In a report titled “Why Is The Bitcoin Futures Curve So Steep?” JPMorgan Chase analysts examined the growing futures and derivatives market surrounding bitcoin, provided insights as to why the contango is so steep and explored what the future holds for the monetary asset as it becomes increasingly financialized.
Here are some of the highlights from the report.
“As has often been the case in the past, the growth and gradual maturation of cryptocurrency markets has naturally generated interest in derivatives and other sources of leverage. Though futures trade against a range of pairs, Bitcoin unsurprisingly dominates this nascent marketplace. Similarly to the spot market, these products trade within a highly fragmented ecosystem, with nearly 30 active venues. The vast majority is traded offshore as well, with less than 15% of the total open interest listed on major, regulated domestic venues like the CME (Exhibit 1). Normalized depth in futures has also kept pace with the deepening of the cash market, suggesting it too is benefiting from institutional inflows and improved liquidity provision in spot (Exhibit 2).”
With the launch of CME bitcoin futures contracts in late 2017, institutional investors in the United States began to have access to bitcoin derivatives exposure, but access to “spot bitcoin” has been harder to come by, even as the bitcoin market cap has increased more than 200 percent above the 2017 peak.
The analysts offered up potential reasons for why the contango has remained so large. Among the possible explanations provided by JPMorgan is counterparty and repatriation risk in offshore markets, complications with obtaining spot BTC exposure in the legacy system and, subsequently, the Grayscale Bitcoin Trust (GBTC) being a main source of BTC exposure on the street (and all of the premium/discount problems that come along with the investment vehicle).
“Why has such attractive pricing not simply been arbitraged away? One could perhaps…