28 Jun 2022

Derivatives Update: A very slow launch of Coinbase’s BTC nano futures

The 3-month annualized futures basis on the offshore futures market has reached all-time lows while CME trades at a substantial premium.
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Yields have dwindled completely in the BTC futures market, and the vanishing yields are particularly evident in the offshore market, where the futures premium has flattened at all-time lows.
Source: Skew, Laevitas
CME still trades at a premium to the offshore market, but the futures basis saw a sharp decline yesterday amid BTC’s decline at yesterday’s U.S. open and currently trades at a 1.52% basis, compared to 2.79% last week.
Slow launch day for Coinbase's BTC Nano Futures
Coinbase derivates launched the cash-settled nano BTC futures yesterday. Along with CME and Bakkt, Coinbase has thus become the third platform offering derivatives to U.S. traders. One nano BTC contract represents 1/100th of a BTC, and the contract is thus smaller than what’s available through CME’s micro futures and Bakkt’s futures.The Coinbase derivatives launch yesterday was rather slow. After one day of trading, the July nano futures has an open interest equivalent to 25.94 BTC, equivalent to 0.0052% of the global open interest in BTC derivatives, while seeing a daily trading volume of $3.8m USD.
Futures premiums at all-time lows
Source: Skew
The 3 month annualized futures basis on the offshore futures market has reached all-time lows. On June 23rd, the average annualized 3mth basis across all offshore exchanges reached 0.62%, and the basis has remained low ever since.
CME at largest premium to offshore market since 2020
The CME premium over offshore futures has reached its highest level since November 2020, albeit – yields overall are extremely compressed given the current state of the market.
Source: Skew
The extremely compressed yields in the offshore market have led CME’s futures to trade at its highest premium to the offshore market since November 2020, with CME trading at a 2% premium to the offshore futures on Friday. However, comparing the current climate in the futures market to the state of the market in 2020 is like comparing apples and oranges. Then, momentum and optimism brewed, with the futures basis sitting comfortably above 5%. Back then, the CME basis signaled increased demand for institutional exposure in BTC. The current deviation comes in the backdrop of a very prolonged and rough sell-off in crypto, leading to very compressed yields. In the current market climate, these deviations may suggest that institutional traders are viewing this as an attractive entry point for slowly building BTC exposure. Offshore derivatives markets, on the other hand, seem to be in a state of capitulation, likely enhanced by the shaky state of lending markets following the Three Arrows Capital collapse earlier this month.
Institutional investors cautious with Ether?
Ether futures on CME see basis decline to lowest levels ever recorded, while asset manager net short exposure to Ether sits at all-time highs.
Source: Skew
CME's front-month Ether futures have traded at a negative basis (below spot) since the middle of May. Interestingly, the 3mth Ether basis has decoupled from BTC in June and traded continuously below spot on June 23rd for the first time ever.We also note that the Ether-denominated open interest on CME climbed to the highest level since early April on Thursday while seeing a slight decline over the weekend.According to the most recent CFTC Commitments of Traders reports, asset managers are shorting Ether heavily. In fact, asset managers have never had a higher net short exposure to CME’s Ether futures. On June 14th, asset managers were net short of $37m on CME’s Ether futures and have since reduced their net short exposure slightly to $32m last week.
Negative funding rates on Binance and Bybit in the last seven days
Funding rates on Binance and Bybit have remained negative on average in the last seven days.
Source: Skew
Binance and Bybit’s perps have seen an average funding rate of -0.0015% in the last seven days, considerably below the neutral funding rate level of 0.01%, with the aggregated funding rates never reaching neutral territory.This suggests that short traders have been the most active market participants in the last week, and pessimism seems to be the leading sentiment among perp traders.The muted funding rates are accompanied by a growth in open interest, pushing the BTC-denominated open interest in perps up to June 18th highs.
Open interest in bitcoin perps at highest levels since June 18th
Source: Skew
After some relatively idle days in the BTC perps, open interest has again risen, currently sitting at 309,350 BTC. This is the highest OI recorded in BTC perps since OI soared amid BTC’s leg down below $20,000 on June 18th. The growing open interest has been chiefly concentrated at Binance and Bybit, where the perps have seen negative funding rates in recent days, suggesting that shorts have dominated in the contribution on this leg up.
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