Glassnode’s Lead Analyst Explains the Bitcoin ‘Cash and Carry Trade’ and How It Affects Market Structure

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As a crypto investor with some experience in the market, I find James Check’s explanation of the Bitcoin cash and carry trade both enlightening and reassuring. His clarification of this delta-neutral strategy and its implications for Bitcoin markets is an essential read for any serious investor.

James Check, Glassnode’s lead analyst, clarified the intricacies of the Bitcoin cash and carry trade in a detailed explanation on social media platform X (previously known as Twitter) on June 11. He aimed to dispel widespread confusion regarding this strategy’s influence on Bitcoin market structure.

Let’s start by examining the concept of cash and carry trading, a strategy commonly used in both calendar expiring futures and perpetual swap funding rates. Checkpoint explains that currently, these funding rates exhibit positive values, equivalent to an annualized rate of 10%. This implies that traders are prepared to pay an interest fee to maintain long positions through leverage.

As an analyst, I’d describe this arbitrage setup as follows: In this arrangement, I, as a trader, would enter into a long position in the spot market or ETFs, while simultaneously opening a short position in the futures market. This strategy is effective due to the distinct characteristics of different types of derivatives. For perpetual swaps, the yield is subject to frequent changes, whereas for calendar futures, it remains constant and expires on a specific date.

According to Check’s analysis, holding positions in Bitcoin serves a dual purpose. On one hand, these positions bolster buying activity in the spot market and exchange-traded funds (ETFs). Simultaneously, they fuel selling activity on the futures market. Check underlines that this behavior enriches Bitcoin markets by increasing depth, volume, and liquidity without substantially influencing market prices. This phenomenon is inherent to any asset with a developed futures market and will persist as long as the market attains substantial size.

As a researcher, I’d like to clarify some prevalent misunderstandings regarding the market. Contrary to popular belief, the spot price is not being held down by short positions. In fact, these short positions signify a net bullish stance in the market. Long positions are driving up futures prices. The main ingredient lacking here is a significant surge of non-arbitrage demand that could outweigh the selling pressure from HODLers and existing holders.

In my analysis, Check’s post included a chart that demonstrated Bitcoin’s perpetual futures funding rates throughout different periods. This graph showed both positive and negative funding rates and how they correlated with Bitcoin’s price. By visually presenting this information, the chart, as Check pointed out, emphasized the fluctuating nature of funding rates and their impact on market liquidity and framework.

Many people appear to be perplexed by the Bitcoin cash-and-carry trade and its impact on market dynamics. This phenomenon shares similarities with calendar expiring futures and perpetual swap funding rates, and it is based on a delta neutral strategy.

— _Checkmate 🟠🔑⚡☢️🛢️ (@_Checkmatey_) June 10, 2024

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2024-06-11 17:21