Crypto Cash & Carry Trade

Hi all,

I came across an interesting opportunity: cash and carry trading with crypto. I summarized it here:

I am still trying to find out why this arbitration opportunity seems to be so interesting from a risk/reward perspective.

Has anyone else looked into this? Your thoughts?

Similar idea here with an example: https://twitter.com/100trillionUSD/status/1388821979361329159?s=19

I quote :
"If you

  • buy 1 btc @ $57K
  • sell 1 Mar2022 $80K call option @ $13K
  • buy 1 Mar2022 $60K put option @ $13K
    … then your guaranteed return (apart from exchange risk) will be between 5%-40%. 5% when btc <$60K and 40% when btc >$80K Mar2022. No wonder Buffett & Munger hate #bitcoin"

Try it :wink: I don’t think it will last forever.

Edit: I haven’t tried myself yet

Of course I tried it. With money I am willing to lose. Based on the risk/return profile I am willing to invest more. So, I am DD’ing. :slight_smile:

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IIRC there were some arbitrage opportunity with the futures (like 5% guaranteed, the only risk you’re taking is having to manage/keep your BTC secure).

That was mentioned in Matt Levine’s money stuff newsletter.

What I don’t fully understand is, do you still benefit of a raising BTC price or do you only walk away with the premium and initial principal nothing else?

The idea is to be neutral to BTC change (if what you want is BTC exposure you might as well do it as a separate trade).

My goal would be rather to put my hodl stash to work to earn some money…

Heya, I’m having fun with perpetual yield farming described on www.ftxcashandcarry.com - which I created to spread the fun.

I created a sub account on FTX and moved $800 there.

I did these two trades, using 3x leverage on the short PERP-DENT:

buy 59000 DENT/USD @ 0.1159
sell 59000 DENT-PERP @ 0.1159

I rode an upward trend to get the same fill on both markets - don’t try that :smiley:

On an hourly basis I am getting 0.05$

Not much?

Edit after the last report: so far I averaged 1.50$ per day so far, that’s 547.50$ in one year. Not bad for a sub-account with 800$ on it.

I created the website to make people aware of all the technicalities and rules of FTX but it’s worth trying with small amounts to start with.

I am curious about your feedback if you never used the exchange before.

Should I create a section “how to create an account on FTX” and “how to fund your account” etc?

I didn’t go through that bit as I believe if you need a tutorial to create an account and fund it then you shouldn’t be doing cash & carry arb but I’m open to your comments :slightly_smiling_face:

`

what is the counterparty risk on this - who is behind the options contracts / futures contracts guaranteeing that they get paid out ?

Hi Barto,

good question. There is an exchange risk to consider, as the exchange might go down or might get hacked.

FTX has never been hacked, it’s a solid exchange but relatively young (2019). When Binance lost some funds due to hack, users were refunded in full. I think about it as an opportunity cost, you lose your reputation, you lose everything.

Crypto exchanges make money at mind-blowing rates and will put hands in their deep pockets in case of a hack. I don’t see Mt Gox happening again as these exchange now use institutional grade security (e.g. Fireblocks) stronger than a bank.

Futures on FTX are stablecoin settled. A stablecoin like USDT (Tether) is the crypto equivalent of the slow/expensive to move US dollar. Other assets held on the account are used to collateralize positions, with thifferent weights depending on their liquidity. It’s a bit of a deep dive but you can find more info here:

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Some info from Binace.

https://www.binance.com/en/blog/421499824684900367/Liquidation--Insurance-Funds-How-They-Work-and-Why-They-Are-Important-to-CryptoDerivatives-Part-1

https://www.binance.com/en/blog/421499824684900373/Liquidation--Insurance-Funds-How-They-Work-and-Why-They-Are-Important-to-CryptoDerivatives-Part-2

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Uhm Binance liquidation on bad market spikes is extremely poor. Their platform is user friendly but on weird spikes generated by deleverage on mass liquidation or badly executed chunky TWAP orders they will liquidate you with no mercy. FTX has a gentler hand on its users. Also if you need support from them you will wait weeks to get an answer sometimes. Binance is extremely popular and is growing its retail user base greatly but they are overwhelmed with new users and new tickets they struggle to cope with. :confused:

I wasn’t thinking of a hack although you are right that seems like a risk

I was wondering about the counterparty risk: What happens if the person or entity you sell the option (or future) to can’t fulfil their side of the contract? Are these exchanges providing the guarantee that you get paid, if so how creditworthy are these exchanges?

