Crypto Cash & Carry Trade

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.

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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.

Hmm I disagree on the conclusion. The only reason this kind of arbitrage exist for retail traders is exactly that hedge funds and banks have been naysayers for years about everything crypto.

Sam Bankman-Fried (FTX founder and 2nd largest donor to the Biden campaign) has a personal net worth of 10BN$ just because he and his fund had a huge size of the crypto arbitrage cake to eat. He is 29.

For instance, he has been arbitraging for a whole year the difference between Bitcoin price in Japan VS Bitcoin price in the US. He made 20M$ with a risk-free arbitrage trade, every day, for one year. A decent one year punt :smiley:

Now that Coinbase is worth more than Goldman Sachs, Binance probably even more and FTX following soon, banks and traditional hedge funds can’t ignore digital assets anymore. No surprise that Goldman and Fidelity are attempting once again to launch a Bitcoin ETF.

Traditional hedge funds returns have been ridiculed by crypto hedge funds returns in recent years - and I’m including crypto quant funds with delta-neutral arb strategies that only need market volatility to generate yield.

Slightly OT but I get carried away and excited by seeing a silent revolution happening in front of my eyes.

Edit: US banks FOMO might have finally produced something to save their balance sheets, today’s news

The arbitrage is also covered here incl its potential implication:

I guess the biggest risk is counterparty liquidation risk where in a flash crash the counterparty gets liquidated.

Does anyone know that happens to me in that case? Will my position simply be closed?

From the link you shared, if the insurance maxes out I guess one of the other 2 kick in

« 1. Insurance Fund: A fund that is maintained by the exchange to ensure that profitable traders receive their profits in full and cover for any excess losses incurred by a bankrupt trader.
2. Socialized Loss System: With this method, losses of bankrupt positions are distributed among all profitable traders.
3. Auto-deleverage liquidations (ADLs): In ADLs, the exchange selects opposing traders in order of leverage and profitability, from which positions are automatically liquidated to cover for the losing trader’s position. »

I’m still not clear on how to identify the best yielding coins. Also what stops you from throwing 8k USD at it and making 5k USD a year?

You can finde historical data from Binance here: Bitcoin Exchange | Cryptocurrency Exchange | Binance and from FTX here: FTX

I also made a real-time tracker with Google Sheets: Contango Tracker - Template - Google Tabellen

I am still working on it. Feedback welcome.

Nothing stops you from trowing any money at anything - depends on your risk appetite. :slight_smile:

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Cool stuff, can you please update the settings so viewers can copy the spreadsheet?

I wanted to post this nice tracker for Binance users (not by me). Here’s how I understood this trade intuitively (hoping that it’s useful to others too):

If you have a long position in an asset, you short the future to give up the potential upside until the expiration date in exchange for a (quite generous) interest rate.

The difference between the perpetual and the delivery futures is similar to a floating-vs-fixed rate mortgage. With the delivery future, you’ve locked in the interest rate until the delivery date, with the perpetual the interest rate is floating depending on the long-short interest on the asset.

What I found really interesting in this article (a bit long-wided but worth it) is that cash&carry traders hold “synthetic USD” positions (ie give up their upside) so that other investors can hold more long positions for a given amount of fiat collateral in the system.

For example, I had some DOGE laying around (don’t judge…) and shorted the perpetual. The price of the future has gone down quite a bit in the past few days because DOGE has gone up in USD. My portfolio is still worth the same overall in USD terms (and will continue to be) but I’m pocketing an “interest payment” every few hours. Of course, in this case I’d have been way better off just holding the DOGE without the short position on.

I recommend trying this with play money. I thought I understood contango and all that stuff but I actually didn’t. Now I know I don’t :smiley:


Am I doing this right?

Date Pair Side Price Filled Fee Total
2021-05-13 18:38:46 FILUSDT Sell 118.31 8.4620 1.00113922 USDT 1001.13922000 USDT
2021-05-10 09:45:38 FILUSDT Buy 147.33 6.7874 0.00678740 FIL 999.98764200 USDT
Asset Time Type Amount Symbol
FIL 2021-05-13 18:38:14 Withdraw -8.46206716 -
FIL 2021-05-13 18:38:04 Commission -0.00418505 FILUSD Perpetual
FIL 2021-05-13 18:38:04 REALIZED_PNL 1.66960347 FILUSD Perpetual
FIL 2021-05-13 18:38:04 Commission -0.00004227 FILUSD Perpetual
FIL 2021-05-13 18:38:04 REALIZED_PNL 0.01687254 FILUSD Perpetual
FIL 2021-05-13 18:00:00 FUNDING_FEE -0.00143564 FILUSD Perpetual
FIL 2021-05-13 10:00:00 FUNDING_FEE -0.00817802 FILUSD Perpetual
FIL 2021-05-13 02:00:00 FUNDING_FEE 0.00106356 FILUSD Perpetual
FIL 2021-05-12 18:00:00 FUNDING_FEE 0.00072361 FILUSD Perpetual
FIL 2021-05-12 10:00:00 FUNDING_FEE 0.00070468 FILUSD Perpetual
FIL 2021-05-12 02:00:00 FUNDING_FEE -0.00039900 FILUSD Perpetual
FIL 2021-05-11 18:00:00 FUNDING_FEE -0.00013658 FILUSD Perpetual
FIL 2021-05-11 10:00:00 FUNDING_FEE 0.00071124 FILUSD Perpetual
FIL 2021-05-11 02:00:00 FUNDING_FEE 0.00073659 FILUSD Perpetual
FIL 2021-05-10 18:00:00 FUNDING_FEE 0.00167979 FILUSD Perpetual
FIL 2021-05-10 10:00:00 FUNDING_FEE 0.00441245 FILUSD Perpetual
FIL 2021-05-10 09:47:12 Commission -0.00067005 FILUSD Perpetual
FIL 2021-05-10 09:47:09 Commission -0.00000676 FILUSD Perpetual
FIL 2021-05-10 09:45:53 Deposit 6.78061260 -
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