After a surprise rally fueled by an update to Elon Musk’s Twitter biography, demand for Bitcoin (BTC) appears to be particularly strong in professional trading circles.
According to TradingView data, the ticker BTC1!, which represents CME’s Bitcoin futures contracts with the closest expiry — currently for February — is trading at over a 1% premium over spot BTC markets. This positive deviation in prices between a future and the underlying — which traders call "contango" — indicates that few institutions are willing to be short on the asset. Since this difference can be arbitraged, a consistent contango condition means that the buying pressure is overwhelming arbitrageurs, who cannot keep the price divergence in chec.
A one percent deviation on a contract expiring in one month is significant. It is normal for longer-dated contracts to have significant deviation, as the longer the wait, the less compelling the arbitrage opportunity becomes. The attractiveness of such an opportunity is compared to the “risk-free interest rate,” usually U.S. Treasury bonds. Current yield is just over 1% per annum, meaning that making 1% in a month should be more than lucrative.
Looking at the charts, it is clear that CME’s contract is trading at about $500 higher, a 1.3% difference. It is worth noting that TradingView delays CME data by ten minutes, meaning that the chart must be compared with previous candles on Bitstamp.
CME is a traditional futures exchange that offers contracts for 5 BTC each — outside of the reach of most retail traders. A contango condition on this platform is a strong indicator that traditional institutions are particularly bullish on Bitcoin.
Indeed, the institutional world has seen dramatic short squeezes lately, fueled by traders on Wall Street Bets, a Reddit forum. Stocks like GameStop, AMC and Nokia are seeing immense rallies as the community rallied behind assets with huge short positions opened by hedge funds.
Nonetheless, excessive premiums on futures contracts are usually interpreted as signs of exhaustion. This indicates that most of the traders who want to be long on the asset are already long, with buyers having little firepower left to continue the rally.