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Topic: Everything you wanted to know about BTC futures but were afraid to ask! - page 2. (Read 3941 times)

legendary
Activity: 2114
Merit: 15144
Fully fledged Merit Cycler - Golden Feather 22-23
How many ETFs have been launched since the first US approval? I mean, the percentage difference fillippone [5.92% / 1.47%] mentioned might be the reason ETFs are in a regulated space, so to speak.

As long as I know only two future based ETF’s have been approved in the US. And both of them suffer from the same negative feature: as they have to scoop CME futures, they are exposed to the specific CME contango structure. I am afraid this is the “price” that you want to pay to have a regulated instrument being in the US, while in other jurisdictions there are cheaper instruments like the BTCE, Who, being physically settled, haven’t this drawback.
legendary
Activity: 1456
Merit: 5874
light_warrior ... 🕯️
How many ETFs have been launched since the first US approval? I mean, the percentage difference fillippone [5.92% / 1.47%] mentioned might be the reason ETFs are in a regulated space, so to speak. While Bitcoin and most Bitcoin-related companies are not. I also do not exclude that Biden spoiled the mood of investors with his new bill, (although I may be mistaken, since I am not sure if ETF investors can be considered as investors BTC). Btw, I was sorting through my bookmarks and came across a couple of articles, so if no one minds, I'll leave them here for now so that in case of anything I know where to look.

Quote
[1] On-chain Fundamental Analysis: Article on using network metrics to assess the primary value of the cryptoassets.
[2] Woobull Charts: Various price models for Bitcoin.
[3] Algo Trading Strategies: Some quantitative trading strategies.
legendary
Activity: 2114
Merit: 15144
Fully fledged Merit Cycler - Golden Feather 22-23
Will they be able to gain what they have lost?
No. Not unless the futures market sees an extended period of backwardation.

Right now the ETF will see another approximately 1% loss due to rolling from November to December contract (assuming no slippage).

I do believe so.
I am close to replicating the index in the Twitter thread above. I suspect the cost of rolling shoots on the roll dates, but adding 1% cost each month is bad.
Again, bad for the final investor.
All this while the SEC is sleeping.
 
copper member
Activity: 2870
Merit: 2298
Will they be able to gain what they have lost?
No. Not unless the futures market sees an extended period of backwardation.

Right now the ETF will see another approximately 1% loss due to rolling from November to December contract (assuming no slippage).
legendary
Activity: 2114
Merit: 15144
Fully fledged Merit Cycler - Golden Feather 22-23
We were talking about the "hidden costs "of a Futures ETF.


Maybe it's too early to call, but here you have a few data points:



Using the 19th of October as a reference, we see that Bitcoin appreciated 5.92%, while the ETF appreciated only 1.47%.
It's an incredible down performance, in such a short period of time.

Will they be able to gain what they have lost?

legendary
Activity: 2114
Merit: 15144
Fully fledged Merit Cycler - Golden Feather 22-23
Contango is going to killProFunds redditivity according to some analyst:

Contango Conmigo: Why a Bitcoin Futures ETF Could Be a Bloody Ride

There is a Twitter thread, cited in that article, which was very interesting:


https://twitter.com/AtlasPulse/status/1451228229210099726?s=20

This measure the price difference of the 3rd and 2nd future, this is another way of measuring the "cost" of holding the futures.

Of course this cost is going to be paid by the investor in the Future ETF, not by the manager.

This is a point worth observing in the next few months, when the ETF's AUM is going to grow significantly and the roll position will grow bigger.



legendary
Activity: 2114
Merit: 15144
Fully fledged Merit Cycler - Golden Feather 22-23
After two days of trading, BITO has a little more than 1.2 Billion of AUM.

It is much easier for an institutional fund, such as a pension fund or an endowment to account for buying an ETH verses buying a "non-traditional" investment such as a hedge fund (or bitcoin). My guess is there are some investment managers who want bitcoin exposure that cannot account for holding bitcoin directly.

Absolutely. This is the rationale behind the convoluted design of those vehicles.
 Even if I must admit that comparing this EFT to other financial options, like Grayscale (trading at a huge 15% to NAV, or other European ETP, investing directly in cash, looks a suboptimal choice. But I am sure there is a lot of regulatory, fiscal, and mandate constraints on those managers.
copper member
Activity: 2870
Merit: 2298
After two days of trading, BITO has a little more than 1.2 Billion of AUM.

