Last week, substantial volatility returned to the crypto markets. At the same time, the CME Bitcoin Futures contracts passed Binance in terms of open interest. This suggests a rising presence of U.S. based institutional investors within the derivative space. Platforms such as CoinRoutes are creating substantial opportunities for traders, as the spreads between markets have been volatile and also predictive of short-term market moves.
On Thursday November 9th, the news that BlackRock had filed for an Ethereum trust in Delaware roiled the crypto markets. Ethereum jumped, but so did Bitcoin, and many alt coins had outsized moves.
For the purposes of this piece, we are going to look only at Bitcoin products, however, and specifically the CME November Futures, along with the Inverse perpetual swap markets that trade on multiple offshore exchanges.
The following chart shows the extreme volatility of the CME Futures Spread to Bitcoin Spot over the period before and after the move to $38,000 in Bitcoin on the 9th. Data for the chart was copied from the CoinRoutes’ UI, where our Spread Algo allows traders to either buy or sell the spread on any spot venue, exchange, or market maker, including the CME.
Note that the spread premium increased from $200 above the spot price to over $400 at its peak. To put this in context, while the CME futures premium is persistently higher than the implied funding rate would imply1, Thursday’s move was more than three times the usual level. In short, the breakout of the premium over $350 was a clear arbitrage opportunity. When it started to revert towards its normal range, it also provided a clear sell signal on Bitcoin, which fell rapidly from $38,000 to under $36,000 as the move upward retraced.
One could have also traded the premium on the Inverse Perpetual Swap Contracts on multiple markets. Those products trade much closer to the spot market as the funding rate is calculated separately2 but the funding rate can also be volatile. During the period when premiums were increasing, the average funding rate tripled. However, as the chart below illustrates, the premiums were well below the CME levels.
Once again, the magnitude of the move created arbitrage opportunities and, the real-time funding rates across exchanges provided crucial information to traders. Although we did not screen-capture CoinRoutes’ reported funding rates during this volatile period, they did spike between two and three times the ‘normal’ rates shown from the evening of Nov 10:
To understand the magnitude of the moves in the futures premium on November 9th, while also seeing the opportunities created for arbitrage and directional strategies, compare the earlier charts to the same view on November 10th.
The CME chart, shown below, is somewhat similar to the previous day, showing arbitrageable price differences as the market approached the weekly closing time. (ignore the last spike which is from the 5pm closing of the exchange during a small drop in the spot markets)
What is important to note is the persistent trading flows from U.S.-based traders, under pressure to close their books on a Friday afternoon, that can be taken advantage of by traders who can trade on the CME and also on foreign markets using tools such as CoinRoutes provides. To complete this picture, here is the IPERP spread for the 10th. it remained slightly over 0 most of the day, particularly during the early morning rally, but did not move nearly as much as the CME. This is strongly indicative of a market led by U.S.-based institutional money, at least in Bitcoin.
- Futures allow traders exposure to Bitcoin while only depositing margin. If, for example, the margin rate was 10%, then the implied funding rate would be 1/365th of the overnight interest rate per day on 90% of the value of the position. As the expiry was the 24th and this was the 9th, and the prime rate is 8.5%, that implies the “fair” premium should be .314% (90% * 8.5% * 365 / 12). At a Bitcoin price of 37,000, that means “fair” would be $116
- The average funding rate across major exchanges is .01% for each 8 hour period, but during this event it spiked to between .02 and .03%. To put that in perspective, if one held a position for the same length as the CME future to expiration (15 days) at the standard rate, it would imply .45% interest, which would equate to $166.5 per Bitcoin.