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23 Aug 2022

CME’s front month BTC futures trading at sharpest discount ever recorded

Futures premiums plunged towards late June lows as BTC’s upward momentum stalled. The offshore premium is near all-time lows, while CME’s front month contract trade at its sharpest discount to spot ever.
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Futures basis plunge to June lows as market sentiment worsens
Futures premiums plunged towards late June lows as BTC’s upward momentum stalled.The futures basis on both Binance and CME was pressured into its lowest levels since late June amid BTC’s Friday sell-off.
basis1
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Source: Skew
The shakeout was particularly rough on Binance, where the basis plunged from 1.5% to 0.2% on Friday as BTC derivatives saw their largest liquidation volumes since June 13th. The annualized basis has since recovered slightly on Binance to 0.92%. CME’s 3-month basis (0.57%) has yet to recover, despite current rolling effects in the futures-based BTC ETFs. As highlighted further below, the current rolling period alongside worsening market conditions has contributed to sending the 1mth basis on CME to an all-time low. Contrary to CME and Binance, FTX’s basis remained fairly stable last week, currently sitting at 1.51%.Overall, the current futures basis sits at levels only experienced briefly during the June crash, indicative of a very bearish sentiment among futures traders, as illustrated below.
Offshore basis nearing all-time lows
The three-month futures basis reached its lowest level since June in the offshore market and plunged below the 2021 lows.
basis2
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Source: Skew
The average annualized offshore 3-month futures basis declined to 0.8% on Saturday, August 20th, and has yet to see a proper recovery, currently sitting at 1%. This is the lowest futures basis seen in BTC futures since late June. Additionally, today, the average offshore futures basis sits below the lows of 1.3% on July 21st, 2021. This shows that traders are currently very cautious, with a deficient willingness to add long exposure while hedging remains in high demand. Such signals have typically preceded recoveries in BTC, but this time around, it could also be a symptom of reduced interest and apathy towards BTC, as experienced during the bear markets of 2014 and 2018.
CME’s front month BTC futures trading at sharpest discount ever recorded
While CME’s quarterly contracts trade at a slight premium, CME’s front-month contract sees its largest discount to the spot market ever recorded.
basis3
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Source: Skew
The futures basis on CME’s most traded BTC contract, the front-month futures contract, is trading in sharp backwardation as the annualized basis reached an all-time low yesterday, averaging at -3.36%. The previous all-time low occurred on July 21st, 2021, and was followed by a hefty short squeeze. Overall, CME’s futures have tended to trade at a discount in the last two months but saw a solid short-lived recovery during the early August strength in the market. The growing discounts in the front-month contracts might be explained in part by structural effects. BITO has begun rolling their August contract exposure, possibly causing downward pressure on the front-month contracts. Yesterday, BITO rolled over 1000 August contracts and will roll over a further 3000 August contracts by Friday. Previous rolling periods have tended to be accompanied by a declining front-month basis. Still, such extreme discounts have not appeared during previous rolling periods. They might be a symptom of worsening liquidity or general de-risking as S&P 500 and Nasdaq see a tumultuous start to the week while the dollar strength index pushes towards new highs.
Funding rates remain in negative territory
Funding rates have mostly ranged in negative territory in the last week, with Binance recording its lowest funding rate since June 30th on Monday.
perps
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Source: Skew, Bybit
We have not seen neutral funding rates on Binance in the last 14 days, as perps continuously trade below the spot market. While funding rates mostly remain below neutral and frequent in negative terrain, perp open interest stays elevated. On Friday morning, the perp OI spiked to a new all-time high of 380,000 BTC but quickly declined to 364,000 BTC as bitcoin momentum turned. The decline coincided with BTC’s highest long liquidation volume since June 13th. The open interest in BTC perpetuals has since recovered and sits near all-time highs at 370,000 BTC, as leverage remains high in BTC derivatives.On Monday, Binance’s funding rates reached its lowest levels since June 30th, suggesting lackluster demand to add long exposure, mirroring what we see in the futures market.While BTC derivatives might signal a climate ripe for a short squeeze, the choppy trading range alongside global market turmoil speaks in favor of conservative positioning and gradual accumulation in the spot market.
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