Good Morning. We have been analyzing the Borrow/Lend market in BTC over the last few days and think we have uncovered an incredible opportunity to capture additional yield. This trade, called an EFP (exchange Financial for Physical), would be for those who are, and want to remain bullish of BTC as a long-term investment. An EFP could be an alternative way to add yield to a long only index fund or similar vehicles. The idea is simple; to loan your BTC to borrowers and collect a yield for that service. In the Futures market, here is how that can be SYNTHETICALLY achieved:
Simultaneously SELL your SPOT BTC, and BUY an equivalent amount of CME BTC Futures (remember 1 CME Future = 5 BTC) at a 5:1 ratio. This trade combo would be cleared with 1 counter-party as an EFP. Based on the current spot and CME Futures markets, below are the values and theoretical bids and asks for these EFP’s:
As you can see, the EFP’s are worth more as you go out the curve. Essentially, you can earn more the longer duration you LEND your coin. Going one step further, we have formulated the yields and annualized yields of these EFP’s.
If you were to choose the January EFP, you would be getting the most ‘Annualized Yield’, however, you would incur more TRANSACTION costs because you would have to roll these futures after 30 days, 6 consecutive months, until June. Alternatively, you can sell the June EFP and only incur 1 transition fee.
This is an example of how a trade could go: Sell the M19 EFP (Expiring 6/28/19) collecting the ~$100 and lower the cost basis of your BTC by such. ~30% of the proceeds from the physical BTC sold will be used to MARGIN your FCM futures account (the M Future buys). The remaining ~70% of fiat could be reinvested in:
CUSIP: 912796RV3: Expires 06/27/2019, a day before the BTC future 2.48 annualized yield to maturity zero coupon treasury bill.
The math is telling us that you can lend your BTC and collect ~6.5% annualized yield ON TOP OF the ~2.5% annualized yield from the Treasury Bill purchase!!!
RE-ENTRY OPTIONS — On 6/28/2019 you can:
- Buy back the physical BTC.
- Buy another dated CME future IF the EFP market grants you the ability to earn similar yields to this initial trade, and purchase another Treasury bill near that Future expiry to maximize yield.
For either the physical BTC or a Future, we can try to achieve minimal slippage on the RE-ENTRY by executing a TAS (trade-at-settlement) order. This means that you will receive the spot BTC or future at a pre-agreed upon amount + or — the SETTLEMENT price of the June Future (expiration price on 6/28/2019). By doing this, the difference between the expiration price of the June Futures contract, and the repurchase price of the SPOT BTC is defined. You would NOT want to have “price risk” during that small time period between of expiration of the June Future and the repurchase order.
**For these trades, you must be set up with an FCM and have the ability to trade the CME Futures. If you do not have one set up, we can help you with this process to proceed moving forward with this trade.
Founder and CEO
Executive VP of Institutional Sales
Dr. Ilya Kurland
Chief Derivatives Strategist
BitOoda is a digital asset advisory firm specializing in trade execution, market analysis, and structured products.
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