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A new crypto derivatives data offering from Brave New Coin provides remarkable sentiment insight into where the ‘smart money’ sees the Bitcoin price heading in the short to medium term.
The growth in crypto derivatives products and increased demand for crypto market data in the sector has seen Brave New Coin launch a new crypto&nbsp;<a href="https://bravenewcoin.com/enterprise-solutions/derivatives-data" rel="noopener noreferrer nofollow">derivatives data</a> offering.
In the legacy financial markets, the value of the notional derivatives market is much greater than the spot market. In crypto, though, while that has not been the case to date, things are trending in that direction as there is a growing need for derivatives as yield generators and hedging tools.
This is because crypto derivatives permit price speculation (which drives most crypto trading) without traders being required to take physical custody of the assets. When markets are inefficient, derivative arbitrage profits are often higher. Today crypto derivative arbitrage profits are high, but increasing complexity in terms of products and operations is lowering margins.
Also, because the spot market dominates Bitcoin trading, crypto derivatives gives traders a way to bet on price drops. Writing for the Reserve Bank of San Francisco, Hale et al (2018) argue that the beginnings of a robust Bitcoin futures market has changed the way BTC is priced. Until things like the CME Bitcoin futures product came along, he says that the BTC market was dominated by ‘optimistic’ speculators. But with new tools and data, ‘professional’ traders are taking a more calculated approach.
<h2 id="header-0">New Bitcoin Futures Data Product</h2>
Data for three fundamental types of crypto derivatives contracts are available in the new Brave New Coin data product - crypto futures, crypto options and crypto perpetual swaps.
Bitcoin Options: With Options, traders have the right to buy or sell an agreed amount of Bitcoin for a specific price, at a set date.
Bitcoin Futures and Crypto Futures: &nbsp;A futures contract is a binding agreement to buy or sell a security or commodity asset for a predetermined price at a specific future time.
Perpetual Swaps: A unique derivative contract that is only available in the crypto derivative space, a perpetual swap is an agreement to non-optionally buy or sell an asset at an unspecified future time. In this way, perpetual swaps are different from traditional futures because they don’t have fixed settlement dates and can be held continuously without the recurring requirement of being formally rolled over.
<h2 id="header-1">Crypto Derivatives Data Delivers Crypto Sentiment Insights</h2>
It is possible to draw a range of macro insights from derivatives data— for example, analysing puts and calls volume can tell a savvy trader a lot about the 'smart money' sentiment about an asset at a specific future date.
The perpetual swaps funding rate indicates what the ‘<a href="https://jpm.pm-research.com/content/45/5/46#:~:text=Crowded%20trading%20refers%20to%20the,are%20caused%20by%20crowded%20trading." rel="noopener noreferrer nofollow">crowded trade</a>’ is, and if markets are bearish or bullish.
In the chart below, the future curve shows the price at which a contract for future delivery or payment is concluded. In doing so it offers insights into what the market thinks an asset price will be in the future based on variables like cost-of-carry and speculation.
Sentiment Insights From Bitcoin Futures Data
<img src="https://academy-public.coinmarketcap.com/srd-optimized-uploads/479950a819ca463385cc43246ef1b830.png">
Source: <a href="https://bravenewcoin.com/enterprise-solutions/derivatives-data" rel="noopener noreferrer nofollow">Brave New Coin Derivatives market data</a>
Future curve data from a range of popular Bitcoin futures exchanges indicates the Bitcoin market is in a state of Contango - a scenario where a commodity’s futures price is higher than its spot price. Contango usually happens when the dominant market sentiment is that an asset price will rise in the future. Note: the futures contracts listed above are physically settled.
Each point on the chart represents a contract available on exchanges such as Binance. Kraken, Bitmex, Deribit and Bybit. The US dollar price is on the Y axis and the X axis shows the expiry date.
An asset’s future’s price can be at a premium due to the cost-of-carry, which is the expense that comes with holding or storing a physical commodity or security, and can include depreciation. Investors will often pay a premium for a future to sidestep the cost of carry.
With no physical storage costs or depreciation, Bitcoin is considered a lightweight asset. That said, BTC does come with some carry costs. Counterparty risk, for example. Exchanges like Binance and Bitfinex are currently loosely regulated. As the FTX debacle has shown, exchange trading comes with not insignificant risk and the potential exists for funds on an exchange to evaporate in an instant.
For this reason, committing to a contract that delivers Bitcoin in the future could come with a premium. Interestingly, this is one reason why investment vehicles like Grayscale Bitcoin Trust often trade at a premium.
Another Contango contributor is speculation that the Bitcoin price will rise in the future. This suggests crypto sentiment in markets is positive. Although Bitcoin volatility is high, BTC has made consistent prices over longer time frames which supports trader's positivity.
If investors think an asset price will go up in the future and it has a high cost of carry, they will be willing to pay more for it down the track. To some extent, BTC meets both these requirements and as a result the Bitcoin futures price often trades at a premium to its spot price.
Over time the futures price converges towards the spot price as the expiry date nears. This leads to a scenario where if the price of the underlying remains constant, longing the future will deliver a loss as the futures and spot prices converge.
