Crypto traders are reportedly pocketing returns of more than 40% due to the widening spread between Bitcoin’s spot and futures prices — known as Bitcoin ‘contango.’
There’s an arbitrage strategy that profits from contango, which occurs when the futures price of a commodity is higher than its spot price.
The tactic involves buying an asset via a spot market (like Bitcoin from Coinbase) while shorting its corresponding derivative, which in this example would consist of selling Bitcoin futures contracts.
- Arbitrageurs simultaneously buy Bitcoin and sell Bitcoin futures contracts at their current prices.
- Selling the futures contract means agreeing to sell Bitcoin at the expiry price — which is higher than its purchase price.
- The Bitcoin sale executes at inflated prices once the contract expires, the arbitrageur keeps the profit.
Canny investors can hypothetically exploit Bitcoin’s contango. Last month, futures prices were trading 15% to 20% above spot prices, but now they’re double.
But the fact that Bitcoin’s contango is getting bigger — or even exists at all — has some analysts puzzled.
After all, the current situation makes for an almost risk-free opportunity for traders who have access to futures contracts and spot markets, but collecting enough capital to make it happen could prove difficult.
In any case, contango isn’t just a Bitcoin thing. A notable example from 2020 saw oil trader Vitol Group profit around $3 billion by making dramatic moves in the energy markets.