Today I want to talk about the function and purpose of a Future/Forward curve. The price of any future/forward contract would be the spot price of an asset adjusted by the yield on an asset (lending/borrowing rate) relative to the borrowing rate of the currency in which it is prices (USD for most of us).
Given that BTC has negligible storage costs there really is no cost to hold (HODL) coins. The forward curve should act the same as if BTC were a foreign currency. The forward curve shape should be in contango when BTC borrowing costs are below USD interest rate and in backwardation if BTC borrowing costs are above the USD interest rate. Because of these dynamics, the main factor that should dictate the pricing of futures/forwards contracts would be the USD interest rate minus the BTC Borrow/lend rate.
The chart above shows the current CME Futures Curve in purple, with examples of futures curves when Borrow/Lend rates are at 3%,5%, and 7% in excess of US interest rates. These shapes we had seen over the last month or so while BTC was trading near the lows. The current futures curve implies that BTC borrowing costs dropped slightly below USD rate.
If you remember from our “EFP Trade” morning piece, we recommended to those who planned to hold BTC as a long-term investment, to sell their PHYSICAL coin in order to buy cheaper FUTURES contracts. This trade was a synthetic way to ‘loan’ their coin and collect extra yield instead of letting the physical coin burn a hole in their e-wallet.
While you can continue to earn interest on your BTC holdings the rates are not nearly as attractive. The long term holder can only get 2%-2.5% on their BTC holdings. That’s nearly 4% worse than only a few weeks ago.