The negative roll can occur if traders decide to roll over their contracts. To roll over to a later date, a trader has to pay the Contango premium and the later expiry future will be more expensive than the current spot price. To keep the same number of contracts the trader must pay more.
For the ProShares Bitcoin Strategy Exchange Traded Fund (BITO) trading on the NYSE Arca, this scenario is particularly important. As a futures-based product that tracks Bitcoin CME Futures price, the fund’s capital appreciation comes through managed exposure to CME Bitcoin futures contracts. BITO does not buy and hold actual Bitcoin. It is a futures-based ETF and not a spot-based one. This can mean the fund supporting the ETF must deal with the negative roll when contracts have to be pushed back to buffer the ETF.
<a href="https://www.fool.com/investing/general/2013/03/04/contango-1-key-reason-not-to-buy-these-etfs.aspx" rel="noopener noreferrer nofollow">Motley Fool warned&nbsp;</a>against buying the US Natural Gas ETF in 2013 because it had been trading at a loss against the natural gas spot price - and at the time stood to lose 1.5% of its value in a single month’s futures roll.
The degree to which a futures-based ETF might be affected is often dependent on the underlying asset’s market size. In traditional finance, high-frequency traders will quickly take advantage of a price difference between futures and spot and the price gap reduces quickly as a result of this arbitrage.
In the Bitcoin and wider crypto markets, however, retail traders far outnumber institutional players. Therefore, there is usually not enough big-money capital to close the futures price and spot price gap. At ByteTree Asset Management, &nbsp;Charlie Morris <a href="https://bytetree.com/insights/2021/10/why-you-should-not-buy-a-bitcoin-futures-etf/" rel="noopener noreferrer nofollow">says</a>&nbsp;he thinks the BITO ETF will underperform spot BTC by 8.4% a year, before fees.
<img src="https://academy-public.coinmarketcap.com/srd-optimized-uploads/914851a428994b949ec4660b102347ac.png">
But as the chart above shows, for the last three months the BITO futures ETF has actually outperformed spot BTC. The separation formed at the same time as FTX collapsed which suggests an increase in the cost-of-carry of Bitcoin due to the increased counterparty risk of an exchange failure. Again, this illustrates why investors will pay a premium for a non-physical asset like an ETF, which simply allows for betting on movements in the Bitcoin price.
<img src="https://academy-public.coinmarketcap.com/srd-optimized-uploads/8fe8c22a081e41ddb04cfc154c6f8a28.png">
Source: <a href="https://bravenewcoin.com/enterprise-solutions/derivatives-data" rel="noopener noreferrer nofollow">Brave New Coin Derivatives market data</a>
Ethereum (ETH) like Bitcoin, is in a state of Contango. This is likely for similar reasons to Bitcoin — optimism for the future price of the asset and a rising cost of carry probably because traders are concerned about buying crypto spot following the collapse of FTX.
<h2 id="header-2">The Contango Arbitrage Trade</h2>
There is an opportunity to make a cash and carry arbitrage trade in both Contango markets and its opposite – Backwardation - which is where the current price of the underlying asset is higher than prices trading in the futures market.
For example, buy Bitcoin on the spot market (long position) and then sell it at a predetermined date (short position). If the Bitcoin price moves up or down, the crypto arbitrage trader makes money with this market-neutral strategy. Let’s say an arbitrage trader recognises the Contango and chooses to take part in the cash &amp; carry trade. They could purchase Bitcoin spot at $23,500 and sell futures expiring in October 2023 for $24,200 on Deribit. In this scenario the short future will pay out if the BTC price falls, or, if the BTC price goes up, the spot position becomes profitable.
A bigger gap between the spot and futures price, means higher trader profits. The immature Bitcoin futures market and overall Bitcoin volatility can mean that this premium is frequently large.
The risk-free rate of return is an indication of the possible yield of a Futures trading strategy. For Bitcoin futures, currently, the approximate Risk-Free Rate of return is ~4.6%.
This is based on this traditional formula for calculating the price of the future.
<img src="https://academy-public.coinmarketcap.com/srd-optimized-uploads/7f9f8bfafceb4c62a3dc8c23540b7ea5.png">
Where the&nbsp;Futures price&nbsp;is the price of the BTC-Future on December 29th = US$24,160
The&nbsp;Spot price is the current BLX price = US$23,485.87
x is the number of days to expiry. For the December 29th futures contract that is&nbsp;226 at the time of writing.
A risk-free rate of return around 5% is considered high. For example, in currency markets we might only observe similar rates for geopolitically volatile currencies like the Turkish Lira. The cash-and-carry returns for Bitcoin futures, which involve manipulating more market inefficiencies than the baseline to maximize the arbitrage trade, is between 25-50%.
Speaking to the Financial Times, Stéphane Ouellette, the CEO of Canadian hedge fund FRNT said “The gap is large and does not look like shrinking any time soon.” He says it has provided this fund with a return of 30% per year.
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New Crypto Derivatives Data Provides ‘Smart Money’ Sentiment Insights

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