After a surprise rally fueled by an update of Elon Musk’s Twitter biography, ask for Bitcoin (BTC) appears to be especially strong in professional trade circles.
According to data from TradingView, the ticker BTC1 !, representing CME’s Bitcoin futures contracts with the closest expiration date – currently for February – is trading at a premium of more than 1% against spot BTC markets. This positive price deviation between a future and the underlying asset – which traders call “contango” – indicates that few institutions are willing to go short on the asset. Since this difference can be brokered, a consistent contango condition means that the buying pressure is overwhelming arbitrageurs, who cannot contain the price differences.
A one percent deviation on a contract that expires within one month is significant. It is normal for longer term contracts to deviate significantly because the longer the wait, the less compelling the arbitrage opportunity becomes. The attractiveness of such an opportunity has been compared to the “risk-free rate,” usually US Treasury bonds. The current yield is just over 1% per year, which means that earning 1% in a month should be more than lucrative.
Looking at the charts, it’s clear that CME’s contract is trading about $ 500 higher, a difference of 1.3%. It’s worth noting that TradingView slows down CME data by ten minutes, which means comparing the chart to previous candles on Bitstamp.
CME is a traditional futures exchange that offers contracts for 5 BTC each – beyond the reach of most retailers. A contango condition on this platform is a strong indicator that traditional institutions are particularly optimistic about Bitcoin.
Indeed, the institutional world has recently seen dramatic tricks, fueled by merchants on Wall Street Bets, a Reddit forum. Stocks like GameStop, AMC and Nokia are seeing immense rallies as the community rallied behind huge short assets opened by hedge funds.
Nonetheless, excessive premiums on futures contracts are usually interpreted as signs of exhaustion. This indicates that most traders who want to be long are already long and buyers have little firepower to continue the rally.