Investors look to run lucrative trade after US Bitcoin ETF launched

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The launch of Wall Street’s first bitcoin exchange-traded fund created an opportunity for professional investors to make hefty profits on a single bet, enabled by a lack of big players in the young crypto market.

The price of bitcoin hit a new high this week as $ 1.2 billion in new cash poured into the ProShares Bitcoin Strategy ETF in just three days, signaling voracious demand for the new investment fund that holds futures contracts that track the price of the cryptocurrency.

But these inflows and the new all-time high bitcoin price have also caught the attention of savvy traders looking to exploit the gap between the price of the coins themselves and that of the futures markets.

The ProShares ETF is linked to CME futures: As new money flows into the bitcoin ETF, the fund has to buy futures contracts to gain exposure to the price of bitcoin. Futures contracts expire each month, which means that the fund must regularly “roll” its holdings into the following month’s contract.

The recent surge in demand has driven the price of short-term bitcoin futures up and out of sync with the underlying cash market, creating a gap between the two prices that trades can profit from.

“[The ETF] rolls the contract of the first month, so that when the flows enter the ETF, the contract is pushed up, which widens the [difference between futures and cash prices]”said Michael Bucella, partner of New York-based hedge fund BlockTower.

A “simple cash and carry trade” of buying bitcoins and selling futures contracts traded on the Chicago Mercantile Exchange offers an annualized return of around 30%, said Stéphane Ouellette, managing director and co-founder of the hedge fund and broker Canadian FRNT.

In traditional markets, high-frequency traders step in quickly to close these price gaps for a profit, and the opportunity disappears. But a shortage of big players in the crypto industry means there are few who are willing to deploy the extra capital needed to erase the price differences.

Trading on the CME is more expensive than on other platforms because the exchange has higher margin requirements.

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“As is the thesis of many of the most successful transactions in crypto, there are not enough sophisticated arbitrary actors to manage and control the spread,” Ouellette said, referring to Arbitrage-based trading strategies that take advantage of price differences between markets.

The possibility of profiting from this bet has been amplified by the fact that bitcoin is traded on a wide range of sites across the world, which means that there are several prices available for traders to buy coins in the spot markets.

Knowing that ProShares will be launching its contracts means traders believe they can count on a constant long buyer in the futures markets to drive the price up.

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