoin it holds if the spread goes to say 80%+.

I would think the Algos would not let the premium blow out that much due to the potential 'risk-free-ish' profits on offer but again this is crypto and just last weekend we saw the futures premium go 30% negative when it was 10%+ positive the day before. I think if you'd said last Friday that the futures premium would go 30% negative two days later, 99% of the pros (who do this sort of trade) would have laughed and said impossible (we're in a bull market), but it happened.