The price of fixed-date futures contracts does not have a funding rate, so it differs from that on regular spot exchanges. Bitcoin futures contracts at USD 73,500 in December will not necessarily reveal investors’ views.
In the last month, Bitcoin (BTC) has struggled to break above the USD 60,000 resistance. However, the Bitcoin futures markets have never been so bullish.
Although regular spot exchanges display a price close to USD 59,600, Bitcoin contracts expiring in June show one above USD 65,000.
Futures contracts usually trade at a premium, especially in bullish neutral markets, which happen with all assets. However, an annualized (base) premium of 50% for contracts expiring in three months is uncommon.
A futures contract allows buying the underlying crypto asset at a previously agreed price at a specific time in the future. However, the investor is forced to make the purchase, which is only possible on certain exchanges.
Differences between Bitcoin Contracts and Perpetual Contracts
These fixed-date futures contracts do not have a funding rate, unlike perpetual contracts or reverse swaps. For that reason, their price will differ from what regular spot exchanges display.
From a buyer’s perspective, fixed-date futures suppress feasible peaks in financing rates, which can achieve up to 43% per month.
Besides, the seller takes advantage of a predictable premium, commonly used in longer-term arbitrage strategies. The simultaneous purchase of Bitcoin for cash and the sale of futures contracts produce a zero-risk sample with a predetermined profit.
For that reason, the seller of futures contracts demands higher profits (premium) each time the markets have a bullish trend.
Traders typically trade three-month futures at a 10% to 20% premium in contrast to regular spot exchanges. They do this to credit the blocking of funds rather than cashing them immediately.
The situation reappeared last February 2021, when Bitcoin rose by 135% after 60 days. That occurred before the 3-month futures premium exceeded the annualized level of 25% on February 8th.
Traders’ Position on Fixed-Month Futures and Perpetual Contracts
Professional traders usually choose fixed-month futures, while retail traders dominate perpetual contracts, avoiding the hassle of expirations.
In addition to that, retail traders find it costly to pay 10% or more in premiums. However, perpetual contracts are more expensive when determining the finance rate.
Although the recent funding rate of 0.20% every 8 hours is extraordinary, it has become common in the BTC markets. This fee is equivalent to 19.7% per month, but it seldom lasts more than a couple of days.
A high financing rate makes arbitration boards take part in the matter, buying fixed-date contracts and selling perpetual futures. Therefore, excessive leverage by retail longs (buyers) typically increases the basis of futures, rather than the other way around.
Given that crypto derivatives markets are still largely unregulated, differences will continue to prevail. While a 50% base premium seems uncommon, retail traders have no other means of leveraging their positions. In turn, this creates temporary distortions, not necessarily worrying from a commercial perspective.
However, as financing rates are still excessive, leveraged longs will be forced to close their positions. Therefore, a Bitcoin futures contract at USD 73,500 in December will not necessarily reveal investors’ views, and such a premium could reduce.
By Alexander Salazar