In a report titled “Why Is The Bitcoin Futures Curve So Steep?” JPMorgan Chase analysts examined the rising futures and derivatives market surrounding bitcoin, supplied insights as to why the contango is so steep and explored what the longer term holds for the financial asset because it turns into more and more financialized.
Listed here are a number of the highlights from the report.
“As has typically been the case prior to now, the expansion and gradual maturation of cryptocurrency markets has naturally generated curiosity in derivatives and different sources of leverage. Although futures commerce in opposition to a spread of pairs, Bitcoin unsurprisingly dominates this nascent market. Equally to the spot market, these merchandise commerce inside a extremely fragmented ecosystem, with almost 30 lively venues. The overwhelming majority is traded offshore as properly, with lower than 15% of the full open curiosity listed on main, regulated home venues just like the CME (Exhibit 1). Normalized depth in futures has additionally stored tempo with the deepening of the money market, suggesting it too is benefiting from institutional inflows and improved liquidity provision in spot (Exhibit 2).”
With the launch of CME bitcoin futures contracts in late 2017, institutional buyers in the USA started to have entry to bitcoin derivatives publicity, however entry to “spot bitcoin” has been more durable to come back by, even because the bitcoin market cap has elevated greater than 200 p.c above the 2017 peak.
The analysts supplied up potential causes for why the contango has remained so massive. Among the many attainable explanations supplied by JPMorgan is counterparty and repatriation danger in offshore markets, issues with acquiring spot BTC publicity within the legacy system and, subsequently, the Grayscale Bitcoin Belief (GBTC) being a principal supply of BTC publicity on the road (and the entire premium/discount problems that come together with the funding automobile).
“Why has such enticing pricing not merely been arbitraged away? One might maybe blame counterparty and repatriation danger in unrelated offshore markets, however actually not the CME. In a market with rampant bullish sentiment and heavy retail involvement it’s tempting to easily blame demand for leverage. And that’s actually true to some extent. Nevertheless, there are additionally some extra idiosyncratic however equally necessary elements of how these contracts are designed within the context of market segmentation which can be particular to Bitcoin and sure clarify a considerable fraction of this richness.”
JPMorgan believes that the introduction of a bitcoin exchange-traded fund (ETF) will compress the yields supplied by the commerce, as a liquid funding automobile that trades at internet asset worth (NAV) will give buyers the entry to “spot BTC” that they want with the intention to execute the arbitrage commerce.
As proven within the chart under, internet positions within the CME bitcoin futures market exhibits that hedge funds have continued to extend their quick positions into 2021, totaling about $1.45 billion on the time of writing. Are hedge funds bare quick bitcoin? Completely not, they’re merely executing the money and carry commerce, and capturing the big unfold within the course of.
“These foundation trades are significantly enticing within the cryptocurrency market. As of this writing, the June CME Bitcoin contract affords ~25% annualized slide relative to identify. The richness of futures is much more acute if we broaden our view to incorporate unrelated exchanges, the place carry might be as excessive as 40+% (Exhibit 4). To place this in context, only a few fiat currencies, together with each developed and rising markets, supply simply monetizable native yields (e.g., from FX swaps) in extra of 5% (Exhibit 5). There’s in fact the particular case of TRY, however with native client worth inflation round 10% or larger, as in comparison with the explicitly deflationary financial coverage and cross-border transferability of Bitcoin, this hardly appears a believable substitute.”
It’s fairly bullish for JPMorgan to match bitcoin with overseas fiat currencies, and never solely spotlight the large alternative supplied by the steep futures curve, but additionally spotlight the disinflationary financial coverage, transferability and world liquidity of the asset all through the report. The analysts additionally pointed to the worldwide facet of bitcoin’s liquidity and market penetration, displaying the yield supplied on CME futures in addition to different offshore markets.
The report additionally pointed to the introduction of a bitcoin ETF as a key step for the property liquidity and buying and selling volumes into the longer term.
“This makes launching a Bitcoin ETF within the U.S. the important thing to normalizing the pricing of Bitcoin futures, in our view. As has been extensively mentioned, it might scale back many boundaries to entry, bringing new potential demand into the asset class. A danger issue price contemplating, nonetheless, is that it could additionally make foundation buying and selling far more environment friendly and enticing at present pricing, significantly if these ETFs might be bought on margin. We’d anticipate that to convey extra foundation demand into futures markets, particularly the CME but additionally doubtlessly different onshore exchanges. To the extent that contango normalizes for these contracts, we’d anticipate some pass-through to pricing on unrelated exchanges as properly, since presumably there’s some arbitrage exercise between the 2.”
In a big, however anticipated growth, the massive banks appear to be eyeing the bitcoin market in a major approach. JPMorgan certainly is not the one legacy establishment eyeing the developments within the ecosystem, and it is just a matter of a time earlier than it begins to get publicity itself, presumably by way of the money and carry commerce.
The important thing query for buyers is, what occurs if the contango doesn’t normalize because the bitcoin spot and derivatives market proceed to develop exponentially?
What occurs when the markets of a completely scarce financial asset and a fractionally-reserved fiat foreign money with centrally-controlled low cost charges converge?
Perhaps, simply perhaps, the true “danger free price” is bitcoin…