Crypto traders are profiting from Bitcoin ‘contango’ — here’s how

A crystal ball containing a bitcoin logo and stock prices on an upward trajectory

Crypto traders are reportedly pocketing returns of more than 40% due to the widening spread between Bitcoin’s spot and futures prices — known as Bitcoin ‘contango.’

There’s an arbitrage strategy that profits from contango, which occurs when the futures price of a commodity is higher than its spot price.

The tactic involves buying an asset via a spot market (like Bitcoin from Coinbase) while shorting its corresponding derivative, which in this example would consist of selling Bitcoin futures contracts.

  • Arbitrageurs simultaneously buy Bitcoin and sell Bitcoin futures contracts at their current prices.
  • Selling the futures contract means agreeing to sell Bitcoin at the expiry price — which is higher than its purchase price.
  • The Bitcoin sale executes at inflated prices once the contract expires, the arbitrageur keeps the profit.
Khan Academy has a decent explainer on the concept of contango.

Canny investors can hypothetically exploit Bitcoin’s contango. Last month, futures prices were trading 15% to 20% above spot prices, but now they’re double.

But the fact that Bitcoin’s contango is getting bigger — or even exists at all — has some analysts puzzled.

After all, the current situation makes for an almost risk-free opportunity for traders who have access to futures contracts and spot markets, but collecting enough capital to make it happen could prove difficult.

Contango usually happens when an asset’s price is expected to rise.

[Read more: Canada’s first Bitcoin ETF broke trading records last month]

In any case, contango isn’t just a Bitcoin thing. A notable example from 2020 saw oil trader Vitol Group profit around $3 billion by making dramatic moves in the energy markets.

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