Scanning quicky the link to FTX you sent the collateral behind the future contracts seems to be crypto itself. Wouldn’t this mean the collateral itself is subject to swings in value and if prices start going down there is potential for panic to set in and the whole thing to come down faster a house of cards? I guess these exchanges would need strong risk departments ?

I guess we’ll all discover how it unfolds in the next flash crash when all the stuff build on top of crypto will be battle tested.

(assuming many of those use crypto collateral, given the direction of the market, they never had any trouble, the real question is when the direction reverse, it might also create a feedback loop for the whole market when everything unwinds)

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hey Barto,

cryptocurrency market don’t have central counterparty clearing and there is no midman to manage your collateral - there is no need for all the structures of ‘old’ finance.

Liquidation happens before the contract holder reaches bankruptcy, i.e. when a certain margin is breached. FTX for instance accepts not only USD or USDT but also other cryptos as collateral (less liquid = less weight).

There are insurance funds and other mechanisms to avoid mass market movement and exchanges like Bitmex and FTX have sophisticated liquidation mechanisms to mitigate the effect of mass liquidations - you can google it.

Having said this, retails are greedy and use leverage of up to 100x and inevitably, periodically, people get rekt. The effect on the market is today much less than back in the days. In March 2020 bitcoin dipped from 10k$ > 4k$ after a chain effect on leveraged long positions getting liquidated. However it recently ‘only’ dipped from 65k$ to 54k$ with liquidations totalling over 200BN$, much more than the 2020 crash.

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Thanks. In the event of a wider market shock wouldn’t you think there is a risk of prices jumping past the exchange’s stop loss before luqidation can happen, taking into account the volatility of Crypto (?) The Binance article posted above says they have an insurance fund of 11.5 million in USDT, I don’t know how many assets are traded there but that doesn’t sound like a heck of a lot

Hi Barto, I don’t know the details on the liquidation strategy of the different platforms. However, on Binance, you can place your crypto as collateral. In my understanding, if you don’t use leverage, you do not have any liquidation risk on the non-perpetual futures.

As an example, you can buy 0.5BTC on the spot market, transfer it to your Future Wallet and use these 0.5BTC as your collateral for the 0.5BTC you are going to short. In that sense, you are going to promise to sell something in the future that you already are in possession of. Whether BTC goes to 1’000’000$ or 100$ will not change anything because you promised to provide 0.5BTC.

This seems to be the case on Binance. The “Liquidation Price” information is blank if I do the trade as indicted above.

Of course there is still the platform risk. If Binance goes belly-up, the collateral might be at risk too.

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Yes thatt’s a fair observation. Crypto exchanges are independent, they have their pool of clients, their liquidity, their rules. It’s kinda like the FX market in the real world, it’s on OTC market, unlike shares. Arbitrage opportunities arise and bots take advantage of these opportunities to maintain prices in line on different exchanges.

In the event of mass liquidation exchange integrity and liquidation rules are key. Some exchanges will just liquidate accounts in a disorderly fashion, the more people get rekt, the more money they make.

The more the market matures, the less volatility you have.

You can get rekt on an illiquid shitcoin but that doesn’t matter if you have USDT or bitcoin or other liquid assets backing your position as collateral.

Tesla recently sold 272M$ of bitcoin over a weekend, the market didn’t move. It would have been impossible just 1 year ago.

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Yes, in this example my trade trade would be covered so I should not be a risk to the other party in the contract even if the price jumps by a lot. However no way to know what the person on the other side of the contract is doing…

I think I got it, thanks. My conclusion is this might be a trade to take a short term punt on but not wise to put in more than play money. Certainly not a guaranteed return - if that was true the hedge funds would’ve close the arbitrage gap by now.

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