It is much easier for an institutional fund, such as a pension fund or an endowment to account for buying an ETH verses buying a "non-traditional" investment such as a hedge fund (or bitcoin). My guess is there are some investment managers who want bitcoin exposure that cannot account for holding bitcoin directly.
legendary
Activity: 2114
Merit: 15144
Fully fledged Merit Cycler - Golden Feather 22-23
After two days of trading, BITO has a little more than 1.2 Billion of AUM.

As of COB of 21 Oct 2021, these were the fund Holdings:



they bought an aggregated of 3,812 contracts. As each of them controls 5 Bitcoin, the market value of such a position is right around 1,221,000.

So this position, as expected, almost exactly covers the AUM of the fund.
On the CME website, we discover they hold a large percentage of the Open Interest (essentially, the position held open overnight) of the whole contract:



Bear in mind that each account has a position limit of 4,000 contracts (due to be reduced to 2,000 in the last three trading days).

Actually, BITO is the only player in the future market at the CME, and they are forced to buy.
This is reflecting on the measures.
First of all, all this buying sent the curve in contango again. Annualized future basis went crazy again, and cash and carry trades (selling future vs buying spot) are profitable again.



This is certified by the COT documents, which tells us that "Leveraged Funds" accounts are again turning short and shorter in the future



You see there is a correlation between leveraged accounts short and basis, and the causality flows from the first picture to the second: when the basis is high, those accounts try to profit from it, selling the future and buying the cash. As they sell, the basis compresses, and once they get to their target, they exit the position, closing their short and returning toward a neutral position.


legendary
Activity: 1988
Merit: 1007
Beyond Imagination
OMG, im shocked, really its walls of text to explain one way of investing? I mean why there is need to create such complex ways of investing in Bitcoin world?
Buying is best investment, why complicate things? Often its to confuse less bright or people less beign able to manage their funds, to make them make wrong decisions and loose money.
I really don't like complicated instruments of investment, banks love to create them to steal money from customers over and over. Its really sad how many people falling for that.

Totally agree!

Although there is a need for hedging price risk for a future delivery of commodities/goods, such kind of risk does not exist for bitcoin, since it is always delivered instantly in an hour

Futures and options for bitcoin seems to be merely a complicated way of gambling using leverage
full member
Activity: 597
Merit: 147
This is a pretty good topic to my interest., I've been in the crypto market for a while now and my interest in long-term investing has always been something I'm interested in right now. , i have done a lot of research on futures contracts contracts of many projects including Chng finance this is my project on futures contracts and your topic is very helpful for those who want to learn more about operation and details everything about futures contract.
legendary
Activity: 2114
Merit: 15144
Fully fledged Merit Cycler - Golden Feather 22-23
Oh, you spoiled my "suprise".

But it's not surprise as it is well known.


https://twitter.com/EricBalchunas/status/1448738997543612418?s=20


Complete ETF list:



copper member
Activity: 2870
Merit: 2298
There is a big push in CME futures markets.


Where does this observation lead?
What cause such an excitement in the market?
CME futures are cash settled. This means it is more difficult for trader to arbitrage price discrepancies.

Say for example, interest rates, the cost of holding, and the cost of borrowing bitcon are all zero (for simplicity sake). With a "physical" delivery futures contract, the cost of an arbitrage trade would be trading commissions, and slippage when trading both the futures contract and when trading bitcoin. However when a futures contract is settled via cash, an arbitrage trader will need to close his position in bitcoin when the contract expires, which includes  the cost of price slippage when he closes his trade. It is unknown how deep orderbooks will be when the futures contract expires, so a trader will have to guess the cost of slippage when closing the bitcoin portion of the trade, and he will likely need to assume there will be an increased slippage cost in his model to protect himself against losses.

A "physical" delivery futures contract is much easier to arbitrage. If the futures price is above the spot price, he can simply buy spot bitcoin, short the futures contract, pay the trading fees, incur slippage, then transfer his bitcoin from his exchange account to his futures account, and wait for the contract to expire. Or he could buy the futures contract, short bitcoin, transfer the delivered bitcoin from his futures account at expiration to his exchange account to cover his short position, if the futures price is below the spot price.

Obviously, the cost to borrow bitcoin is not zero, and as such, the futures price compared to the spot price will change in part by changes in the cost to borrow bitcoin.
legendary
Activity: 3458
Merit: 9272
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legendary
Activity: 2114
Merit: 15144
Fully fledged Merit Cycler - Golden Feather 22-23
Some very interesting development in the futures market.
There are many tweets and article out there with the same content.
I will try to provide a summary of them in the most complete way.

