Amber Group: Dollar Scarcity and Contango in Crypto
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One of the more under-talked about events over the past few weeks has been increasing the scarcity of dollars in the market. Since January, the rally in BTC has been largely spot-driven, with futures and swaps moving in tandem with underlying. This is somewhat rare as derivatives tend to be the main point of price discovery given the market depth, volume and open interest are far greater than in crypto spot markets. However coming into February, we saw derivatives starting to outpace spot, with basis moving into the mid-teens (annualized % difference between derivatives and spot). Buying spot and selling futures (or swaps) to capture this difference have been a popular trade (cash-and-carry), allowing you to earn a USD yield from the curve.
The growing popularity of the basis trade, coupled with multiple quarters of relatively confined trading ranges in the futures basis has created a certain level of complacency in the market, with active market participants rushing in to lock in cash-and-carry in the mid-teens. This looks like an obvious trade, capturing a 15% annualized yield on your portfolio when dollar/stablecoin lending rates on major platforms remain sub-10%. However, markets tend to move in the direction of max pain – futures basis has since widened to almost 30% annualized against March expiry – a recent high. These elevated level of rates have been persistent in the perpetual swaps too, with funding remaining high (currently at 22% p.a.). Max pain has thus been for long swap positions hedged with short March futures, with the funding payments contributing to negative carry in what may have looked like an easy arbitrage at first.
In the spot markets, Bitfinex USD funding is at 30% p.a., and Binance have over the past weeks quietly raised margin funding for USDT from 7% p.a. to 16% p.a.+. The demand for dollars has been a good opportunity for exchanges (such as Binance) to push trading incentives for their own stablecoins (eg BUSD), where margin funding is currently around half (~8 p.a.%) of USDT funding, albeit in limited size.
In BTC, we’ve seen the opposite happen. On various lending platforms, BTC deposit rates have started to come off. This is indicative of BTC lending supply outpacing borrowing demand. This is also consistent with flows that Amber has seen from mining clients – loan demand in stablecoins against BTC collateral continues to grow on the back of positive market sentiment.
Consider someone that wishes to borrow USD without losing their BTC exposure. They could sell a portion of their BTC, free up cash, and use the residual amount to go margin long exposure they lost (the sold portion) in order to maintain their BTC beta. Alternatively, one could pledge their BTC to borrow USD directly. The two trades are economically equivalent. In the former, you enter a short basis position (selling spot and buying futures), which can be thought of as a synthetic borrow. Taking the other side of that (buying spot and selling futures) can be thought of as a synthetic loan. OTC lending rates and futures basis are tied to each other by more than mere correlation.
Over the past week, we have also seen buying flows come back into altcoins across the board. We continue to pay attention to the large-cap PoS projects (XTZ, ALGO, ATOM). The rise of staking, combined with growing liquidity in derivatives creates many possibilities for new types of financial products to emerge. As an example, one can buy a PoS asset, stake them, and sell the futures if the futures premium is less than the expected staking yield. You’ve now converted something which pays yield in-kind into a dollar fixed income product. Over time, we expect the breadth of trading opportunities in this space to grow, with staking adding a new dimension to the derivatives landscape.