Welcome to Eqonomics, the weekly crypto trading newsletter from EQONEX. Today we look at how investors can capture yield from BTC perps without taking directional exposure.
We recently covered How to Generate Yield with Perps, which discussed how to replicate an ETH spot position and receive a yield.
It’s worth reading the full article, but here is an overview:
When Perpetual Futures < Reference Spot, shorts pay longs a basis payment every eight hours, in USDC.
ETH perps price rose to around $2,500 shortly after publication, so we will use this to calculate yield as our entry $ amount.
From January 29 to February 14, anyone holding a long perps position would have been paid a total of $70 per 1 ETH perps position.
In absolute terms, investors would have received a yield of 2.8% ($70 / $2,500). We can annualize by dividing the total $ received by days elapsed (17) and then multiplying by days in a year:
Annualized yield = ($70 / 17 * 365) / $2,500 = 60% p.a.
The annualized number is to act as a comparative reference, and it is unlikely that this level of yield would be sustained over a long time frame. Also, bear in mind this is a replication strategy: Investors remain fully exposed to ETH price movements.
There are two ways that the effective yield could have been boosted further: 1) leverage and 2) compounding.
I’ll leave that hanging there: Send me an email if you want to find out more.
Markets have been choppy this year, and understandably, many of you may wish to execute this type of trade while mitigating directional risk.
The good news is, you can.
Launched this month, EQONEX dated futures allow for a market-neutral approach to collect BTC perps basis payments in the current market structure.
At the time of writing, BTC perps longs are being paid the equivalent of around 40% p.a. This is based on data for the last seven days.
For a market-neutral approach, use USDC as collateral. All yield figures are based on the trade being fully collateralized at inception. This means if we assume a BTC price of $45,000 and a trade size of 1 BTC, USDC 45,000 would be held in the same sub-account upon entering the trade.
Two legs to execute:
- Buy 1 x BTC perpetuals BTC/USD[F]
- Sell 1 x BTC June futures BTC/USD
The notional in units of BTC should be matched on each leg.
While BTC perps remain below their reference spot, you will be paid this positive basis every eight hours in USDC. There are no basis payments for the short leg, and the dated future will converge to spot on expiry.
If you are new to this type of trade, enter a small size and scale up as you become more confident. BTC tick size is 0.0001 BTC. You can try this out for less than $5 exposure on each leg. You can also open this trade and deposit the required collateral into a sub-account for further peace of mind.
To understand dated futures in more detail, take a look at the excellent (in our biased opinion) video featuring EQONEX’s ‘Crypto Jack.’
For this trade, you have a few options.
For option 2), if you are running this trade with leverage, your BTC spot will need to equal BTC futures at expiry, in units of BTC.
To directly quote the article referenced in the intro:
“The omnipresent risk is that the basis flips direction: in this case, longs pay shorts, [potentially] rendering the trade loss-making. Under these circumstances, positions can be closed out quickly, though there remains the burden of transaction costs from entering and exiting. This becomes a pure cost if the basis flips before any payment has been received.”
Additionally, if the basis flips, you can also replace that long leg with spot BTC – as described in point 2 under the section “What happens as expiry approaches?”. This would still allow you to capture any spread between the June futures and spot, assuming June futures > spot.
Divergence risk: Should you need to close the positions, you would suffer if perps and dated futures diverge relative to one another. Visually, you can think of it like this:
Generally, this will only impact a ‘forced seller.’ It would provide a better entry point for anyone else, assuming basis payments are positive.
While this trade won’t last forever, opportunities related to market structure will always crop up in different forms. Ask questions and get comfortable trading the interplay between spot, perps, and futures. Take advantage of what’s on offer!
I'm always happy to discuss any ideas. Email me at [email protected]
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