What is the best way to profit from contango?

• What is Bitcoin Contango, and how does it work？

• What are Bitcoin Futures and How Do They Work？

• Obtaining a low-risk premium for Bitcoin ownership

This section, is all about how to earn crypto, has been designed to slowly build risk tolerance and complexity. Learn crypto is aimed at newbies to cryptocurrency, and this section, is all about how to earn crypto, has been structured to slowly build risk tolerance and complexity. If you've made it this far, you're ready to learn how institutional investors are gaining value in the burgeoning crypto market at the same time offsetting the inherent risk, thanks to a concept known as Contango.

What exactly is Contango？

Bitcoin contango may sound like a strange dance that takes place at crypto parties, but it is really a strategy of capturing the benefit of owning Bitcoin while reducing the dangers of volatility.

Contango

Contango, commonly called cash and carry trade, is a strategy for gaining a premium for owning an asset in a rising market by purchasing at the current spot price and selling at a Future price.

In a booming market like cryptocurrency, the hope is that future prices will be higher than they are now. One strategy to benefit is to just buy and hodl, as explained earlier in this section.

Cryptocurrencies like Bitcoin have historically done well over time, but last performance does not ensure future success. Hodling clearly carries risk, but smaller investors are usually content to tolerate it in exchange for an asymmetric return.

A modest crypto investor would buy a few hundred euros of Bitcoin or Ethereum and wait on it for a few years, hoping for a 10 or 20-fold growth.

Institutions, on the other hand, with client and investor duties, prefer to manage and minimize risk while generating consistent income streams rather than making an effort for extensive hazardous wagers.

Interest rates, which have been near zero since the 2008 financial crisis, govern fixed income returns, therefore money managers are seeking for alternatives.

Bitcoin has the potential for large profits, but it is still a volatile asset with a market cap that isn't large enough for Pension Funds to invest in.

Bitcoin Contango is a mechanism for institutional investors to capture value while reducing dangers, as the CME Group, later Bakkt, and the Intercontinental Exchange, have issued Bitcoin Future contracts since 2017.

Bitcoin's Futures and the Road to Mature Asset

Futures are a kind of financial derivative that allows you to buy and sell depending on your prediction of an asset's price at a future date. They are a necessary aspect of any maturing asset as a method of hedging risk and controlling manipulation and volatility.

Farmers that wish to lock in the profit from future production today - crops that are still in the ground - can use futures. They want money now so they can reinvest and expand their businesses, and also to safeguard themselves from risks like bad weather or blight, which could result in those crops never reaching the market.

Cryptocurrency contango may seem to be a million miles away from wheat farming, but the principles are basically the same. Owning Bitcoin today has a current worth/danger as well as an anticipated future worth.

That value can be measured as the expectation of a future price that is higher than it is now, say one year from now.

The risk is that the positive price assumption is incorrect, and that once a year has gone, the price will have truly decline. There's also the risk of merely holding bitcoin in a secure location and trading it with a counterparty.

Bitcoin contango isn't free money; it only works if the price slowly rises to the right.

Contango allows you to protect the future value of your investment against the risks of just hodling. You will not benefit from any value increases over time, but you will also be immune to any clear hazards that could lead price to decrease.

In a rising market, you're effectively collecting a premium for having bitcoin.

The last portion of the line, “in a rising market,” is significant. Bitcoin contango isn't free money; it only works if the price slowly rises to the right. Using the date of May 4th, 2021 as an example

• Bitcoin is now valued at $56,465 USD (Spot)

• Bitcoin is now priced at $59,080 in September futures.

• If you're thinking about purchasing Bitcoin right now, you have a few options:

• Buy and hodl in the hopes that the price matches or exceeds what you paid at Spot.

• Buy a premium on the spot and sell the future if you don't care what occurs.

The scenarios for price movement are shown in the table below, which have been exaggerated to make the mechanics easier to understand.

If the price rises, the Buy Hodl option will reap all of the benefits.

However, if the price falls to zero, there is a chance of ruin.

Whatever occurs, the Contango option will lock in a 5.25 percent premium.

The following table summarizes how Futures work:

• It excludes the costs of putting the contract in place.

• Futures contracts on platforms for exchanges like CME have a minimum value, which is equal to 5 bitcoins.

• They'll only be available for the next six months, as well as two Decembers.

• They get paid in cash. No Bitcoin is ever exchanged.

Although a small investor is unlikely to need or desire to use a strategy like Bitcoin, it is important to understand because the premium serves as a standard for the entire crypto ecosystem.

In other words, based on the perspective on May 4th, 2021, this is what people should be compensated for holding Bitcoin until September, whatever happens.

This number should make it easier to understand how CEFI's passive interest rates are calculated. If you can make 5.25 percent minus the fees linked with purchasing the Future contract, the rest of the market opportunities should logically fall somewhere around this percentage.

The rise of Bitcoin derivatives helps the price discovery process, which we address in our section on how to trade cryptocurrency.

Micro Bitcoin Futures, for example, were introduced by CME in April 2021, lowering the entry level from roughly $250k per contract to around $5,000, or one hundredth of the price of Bitcoin.

Because they are regulated by the CFTC (Commodities and Futures Trading Commission), CME's Futures Contracts are fixed term and cash settled at the same time each month. However, these aren't the only Bitcoin Futures accessible.

Bitcoin Futures & Funding Rates Forever

Perpetual Future Contracts are presented by most of the major cryptocurrency exchanges. Because they are updated every eight hours with what is known as the funding rate, they are considerably more fluid than the CME's set variety.

The funding rate is the cost of borrowing a certain asset for eight hours with the anticipation that its value will rise faster than that rate. To get finance, you must post collateral with the exchange, and these are known as Perpetuals since the rates keep rolling over until you decide to close them.

The Perpetuals market is one way to create leverage by paying the funding rate for the benefit of borrowing more crypto properties than you actually possess. The funding rate will naturally change in response to market expectations that the price will rise.

You can make a premium by buying Bitcoin at spot price and selling a Perpetual contract to receive the funding rate from someone impatient to borrow it, similar to the contango strategy already discussed. You are collecting the Premium regardless of the pricing.

Binance's financing rate for the current eight-hour period is 0.0764 percent as of May 4th, 2021. It will update once that expires, however you can estimate out the premium you could get from the Perpetual Funding rates for Bitcoin using a basic extrapolation from that value.

· Per day, 0.0764*3=0.229 percent return

· Multiply by 30 for a monthly average return of 6.9%.

This is analogous to the contango strategy above, except it excludes the costs of depositing, buying, and opening/closing short positions on Perpetual short contracts.