Don't look at market pullbacks through the eyes of old-school traders

In recent days, in addition to the sharp drop in the price of Bitcoin, there is another thing that has also attracted the attention of cryptocurrency investors and traders-CME Group's Bitcoin futures have fallen into a state of "backwardation".

Spot backwardation is also known as reverse market or reverse market (Inverted Market), popularly known as spot premium or futures discount, which means that under special circumstances, the spot price is higher than the futures price (or the price of the contract in the recent month is higher than that in the forward month contract price), the basis is a positive value. A widening spread in an inverse market can result in a profit for a bull spread and a loss for a bear spread. In the reverse market, as time goes by, the spot price and the futures price will gradually converge to the delivery month just like in the forward market. Since the demand is far greater than the supply, the spot price is higher than the futures loan price, and when the contract price rises more than the forward contract price, you can enter the market and do bull market arbitrage. But the profit potential of contrarian bull arbitrage is huge and the risk is limited. In addition, no matter in the forward market or the reverse market, the practice of bear market arbitrage is to sell contracts and buy forward contracts at the same time.

Foreign media: Nasdaq is preparing for institutional crypto custody services: Jinse Finance reports that Nasdaq, the second largest stock exchange in the United States, is looking to capitalize on institutional investors by offering cryptocurrency custody services for Bitcoin and Ethereum the power of. The former global head of Gemini Prime will join the Nasdaq team to lead the Nasdaq Digital Assets division.

If approved by the New York Department of Financial Services (NYDFS), Nasdaq would become a custodian for digital assets, putting the stock exchange in direct competition with centralized cryptocurrency giants including Coinbase, Anchorage Digital and BitGo. (blockworks.co) [2022/9/21 7:09:58]

"Backwardation" is a structure of near high and far low, which is destocking. If the near-end price is very high, when it reaches a certain level, the demand will be activated. Traders can borrow other people's inventory and sell it at the near-end, and lock in the far-end price at the same time, because the price is lower and the locked-in The price at the far end is replenished and returned to the warehouse, which also constitutes a risk-free arbitrage of destocking, so the price structure of "spot premium" can also restrain demand.

Nine-time Grammy Award winner Rihanna’s FENTY brand applies for Metaverse products: Jinse Finance reports that nine-time Grammy Award winner Rihanna has applied for Metaverse products for her FENTY beauty brand, and plans to launch “virtual cosmetics” ” and “Virtual Law Enforcement Products.” It is reported that Fenty Beauty was established in 2017 and currently has 1,600 stores in 17 countries around the world. It has been reported that Fenty is planning to seek an IPO listing at a valuation of US$3 billion. [2022/3/17 14:00:58]

The backwardation of bitcoin futures seems to have started at the end of last week, and then continued until this Tuesday (May 18). , traditional market analysis methods may not be applicable to Bitcoin.

Nathan Cox, chief investment officer of Two Prime Digital Assets, said that the "spot backwardation" of Bitcoin does not necessarily mean that the supply situation will be tighter. In fact, it often happens, for example, compared to the Bitcoin futures contract in June, the price of the May contract is slightly discounted (this situation is called contango, that is, futures contango, or contango/discount).

Balancer joined the Vesta Finance incentive plan: On February 13, the mortgage lending agreement Vesta Finance tweeted that the partner Balancer has joined its incentive plan and will release 1,000 BAL (approximately 13,000 BAL) to the VSTA-ETH pool on Balancer every week. Dollar). BAL incentives will start at 00:00 UTC on Monday, February 14th.

Current VSTA-ETH pool stakers don’t need to do anything, as Balancer’s reward system will issue rewards directly to those users who stake in the Vesta Finance staking contract. [2022/2/13 9:49:13]

"Contango" is a downward-sloping futures curve in which near-term contracts are more expensive than forward-dated contracts. For example, from the data source provided by TradingView, it can be seen that the futures contract price of Bitcoin expiring in May 2021 is at a premium of $15 to the price of the futures contract expiring in June, while the futures contract expiring in June 2021 is at a premium of $15. The price was another $55 premium over the futures contract expiring in July.

Beixinyuan: The company’s shareholding subsidiaries have products in the field of blockchain and digital currency: Golden Finance reported that Beixinyuan recently stated that the company, as a leading solution provider in the field of domestic network and information security, can provide related companies in Metaverse Comprehensive and three-dimensional security services. One of the important supporting technologies of Metaverse is the digital communication between people and people, and between people and things. This is exactly the feature or attribute that instant messaging can expand. The platform-Xinyuan Doudou (Xinyuan Mixin) comprehensively adopts rich media, AR and other related technologies. At the same time, the company's subsidiaries have products in the fields of blockchain and digital currency. Digital twin city application scenarios can be widely used in metaverse and other fields to provide platform services. [2022/1/4 8:24:11]

As defined by the investment encyclopedia website Investopedia, higher demand for an asset relative to contracts that expire in the futures market in the next few months will lead to an increase in reserves. However, this definition seems to be more suitable for a traditional market like oil. In the oil market, demand is related to economic growth to a certain extent (can be calculated by a function), and the oil market will change due to various uncertainties, sometimes reducing production. , Sometimes there is a sudden surge in economic activity, which in turn leads to tight supply conditions in the market.

