💡Is Bitcoin’s Price Being Manipulated?

Issue 120

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Today’s Bullets:

• Arbitrage Made Simple

• BTC Spot vs Futures

• The Bitcoin Cash & Carry Trade

• Miner & OG Reality

• Bottom Line

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Inspirational Tweet:

We keep hearing about the demand for Bitcoin spot ETFs and have seen the numbers, the metrics, detailing $15B+ of capital that has flowed into them already.

So, if there’s such a high demand for the spot ETFs, which, in turn, necessitates buying Bitcoin to match those dollar inflows, why has the Bitcoin price stagnated for months, hovering under the all-time highs?

Why isn’t Bitcoin rocketing to the moon? 🚀

Is it because the Bitcoin futures are being shorted, as MartyParty points out above, and ‘paper Bitcoin’ is suppressing the real Bitcoin price?

Is it the so-called ‘Cash and Carry Trade’ that is holding Bitcoin down?

Well, it could be that or a number of other factors, in my opinion, some of which we will explore here today.

But if you have no idea what cash and carry means or Marty’s chart above makes your head spin, don’t worry.

Because we are going to unpack this concept and more, nice and easy as always, here today.

So, grab your favorite cup of coffee and settle into your favorite chair for a Sunday peek behind the scenes and into the world of Bitcoin arbitrage with The Informationist.

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🤓 Arbitrage Made Simple

You may have heard me talk about arbitrage before, as this what I did for the first two decades of my career on Wall Street.

But for those who haven’t heard or just want a refresher, we will quickly walk through it here.

Put simply, arbitrage is the ability to take advantage of market price inefficiency.

How?

In essence, you buy an item at one price and simultaneously (this is the critical part) sell the same or interchangeably same item at a higher price, thereby creating a guaranteed profit for yourself.

For example (ignoring tax and shipping to simplify):

You go to Home Depot and see they are having a one-day sale on Stanley cups.

Marked 33% off, they are selling for $50.

But you know that they are selling for $75 *Brand New* on eBay.

You pull out your phone and quickly whip up an offer on eBay for $75 and instantly sell a Stanley cup.

As you sell that tumbler, you buy the same one for $50 at Home Depot.

You then send the cup you bought for $50 to the person who bought it from you at $75, and you pocket the difference.

An instant $25 profit.

This is arbitrage.

The same thing can be done with stock shares from a company being taken over (merger arbitrage), bonds that can be converted into stock (convertible bond arbitrage), foreign stocks of a company that can be exchanged for similar ones that trade domestically (ADR arbitrage), etc.

So, how does this all relate to Bitcoin, where’s the arbitrage there?

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🤨 BTC Spot vs Futures

First, let’s define the interchangeable (or in this case, highly similar) pieces of the Bitcoin arbitrage trade.

For a number of years, we had two primary ways to gain exposure to Bitcoin.

Bitcoin itself. Period.

Bitcoin Futures, which are cash-settled contracts that serve as a proxy for Bitcoin, and designed to track the price of Bitcoin without involving the physical exchange of the cryptocurrency.

Completely different from Bitcoin itself, futures contracts represent a bet on the price of Bitcoin on a specified future date.

For instance, if on April 1st, when the price of Bitcoin was $65K, you bought Bitcoin May futures at $70K, you were betting that the price of Bitcoin would reach or exceed $70K before the futures contract expired.

Conversely, if you sold the $70K May future, you were betting that the price of Bitcoin would remain below $70K through the May settlement date.

It's important to note that these are not options but actual cash-settled contracts.

At the time of the contract expiration, if the price of Bitcoin ended at $75K, the buyer of the contract would receive $5K from the seller, as such:

$75K settlement price - $70K futures contract price = $5K.

These futures trade on numerous exchanges, but primarily on the CME (Chicago Mercantile Exchange), where corn and wheat and cotton and the rest of the major commodity futures trade, and Binance, where most of the crypto futures trade.

As many of you know, the SEC recently approved the trading of spot Bitcoin ETFs.

These are Exchange Traded Funds that own the same dollar amount of Bitcoin as the underlying dollar amount invested the ETFs.

This is no different than QQQs or SPYs, which own the underlying dollar amount of NASD or SPX 500 that has been invested in the ETFs.

Easy to buy, just like a regular stock on an exchange, these ETFs have opened the door for institutions like pension funds, endowments, and family offices to start adding Bitcoin to select portfolios.

But it has also opened a bit of a pandora’s box, too.

How?

Surprise, surprise, hedge funds have found a nifty way to muck it all up…

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🤑 The Bitcoin Cash & Carry Trade