Major differences in the spot price for bitcoin and the cost of buying the cryptocurrency in the futures market create unique opportunities for traders. Several factors may be behind this development, but it could be bullish for the bitcoin price outlook no matter the catalyst.
Curious Developments Could Highlight Supply Shortage or Heightened Derivatives Demand
As bitcoin gradually matures and the ecosystem surrounding it expands further, the original cryptocurrency is increasingly behaving like a commodity. Thanks to a robust futures market that continues to grow, derivatives contracts on bitcoin also gain popularity and meaningfully impact its pricing structure.
This has resulted in a unique development that has unfolded over the last several months. Known as “contango,” bitcoin futures contracts to be settled months down the road are trading at a significant premium to spot prices. This delivers a serious arbitrage opportunity that could temporarily result in relatively high returns with minimal risk.
Contango Explained
In more traditional financial markets, primarily for commodity futures contracts, the future pricing structure can vary dramatically compared to that commodity’s spot price. One of the most common examples of contango involves oil prices. Let’s say that spot oil is trading at $50 a barrel, and a contract due in three months is trading at $55 a barrel.
This $5 delta (the difference between the futures price and spot price) represents a chance for traders to capture most of that $5 delta by selling (shorting) the futures contract at $55 a barrel and buying oil in the spot market …
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