Bitcoin whale Joe007: The crypto market is about to usher in a deep decline: On October 24th, Bitcoin whale Joe007 tweeted that if you are still preparing to predict that Bitcoin will exceed $100,000, then you should be prepared to do so. Survive long, deep drops. In addition, Joe007 also quoted his previous tweet: If you are all-in and do not have any fiat funds, then your ability to protect Bitcoin from sudden crashes is zero. If you have established a leveraged long position against BTC collateral, you are not protecting Bitcoin from tail risk. [2021/10/24 6:10:21]

Market analysts also sometimes attribute the "contango" situation to the cost of storing commodities for longer periods of time.

One point of reference could be the futures market for West Texas Intermediate, the main benchmark for U.S. oil prices. The market nearly went “closed” in November 2020 due to continued production cuts by the Organization of the Petroleum Exporting Countries, fully reflecting the shortage of supply in the market at the time. Starting in November 2021, however, WTI started rising from $44 before reaching $68 in March 2021, its highest level in recent months.

Nathan Cox explained:

“Oil spot and futures markets have very different inputs into the calculations, and oil demand can be quantified more explicitly than digital assets, which in turn suggests a greater correlation between pure price expectations and actual use or demand.”

It is worth mentioning that West Texas Intermediate crude oil futures listed on the New York Mercantile Exchange (NYMEX) are physically settled.

Reuters pointed out last year that when the West Texas Intermediate crude oil futures contract expired, only some of the "paper" oil was converted into physical barrels of oil that needed to be used, or stored in major U.S. storage locations. physical barrels of oil. However, the bitcoin futures listed on the Chicago Mercantile Exchange (CME) are cash-settled, which means that CME Group is issuing a contract with a lending nature, so there will definitely be profits and losses in the trading account. In other words, buyers of CME Bitcoin futures do not receive delivery of physical Bitcoin, so the CME Bitcoin futures contract is more of a speculative vehicle.

Jarvis Labs crypto economist Ben Lilly said in a Telegram chat:

“The main difference between bitcoin and oil futures is speculative, and we find that backwardation tends to be a better predictor of reversals or buying opportunities, especially in bull markets.”

So far, the bullish sentiment conveyed by the alleged recent discounting of Bitcoin futures has failed to translate into higher prices. According to Coingecko data, as of this writing (May 23), Bitcoin’s trading price has fallen to $36,586.53, a 7-day drop of up to 21.8%.

Nathan Cox, chief investment officer at Two Prime Digital Assets, continued:

“This shows that Bitcoin’s future price expectations are actually lower than the spot price.”

According to Rahul Rai, managing partner at Gamma Point, spot appreciation can hardly be considered a bullish sign, as Bitcoin futures are where institutional investors gain large-scale exposure to Bitcoin — all things considered, the situation It may represent a certain degree of bearish sentiment among institutional investors.

Rahul Rai added that Bitcoin futures discounts are not the result of a real-time supply squeeze, but are driven by institutional arbitrage liquidity. Profit from the difference between the price and the spot market price.

The CME Group is the main venue for institutions to execute basic arbitrage transactions to short futures. Therefore, there is continuous selling pressure on the funds for arbitrage transactions. The cash arbitrage strategy involves selling futures contracts against long positions in the spot market. That is, institutional investors can earn fixed income as the contango decays over time and converges with the spot price at maturity. Position traders often execute short futures contracts in liquidation trades that are months away, and they offer a premium that is higher than the premium on the contract, which means that in the process, they must want to keep moving contracts that are months away. Premiums pushed lower.

Another factor that makes CME Group futures vulnerable to spot prices is low retail investor participation, and despite larger lot sizes, CME Group does not offer as many leveraged futures contracts as other competitors, such as cryptocurrency. Ann (Binance), but it should be noted that most cryptocurrency exchanges are not effectively regulated.

Rahul Rai finally explained:

“Since the minimum trade size for CME Bitcoin futures is 5 contracts, or 5 BTC (they just recently launched micro Bitcoin futures), and retail leverage is usually bid on spot exchanges and expands the trading base, it is mainly concentrated in Retail investors don't choose CME Group when it comes to centralized cryptocurrency exchanges."

Author | Omkar Godbole Translator | Moni

Tags：

DAI