There is a big push in CME futures markets.
There are a few sign of it:

  • CME futures are trading dearer that other exchange. CME futures rarely trade at premium against other exchanges' futures:


    Here we are looking at the difference of the front month on CME against other exchanges' front month: if negative CME futures trades at discount, the other way round when the premium is positive, as it is now: The CME future has an higher price than other futures: there is more demand for CME futures.

  • CME Open Interest is at historical maximums:

    The buys on CME are kept open overnight: those are not trading positions, meant to be closed intraday, but stay open on multiple days, as signaled by open interest growth.
    Of course the graph here reflects the increased dollar value of the underlying, but the meaning is almost unaffected: open positions are here to stay.

    Also the share of Open Interest on CME has grown more than on other we changes: meaning that the open positions held at CME crew quicker than others:
    Even if CME has not huge trading volumes, has a steady size on open interest, meaning it is used for more long term trades
    legendary
    Activity: 2114
    Merit: 15144
    Fully fledged Merit Cycler - Golden Feather 22-23
    A very interesting tweet today:



    https://twitter.com/btcization/status/1423692870771425290?s=21

    What does it mean?

    When the funding rate is high, means that future long open interest is high, so future holders pay an high price to maintain their longs.

    The fact that funding rate is so low now, means that this move is not a derivatives driven squeeze, rather it is a spot driven move. This means that there are less stops to be triggered, and rally is much more solid.

    Very nice.
    legendary
    Activity: 2114
    Merit: 15144
    Fully fledged Merit Cycler - Golden Feather 22-23
    An interesting article on carry trade by Coindesk:

    How One Fund Used the Carry Trade to Beat Bitcoin


    Quote
    How the carry trade works

    Carry trading, or cash and carry arbitrage, is a market-neutral strategy that exploits inefficiencies in the spot and the futures market. It combines a long position in the spot market and a short position in futures when the market is in contango – a condition where the future prices of an underlying asset are higher than the current spot price. As expiration nears, the premium evaporates; on the day of the settlement the futures price converges with the spot market price, generating relatively riskless returns.


    Yes, this is the basic idea I have been mentioning in the last posts here.

    The closing paragrap is quite distrubing to me:

    Quote
    Instead, some may look to take on another bet: selling options, which can be quite risky as the maximum return is limited to the extent of premium paid, while losses can be significant.

    “The carry trade has no premium anymore,” Tang noted. “Option implied volatilities are still high, so there’s still yield to be harvested there by selling calls and puts, or strangles, if we think the market is going to consolidate around these levels.”



    This is a totally different trade: carry trade is basically an arbitrage: a riskless (or with limited risks) position while shorting options is one of the riskiest positions I can think of.
    Really, mixing apples and pears.
    legendary
    Activity: 2114
    Merit: 15144
    Fully fledged Merit Cycler - Golden Feather 22-23
    Finally I found a graph or the reason behind the closing of position I mentioned in the previous post:



    Here you can see the contango of the bitcoin futures curve has disappeared completely, and it actually now has a backwardation shape. If you recall the OP correctly , backwardation means that future prices are lower than current one (spot price).
    In the graph above backwardation happens when the basis line crosses below zero.

    legendary
    Activity: 2114
    Merit: 15144
    Fully fledged Merit Cycler - Golden Feather 22-23
    A quick update on contango: for a variety of reason we have explored in the previous posts, the steep contango that was characterising the BTC future curve, has now gone, for the desperation of all cash&carry traders.

    If we look at the weekly CoT documents by the CME:



    We see that leveraged accounts have been recently buying back their shorts as there is less profitability to sell the future against buying the underlying. Hence many of those positions got closed.

    legendary
    Activity: 2114
    Merit: 15144
    Fully fledged Merit Cycler - Golden Feather 22-23
    One month into bitcoin futures CME is doing a recap of the situation.

    Micro Bitcoin futures: one-month trading recap
    Micro-sized bitcoin, major possibilities


    Quote
    In the first month of trading, Micro Bitcoin futures (MBT) volume has reached 653,373 total contracts traded across seven expirations, indicating strong customer interest and growing liquidity in the new smaller-sized contract.

    Sized at 1/10 of one bitcoin or 1/50 of the larger Bitcoin futures contract, Micro Bitcoin futures offer greater access for traders of all sizes to scale bitcoin exposure with greater precision and enjoy the price discovery of transparent futures.
     
    Month one trading highlights:
    • 28,408 average daily volume
    • 20,926 average daily open interest
    • 36% of overall volume came from outside the United States
    • Over 54% of the trades were executed during non-US trading hours with quoting available nearly 24 hours a day
    • ~3,700 unique, active accounts trading






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