CME Bitcoin futures trade at a discount, but is that a good or a bad thing?
The Chicago Mercantile Exchange (CME) Bitcoin (BTC) futures have been trading below Bitcoin’s spot price on regular exchanges since Nov. 9, a situation that is technically referred to as backwardation. While it does point to a bearish market structure, there are multiple factors that can cause momentary distortions.
Typically, these CME fixed-month contracts trade at a slight premium, indicating that sellers are requesting more money to withhold settlement for longer. As a result, futures should trade at a 0.5% to 2% premium in healthy markets, a situation known as contango.
However, a prominent futures contract seller will cause a momentary distortion in the futures premium. Unlike perpetual contracts, these fixed-calendar futures do not have a funding rate, so their price may vastly differ from spot exchanges.
Whenever there's aggressive activity from shorts (sellers), the two-month futures contract will trade at a 2% or higher discount.
Notice how 1-month CME futures had been trading near the fair value, either presenting a 0.5% discount or 0.5% premium versus spot exchanges. However, during the Nov. 9 Bitcoin price crash, aggressive futures contracts sellers caused the CME futures to trade 5% below the regular market price.
The present 1.5% discount remains atypical but it can be explained by the contagion risks caused by the FTX and Alameda Research bankruptcy. The group was supposedly one of the largest market makers in cryptocurrencies, so their downfall was bound to send shockwaves throughout all crypto-related markets.
The insolvency has severely impacted prominent over-the-counter desks, investment funds and lending services, including Genesis, BlockFi and Galois Capital. As a result, traders should expect less
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