Capturing Bitcoin Contango Trade with Perpetual Futures

| Crypto | 11 seen

There are several ways to trade and invest with cryptocurrencies. During the several years since I've been exposed to the crypto market, I have learned quite a lot. Starting simple buy and hold, margin trading, lending, short selling, crypto options, crypto futures, and more.

In today's article, I will share some lesser-known, market-neutral, and almost zero risk trade, we use at Terramatris crypto hedge fund to grow our portfolio. Meet - The Contango trade.

What is the Contango?

  • Contango is a situation where the futures price of a commodity is higher than the spot price.
  • In all futures market scenarios, the futures prices will usually converge toward the spot prices as the contracts approach expiration.
  • Advanced traders can use arbitrage and other strategies to profit from contango.

Here is an actual trade I performed:

On September 7, 2023, I bought bitcoin futures worth 0.1 BTC at $25,689.90 per Bitcoin and simultaneously sold September 29, 2023 expiry bitcoin futures worth 0.1 BTC at $25,763.50.

Bitcoin Contago trade using futures

This is the so-called futures spread with a width of $73.6 and a holding period of 22 days.

The closer the expiry date comes, the narrower the spread will turn, in the end converging with the spot price (or long perpetual price), thus realizing the max gain from the trade with almost 0 risk. Not to say this trade is market neutral. We don't need to worry about the Bitcoin price on the expiry.

Let me illustrate

Say on September 29, 2023, the Bitcoin spot price is $30,000, if so, our long perpetual future has made us a gain of $4,310.1 while the short Bitcoin future has made a loss of -4,236,5. In the end, we make. a profit of $73.6

We make a profit even in case the Bitcoin spot price drops to $15,000 - in such case our long perpetual futures have made us a loss of -10689.9, while the short Bitcoin future made a gain of 10.763.5. . We make a profit of $73.6

As you can see, this is market market-neutral trading strategy, we make a profit in both scenarios. 

Now, as I actually sold just 0.1 ETH, my max profit also is going to be 1/10 or just $7.36

Leverage

To control this futures spread worth 0.1 BTC I was required just about $70 because I was using the leverage of 125x for the long position and 50x leverage for the short position. Technically speaking making 7.6 on 70  equals about 10.8% yield in 22 days.

Downside

Now, there are a few downsides, and the biggest is commissions, They can eat up, and you could pay about half of the potential profit in commissions. Of course, there is also exchange risk.

The bottom line

We use bitcoin contango trades occasionally at TerreMatris crypto hedge fund and look at them as short-term deposits with high returns. 

How about you? Leave e a comment, readers and I would love to hear!