Bitcoin Cash and Carry Trade a.k.a. Basis Trading

What is Cash and Carry Arbitrage Trade?

Bitcoin Cash and Carry Trade – an arbitrage trade that combines the purchase of a buy (long) Bitcoin position in the spot market and sells (short) of a Bitcoin position in a futures contract. Traders seek to exploit pricing inefficiencies for theĀ asset in the spot market and futures market to make profits with the very low-risk level. This strategy’s trade-in will be profitable as long as Bitcoin’s future contract price will be higher (contango) or lower (backwardation) than the Bitcoin spot market price.

How It Works and Makes Profit?

Bitcoin Futures contracts tend to trade at a slightly different price than Bitcoin spot markets. On the bull market, Bitcoin futures contracts trade higher than the spot market. And on the bear market, the Bitcoin futures contract trades below than spot market price. It is also known as contango. And it is also known as backwardation.

The traders have a significant advantage because they know that each futures contract has a fixed expiration date. At the expiration date, the futures contracts will be closed using the spot market price. So when you open cash and carry trade, you know that by the expiry date at the latest, the premium of the futures contract will reach zero.

We could not know what price will be at the expiration date, but we know that the difference between the spot price and the futures price will tend towards zero due to expiry approaching zero. Sometimes premium can reach zero earlier than the expiration date or even go negative, as it happened on April 18th, 2021. The following chart displays the percentage premium of the Binance September 2021 bitcoin futures contract (BTCU2021) over spot prices. You can see that the hourly candle had closed with a negative 2.8% premium of the Bitcoin futures contract at some point. That allowed to close Cash and Carry trade 159 days earlier than future contract expired and book profits earlier.

The premium of the futures contract moves around quite a bit over the life of the contract. But always premium goes to zero at the futures contracts expiration date. Because of that, that kind of trade is trendy at institutional levels.

A Practical Example of Cash And Carry Trade on Binance exchange

At the time of the writing, the Bitcoin Spot price was $55,535, while the September Bitcoin Futures contract was trading at $61,204 on the Binance exchange. The difference between Bitcoin futures price and spot price is $5,669 and a percentage premium of about 9.2%. So let see two scenarios, what would happen, if the price of Bitcoin would increased up to $79,000 and decrease to $45,000.

Scenario 1 Bitcoin Price on September 24th – $79,000

We have bought 1 Bitcoin for $55,535. Then we sold(shorted) the same Bitcoin for $61,204 on September’s Futures Market.

As we have shorted our Bitcoin and the price of Bitcoin increased at the end of the contract, we will have less Bitcoin than we had initially at the beginning. We will lose 0.2253 BTC and will have in total 0.7747 BTC. Then we will sell BTC for $79,000 and have a total of $61,201 or $5,666 more as we started.

Scenario 2 Bitcoin Price on September 24th – $45,000

We have done everything the same, only this time, Bitcoin price went down. So with this scenario, we had earned 0.3601 Bitcoin when September’s Future contract would expire. An in total would have 1.3601 Bitcoin as we sold for $45,000, we would have $61,204 or $5,669 more than we begin.

As you can see, no matter Bitcoin goes up or goes down. We still make the same amount.

So, here are the steps to do if you would like to open the Bitcoin Cash and Carry trade on Binance:

  1. Buy Bitcoin on Spot Market
  2. Transfer Bitcoin from Spot account to Futures account.
  3. Sell (Short) Bitcoin on Futures Contract.
  4. Wait till the Futures contact expiries, or close it earlier.
  5. Transfer Bitcoin from Futures account to Spot account
  6. Sell Bitcoin
  7. Enjoy PROFITS

Active vs Passive Trading

Usually, Cash and Carry Trade we make passively. We open a trade and wait till the contract expires. But the beauty of the Cash and Carry trade is that we can also make it actively. So let’s see which one strategy will fit you most:

  1. Passivly – once a quater or half year you open a position and forget about it, you close your position before contract expires or you let it automaticcly close. Then you open a new position on next contract.
  2. Activly – this is more time intensive strategy, but it also can have greater returns. You have to have some knowlegde about chart readings and fundamentals about crypto. But as Cash and Carry is alsmot risk free trade, you can trade it activly and try to catchs tops and bottoms. In the worst senario you will have lower returns then trading passivly.

Rolling forward vs closing

If you have decided to trade passively, then you can save some fees on selling Bitcoin back to FIAT on the spot market. If there is already another attractive Bitcoin cash and carry trade available on the next futures contract, and you are thinking of opening this trade again. Instead, you can skip out the selling it back into the FIAT step and open a new short on the next futures contract instead. As the trading fees on Futures contracts are lower than on Spot markets, rolling the position to the next month will often work out cheaper than closing the position entirely.

If the next contract is not attractive enough and gives a low percentage, you have to close your position by doing all the steps mentioned before.

Risks Associated with Cash and Carry Arbitrage Trade

The Cash and Carry strategy is one of the safest strategies for market-neutral trades. But there is always risk making such trade. Before opening any trade, you must first find out how much risk you are taking. With Cash and Carry Trade, there come to these risk factors:

  1. Crypto Exchange Risk – the biggest risk asosiated with Cash and Carry trade is exgange risk. Echange can be hacked or can run out with your money. Because of that it is very important to find out trustfull Exchange where you will be doing Cash and Carry trade. Here is my list for Best Crypto Exchanges For Cash And Carry Trade
  2. Stable Coin Risk – to do first part of Cash and Carry Trade you have to use Fiat currency or Stable coins to purachse Bitcoin. Most of us uses stable coins such USDT, USDC, BUSD and others to do that. They have cheaper trasnactions between exchanges and lower fees buying Bitcoin with them. But the problem is that all those stable coins are created by private entities. And we are not sure if they have backed all stable coins to same amount of deposits is made to purcahse them.
  3. Liqudation Risk – if you willing to use levarage on Cash and Carry Trade, then the biggerst risk is to get liqudated. Even trading with 2x levarage you can be liqutaed on your Cash And Carry possition if the market will move 50%.
  4. Mistakes – we all make mistakes and small mistaked cosme times can make huge impact. Because of that messure 3 times before cutting.

Using TradingView to make our life easier

TradigView is a really powerful tool. You can find live quotes, stock charts, and expert trading ideas. It has other exciting futures where you can create your formulas. You can find my full article about TradingView here: “How to make a Premium Gap watchlist on TradingView for Cash and Carry Trade.”

Leave a Reply