Original Title: Wall Street Pulls Back From Bitcoin's Money-Spinning Basis Trade
Original Author: Sidhartha Shukla, Bloomberg
Translation by: Peggy, BlockBeats
Editor’s Note: What was once seen as a 'sure-win' Bitcoin basis arbitrage is quietly losing its allure: The open interest of CME and Binance is shifting, and the price difference has narrowed to the point where it almost cannot cover the capital and execution costs.
Superficially, this appears to be a compression of the arbitrage space; at a deeper level, the crypto derivatives market is maturing. Institutions no longer need to rely on 'arbitrage' for profits, and traders are shifting from leverage to options and hedging. The era of high returns through simple strategies is coming to an end, and new competition will occur in more complex and refined strategies.
The following is the original text:
The crypto derivatives market is undergoing a quiet yet significant change: one of the most stable and profitable trading strategies is now showing signs of failure.
The commonly used 'cash-and-carry' trading by institutions, which involves buying Bitcoin spot while simultaneously selling futures to profit from the price difference, is collapsing. This not only indicates that the arbitrage space is being rapidly compressed but also releases a deeper signal: the structure of the crypto market is changing. The open interest of Bitcoin futures at the Chicago Mercantile Exchange (CME) has fallen below Binance for the first time since 2023, further illustrating that as the price difference narrows and market access becomes more efficient, the once lucrative arbitrage opportunities are being rapidly eroded.
After the launch of the spot Bitcoin ETF in early 2024, CME briefly became the preferred venue for Wall Street trading desks executing such strategies. This operational logic is highly similar to traditional market 'basis trades': buying Bitcoin spot through the ETF while simultaneously selling futures contracts to profit from the price difference between the two.
In the months following the approval of the ETF, this so-called 'Delta neutral strategy' often achieved double-digit annualized returns, attracting billions of dollars in funds that did not care about the direction of Bitcoin prices, only about obtaining returns. However, it was precisely the ETF that drove the rapid expansion of this trade that laid the groundwork for its demise: as more trading desks rushed to enter the market, the arbitrage price difference was quickly erased. Nowadays, the returns from this trade can barely cover funding costs.
According to aggregated data from Amberdata, the annualized yield for a one-month term is hovering around 5%, a low point in recent years. Greg Magadini, Head of Derivatives at Amberdata, stated that just a year ago, the basis was close to 17%, while now it has dropped to approximately 4.7%, barely enough to cover the threshold of funding costs and execution costs. Meanwhile, the one-year U.S. Treasury yield is about 3.5%, rapidly diminishing the attractiveness of this trade.
Against the backdrop of the continuously narrowing basis, according to aggregated data from Coinglass, the open interest of CME Bitcoin futures has fallen from a peak of over $21 billion to below $10 billion, while Binance's open interest has remained stable at around $11 billion. James Harris, CEO of digital asset management firm Tesseract, stated that this change reflects more the withdrawal of hedge funds and large U.S. accounts, rather than a comprehensive retreat from the crypto market after Bitcoin prices peaked in October.
Crypto exchanges like Binance are the main trading venues for perpetual contracts. The settlement, pricing, and margin calculations for these contracts are continuous and often updated multiple times within a day. Perpetual contracts are commonly referred to as 'perps', and their trading volume occupies the largest share of the crypto market. Last year, CME also launched futures contracts with smaller face values and longer durations, covering crypto assets and stock index markets, providing futures positions that closely align with the spot market, allowing investors to hold contracts for up to five years without frequently switching positions.
Harris from Tesseract stated that historically, CME has been the preferred venue for institutional funds and 'cash-and-carry' trading. He added that CME's open interest has been overtaken by Binance, 'which is an important signal indicating that the structure of market participation is shifting.' He described the current situation as a 'tactical reset,' with the underlying reasons being declining yields and thinning liquidity, rather than a loss of market confidence.
According to a statement from CME Group, 2025 is a key turning point for the market: as the regulatory framework gradually clarifies and investors' expectations for this field improve, institutional funds begin to expand from solely betting on Bitcoin to include Ethereum, Ripple's XRP, and tokens like Solana.
CME Group stated: 'The average nominal open interest for Ethereum futures in 2024 is approximately $1 billion, and by 2025, this figure has grown to nearly $5 billion.'
Although the Federal Reserve's interest rate cuts have reduced funding costs, this has not led to a sustained rebound in the crypto market since the collective price drop of various tokens on October 10. Currently, lending demand is weakening, decentralized finance (DeFi) yields are low, and traders are more inclined to use options and hedging tools instead of directly leveraging bets on direction.
Le Shi, Managing Director of market maker Auros in Hong Kong, stated that as the market matures, traditional participants now have more channels to express directional views, from ETFs to direct access to exchanges. This increase in options has narrowed the price difference between different trading venues, naturally compressing the arbitrage space that once drove up CME's open interest.
Le stated: 'There exists a self-balancing effect here.' He believes that as market participants continue to gather at the lowest-cost trading venues, the basis will narrow, and the motivation to engage in cash-and-carry trading will consequently weaken.
On Wednesday, Bitcoin fell by 2.4% to $87,188, then narrowed its losses. This drop erased all gains since the beginning of the year.
Bohumil Vosalik, Chief Investment Officer of 319 Capital, stated that the era of nearly risk-free high returns may be over, forcing traders to turn to more complex strategies in decentralized markets. For high-frequency and arbitrage institutions, this means they need to look for opportunities elsewhere.
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