- Bitcoin futures are in backwardation, inverting the basis trade that delivered risk-free returns.
- Analysts believe that unwinding the basis trade in part caused the sharp sell-offs last week.
- They explain whether the current setup is a sign of the bottom and the rebound is sustainable.
In the midst of the crypto boom that saw bitcoin surge to $63,000 at one point, traders were raking in double-digit risk-free returns by simply exploiting the difference between its spot price and futures contract price.
The so-called bitcoin basis trade bets on the cryptocurrency’s basis, or the premium of its futures price over spot price. For many crypto traders, bitcoin has been in contango for as long as they could remember, so they built a strategy that seeks to long spot bitcoin and short a distant futures contract.
Then, they simply wait for the two prices to converge and pocket the spread as the payoff. The nearly risk-less trade is an alluring attribute of the crypto market when bonds yield next to nothing and traditional banks could only offer a paltry 0.04% interest rate for the average savings account.
