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

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  • Bloomberg Quicktake: Now published this video item, entitled “Bitcoin’s Money-Printing Machine Breaks Down as Futures Collapse” – below is their description.

    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.

    “That’s the very simple explanation, that contango is typically indicative of bullishness in the market and so to the extent that market participants are pessimistic, it makes sense to me that it’s broken down,” Nic Carter, founding partner at Castle Island Ventures, said by phone. “It could mean that some capital has just been structurally withdrawn from the market.”

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    In This Story: Bitcoin

    Bitcoin is a cryptocurrency invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto and started in 2009 when its implementation was released as open-source software. Bitcoin was the first decentralized cryptocurrency.

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  • In This Story: Cryptocurrency

    A cryptocurrency, crypto-currency, or crypto is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.

    Bitcoin is the first decentralized cryptocurrency. Since the release of bitcoin, other cryptocurrencies have been created.

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