Although Bitcoin (BTC) struggled to break the $ 60,000 resistance for almost a month, the futures markets saw historic upswing. While Bitcoin changed hands around $ 59,600 on spot exchanges, BTC contracts that expired in June were traded over $ 65,000.
Unlike permanent contracts or reverse swaps, futures have no funding rate. Therefore, their prices are calculated substantially different from normal spot exchanges. From the buyers’ perspective, fixed calendar futures eliminate increases in final funding rates that can reach up to 43 percent per month.
On the other hand, sellers often try to take advantage of predictable premiums by locking in long-term arbitrage strategies. They get zero risk on pre-determined earnings by simultaneously buying BTC from the spot market and selling their futures contracts. Therefore, the futures contracts seller demands higher profit (premium) when the markets are bullish.
They typically trade between 10 and 20 percent compared to spot exchanges to make it more logical to lock in funds rather than cashing quarterly futures immediately.
The chart above shows that even during the 250 percent rally between March 2019 and June 2019, the futures premium remained below 25 percent. This situation resurfaced in February 2021. The Bitcoin 3-month futures premium increased by 135 percent in the BTC price 60 days before it exceeded the annual level of 25 percent on February 8, 2021.
Professional traders tend to prefer fixed monthly futures, while individual traders avoid expiration issues and turn to permanent contracts. In addition, individual traders find it expensive to pay a nominal premium of 10 percent or higher, although it costs more.
While the 0.20 percent funding rate per 8 hours has been outstanding lately, it’s definitely not unusual for BTC markets. Such a price is equal to 19.7 percent per month, but rarely takes more than a few days.
As the crypto derivatives markets remain largely unregulated, inefficiencies will continue. Therefore, it should be noted that even though the 50 percent premium may seem unusual, there is no other way for individual traders to raise their positions. This causes temporary degradation, although not commercially alarming.
Due to the increasing cost of leveraged long positions, investors will have to close their positions. Thus, December’s $ 73,500 contract does not fully reflect investors’ expectations and such a premium could be withdrawn.
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