A friend introduced me to this trading strategy, claiming it “guarantees” 15% return (in USD). Clearly, in my mind, “risk-free” and “15% annualized return” don’t go together, but I must admit I haven’t found the catch and I’m inclined to give it a shot. Please, help me analyze the risks and maybe find the catch…
The strategy goes like this.
Buy bitcoin (today 3.4.2024 one bitcoin goes for roughly 66kUSD)
Sell a bitcoin future (at deribit you can sell “BTC-28MAR25” for 75.8kUSD)
So, in roughly one year you get your premium of 9.8kUSD (75.8-66.0).
Basically you don’t care about the BTC price. All you care about is the USD you invest and the USD you get back. Surely, fees and (USD-) inflation will eat some of your profit but it still sounds suspiciously attractive. What am I missing?
What about counterparty risk? The counterparty may not be able to hold his obligation and BTC goes down to 10k, you just lost a tremendous amount.
What about liquidity risk? You may need to sell your BTC due to unfortunate circumstances during the year and then BTC goes up to 150k in the same time, you just lost a huge amount of money.
I suggest to watch the following video from 2 minutes onward to 6 minutes timestamp. What you are talking about is similar to “buy stock + sell call options” strategy. This video explains the process and the upsides / downsides
Because you took an opposite position. Long BTC, short futures on BTC. Whatever one rises, the other must fall till maturity.
Which also means that it is not:
What they got wrong is:
No, the price movement of the futures contract needs to be paid in much smaller intervals (daily or hourly). Yes, if you hold till maturity you will have received exactly the stated premium, but in the meantime you will fulfill the obligations of the futures contract.
That means if BTC goes up to 150k from 70k and you sold a futures contract for 1 BTC, you will pay the counterparty 80k (minus the premium that trickles to 0 at maturity). Of course, your 1 BTC will also be worth 80k more, but at that point this strategy binds 150k in capital. 15% on 70k became 7% on 150k. Of course this can also go the other way.
Where does this money come from? Will you sell your stocks ETF? But maybe they just fell by a lot, and you have to sell low.
Alternatively, you can always reduce your position in this strategy by selling some BTC and rebuying some BTC futures. But now maybe the premium is not 15% anymore but 60%. You are gonna pay that premium if you want to reduce your position.
These scenarios are not on the extreme side. It happened in the last months. This is certainly not risk free.
Continuous futures would be safer. Since their premium gets paid every hour it doesn’t move far from spot. But you also can’t lock in a long-term premium (your terms are 1 hour).
Similar but with a very important difference. The maximum profit from the sold call is the premium. The maximum profit from the sold future is the price (times the amount) it is sold for - if the value of the underlying goes to 0.
Except of the counterparty risk, there is indeed no market risk in this scheme. I have read that similar things happened in 2021. The reason is the huge demand for leveraging when Bitcoin is soaring, and the amount of futures sellers is low, hence there is a huge premium. There also complications, as e.g. the contract size could be a hefty one.
What about counterparty risk? The counterparty may not be able to hold his obligation and BTC goes down to 10k, you just lost a tremendous amount.
Traded derivatives are usually cleared by a clearing house („CCP“). Credit Exposure is against the CCP which is supposed to have safeguards in place to deal with participants’ default thus be ‚safer‘ than ordinary counterparties. How time-tested and mature they are for Bitcoins, not sure. One of the ultimate ‚safeguards‘ may be to socialise losses.
That said, you have to
pony up initial margin upfront (part of the safeguards), and
settle P/L, usually daily, and in cash (variation margin), as Helix pointed out
You should be able to buy back your futures contract at the same time.
Ok, then it doesn’t apply here. I have seen Bitcoin futures traded on CBOE or something, one contract was 0.1 BTC, I think. It can also be that premium % that you earn with small futures is lower than with large ones, because the market is different.
Keep in mind I‘m talking clearing derivatives in general. Details vary per clearing broker and product, and I haven‘t looked into BTC future offerings.
That being said, you have to post initial margin when you open a position. It serves as a reserve to protect the CCP in case you stop paying your variation margin when the price keeps moving against you and they have to liquidate your position - keep in mind the CCP is obliged to pay the winning party on the other side of the trade.
Ummm, not sure, VM is usually settled in cash, but ask your broker whether they can make special arrangements in terms of collateralising your Bitcoin.
The more general point is that there are some frictional costs and risks with the original trade. Be sure you fully understand the risks and mechanics before entering a future contract.
No way I would ever do this myself as I am siimply to stupid. But if I get it right, wouldn’t the “right” strategy be to:
Buy 1.15 BTC
Sell a Future worth 1 BTC
This way, you can’t lose anything - if BTC goes to Zero you take a loss on the 0.15 BTC but you got 15% premium upfront
And if BTC goes through the roof, you can at least partially mitigate your exposure that you constantly need to top up your collateral, by selling some of Our 0.15 BTC. Clearly, you will still suffer a bit if BTC goes more than factor 4 or so (as your need to take out big debt that will cost you more than 15% if the initial invest)…
No need for the extra 0.15 BTC. If you want to speculate on bitcoin rising in value, you can do that independantly. Personally, I’d be fine with a “guaranteed” 15% in USD. I question the guarantee, though.
Who is guaranteeing that and how in case of a cryptocurrency exchange (deribit, kraken or similair)?
I googled a bit but couldn’t find a satisfying answer. I’d like to better understand how it is guaranteed that I get my premium in the end - even if the BTC value collapses. I’d be grateful for any inputs.
Why is the premium so high?
My hunch is that there are hidden risks priced in. Examples for such risks coult be the exchange getting hacked or the exchange not able to fulfill their commitment. Does anyone know of examples where the exchange failed to fulfill their commitment?
These are not centrally cleared derivatives. The name “futures” is rather misleading, they are closer to CFD and are guaranteed by the trading platform.
I know one thing for sure, and it’s that a guaranteed risk-free 15% per year does not generally exist. Otherwise everybody would be a billionaire already. So there has to be a catch.
The most convincing argument I heard on this thread is the margin calls on the future (or CFD or any contract used for this purpose). No broker will let you hold an open future position without maintaining your margin.
And that’s probably part of the explanation for the difference in price between spot and futures. If this strategy worked, so many people would do it that the future price would get closer to the spot price.
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