Bitcoin’s Money-Printing Machine Breaks Down as Futures Fall

Bitcoin’s Money-Printing Machine Breaks Down as Futures Fall

(Bloomberg) -- One of the most reliable trades in cryptocurrencies has gone awry.

Bitcoin futures, which typically trade at a premium to the spot price, have collapsed along the curve amid a brutal selloff in the world's largest cryptocurrency. That's obliterated what's known as the basis trade, in which a trader would buy Bitcoin in the spot market today and sell long-dated futures, locking in the discrepancy between the two prices.

It's a painful watershed for one of the crypto market's most ubiquitous plays. Hedge funds piled into the trade, which could previously reliably produce double-digit annual gains. Even better, the arbitrage was virtually risk-free, given that CME Group Inc. is the counterparty. However, the trade existed because long-dated futures were more expensive than shorter-dated ones, given that Bitcoin is inherently scarce and theoretically should rise -- a structure known as contango. The breakdown of that dynamic implies that built-in bullishness has disappeared gradually as prices declined.