1. ๐งต As we slide deeper into the bear market, it's become clear that there's been a lot of degeneracy when it comes to yield generation.
But what if I told you, you could be your own yield? A thread on basis trading.
But what if I told you, you could be your own yield? A thread on basis trading.
2. Everything that's going to be in this thread is covered in a lot more detail in my article. Maybe right click -> new tab it for later? machow.ski
3. I'm not going to bury the lede here either. You should check out my side project for finding basis trades. I'll be talking more about it below โคต๏ธ. cryptoncarry.com
4. Crypto derivatives have been around for years now, and are often unjustly conflated with degen leverage plays and mega liquidations.
However, if used prudently they can be used to provide yield with no price risk to the underlying coin.
However, if used prudently they can be used to provide yield with no price risk to the underlying coin.
5. There are two derivatives we need to consider, and understanding both is important to carrying out a special type of trade known as a "basis trade".
For an in depth read on these check out this article. machow.ski
For an in depth read on these check out this article. machow.ski
6. Futures are a derivative that give the buyer an obligation to receive an underlying coin from the seller when they expire at a future date. The difference between the future and the underlying is called the "basis".
At the expiry date, the future price is equal to underlying.
At the expiry date, the future price is equal to underlying.
7. Perpetuals are a derivative that also track an underlying coin. They have a mechanism called "funding" where if the price of the perpetual is above the underlying those who are long make a payment to those who are short, and vice versa every few hours.
8. Using a future, we can create a portfolio (collection of products) that provides a fixed and guaranteed return, no matter the price of the underlying coin.
Check out the example below:
Check out the example below:
9. We buy 1 BTC spot for $20k, and sell short a 1 BTC future for $21k. We only do this if the basis (the difference between the future price and the spot coin price) is positive.
10. This portfolio is "delta hedged" meaning that no matter what the price of Bitcoin is, the value of our portfolio stays roughly the same.
When the future expires, the price of the future will be the same as the underlying. What does that mean for our portfolio?
When the future expires, the price of the future will be the same as the underlying. What does that mean for our portfolio?
11. Let's say BTC crashes to $5k and the future expires. Our 1 BTC is worth $5k (duh), and our future is also worth $5k because we have reached expiry.
Our profit is -$15k from the spot coin, and $16k from the future (we were short).
Our profit is -$15k from the spot coin, and $16k from the future (we were short).
12. Despite BTC crashing, we still made $1k. In fact, this amount of money would be guaranteed at ANY price of BTC. This is in effect a guaranteed fixed yield. Check out this video to see how it plays out over time.
13. What's the catch? Well, theres the usual stuff. Exchange counter-party risk, risk of liquidation if you use leverage, etc. There's also risk of socialised losses on the exchange, though this is thankfully rare.
Check out my article on that: machow.ski
Check out my article on that: machow.ski
14. Fixed basis trades using futures provide guaranteed yield, though it (usually) won't be that high because it's a (relatively) sure thing.
However, what if we want to spice it up a little with some #variance ๐ถ?
However, what if we want to spice it up a little with some #variance ๐ถ?
15. Instead of a future, we can use a perpetual (or 'perp') instead. If you are short a perp, as long as the funding rate is positive, you will receive payments continuously.
Be careful though, if the funding rate changes and becomes negative you will have to pay instead ๐ธ!
Be careful though, if the funding rate changes and becomes negative you will have to pay instead ๐ธ!
16. Like the future, you are still hedged to the underlying price. However, because the funding rate IS variable it requires a lot more baby-sitting to make sure the funding rate remains favourable, and to exit the trade if it isn't.
17. But wait, why does this basis even exist? Isn't all of this a free lunch?
Well, not quite. Sure, you get some yield, but in return you give up the (possibly) unlimited gains from just holding the underlying coin.
Well, not quite. Sure, you get some yield, but in return you give up the (possibly) unlimited gains from just holding the underlying coin.
18. Back in 2021 the BTC "carry trade" (as the fixed basis trade was called) could yield up to ~30% a year, guaranteed.
That may sound great, but bear in mind that during that time BTC shot up nearly 300%!
That may sound great, but bear in mind that during that time BTC shot up nearly 300%!
19. One of the reasons this trade exists is because during bull markets there is a lot of demand for leverage on directional bets.
The spot market doesn't provide enough, so traders bid up the price of these derivatives instead.
The spot market doesn't provide enough, so traders bid up the price of these derivatives instead.
20. By doing the basis trade you are in effect giving up your coins price appreciation (or recently depreciation) to those who desire it, albeit for a fee (the basis/funding).
21. Not gonna lie, I wish I was writing about this 6-12 months ago. Right now the basis for a lot of futures is sitting at about 2% annualised.
These types of trades always do best in bull markets, but so it goes.
These types of trades always do best in bull markets, but so it goes.
22. I've made a website that tracks derivatives on a bunch of different exchanges, and estimates how much yield different trades could make: cryptoncarry.com
@FTX_Official @binance @BitMEX @mangomarkets @okx
@FTX_Official @binance @BitMEX @mangomarkets @okx
23. You can check out recent basis and funding information for futures and perps (including history!), as well as a bunch of other market data.
24. Choose what notional and currency you would like to trade, and the app will show possible trades as well as an estimate of their yield. The app takes into account and estimates factors such as spread, fees, collateral weight as well as slippage.
25. This website is honestly a bit of a prototype right now, so if you see any bugs or have a suggestion feel free to DM me.
I also want to point out that I should have paid a guy on Fiverr to make me a nice looking UI. My design skills are firmly stuck in the 90s.
I also want to point out that I should have paid a guy on Fiverr to make me a nice looking UI. My design skills are firmly stuck in the 90s.
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