Bitcoin hedge funds’ just-about-risk-free trade is roaring back

The meteoric pace of the record-breaking rally in Bitcoin is making one of the most popular trades for crypto hedge funds even more lucrative than usual, likely helping to propel the original digital currency even higher to once unfathomable heights.

Bitcoin, which has surged around 25% since a now more crypto friendly Donald Trump won the US presidential election last week, jumped as much as 6.3% to an all-time high of almost $85,000 on Monday. That has pushed the spread between Bitcoin futures and the digital currency’s price to the most since March, when prices surged to a previous record after the introduction of US exchange-traded funds holding the tokens.

Hedge funds have long sought to profit from the difference with the so-called basis trade, whereby they buy Bitcoin in the spot market and sell long-dated futures to lock in the discrepancy between the two prices. By doing so, the euphoria is likely to help send prices even higher in the futures market.

“Market participants are eager to enter long bets on a further rally via leverage in both futures and options,” Ravi Doshi, head of markets at prime broker FalconX. “The basis curve has increased to 18%+ annualized for the November expiry, highlighting the insatiable demand for margin during crypto market break outs.”

According to data from CF Benchmarks, the basis on the CME exchange is now approaching 18%, with the front contract basis for CME-listed Bitcoin futures outstripping the basis on other derivative platforms.

“Institutions may now look to exploit the spread between the futures and spot price to capture the basis,” said Thomas Erdösi, head of product at CF Benchmarks.

Leverage in the crypto market is also surging, with open interest in both the futures and options markets elevated. The term Bitcoin futures contracts on CME is one of the most popular ways for the US-based institutional investors to add leverage, whereas offshore traders usually tap into the perpetual futures on Binance and options on the Deribit exchange to make bets.

“At these levels, traditional financial institutions will synthetically lend dollars into the crypto market by shorting basis to earn the 18% annualized yield through the end of November,” Doshi said. “FalconX’s derivatives desk has seen heightened interest in this trade as yields continue to swell.”

Bitcoin options traders are already eyeing a landmark price of $100,000 for the original cryptocurrency. Investors are lining up bets that Bitcoin will pass the milestone as soon as the end of the year, according to data from crypto options exchange Deribit.

As of Monday morning in London, there was 9,635 Bitcoin — worth roughly $780 million — in open interest bet on Bitcoin hitting $100,000 by Dec. 27, Deribit data shows. That’s the most riding on any trade for that expiry date. Deribit puts the chances of the trade paying off at 18.6%.