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Bitcoin’s contango and arbitrage surging demand for cash

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Bitcoin’s narrative has evolved over the years. A reason for this could be due to the increase of a plethora of innovative products. Take, for example, the futures, options, derivatives, etc, all of these in combination with institutional onboarding has caused Bitcoin to mature as an asset. According to Genesis Capital, a crypto lending firm, the demand for cash in loans has increased over the last quarter.

In addition, Genesis Capital saw a significant increase in the size of ‘cash’ as the percentage of loans outstanding. Over the last quarter, the size of cash increased to 37.2% from 31.2%. Moreover, cash loans represented cash or USD equivalents like stablecoins, etc.

The report detailed a reason for this drastic increase in demand for cash,

“The demand for cash is driven by both arbitrage and leverage. For much of 2019, the near-dated bitcoin future has traded at a rich premium to the BTC spot price.”

Most of the near-dated futures are trading at a premium, thus causing people to borrow money to buy the underlying asset; this is in hopes of taking the existing premium as a profit when the futures expire. However, in an efficient market, as time lapses, the premium between the future and the spot decrease. Hence, the larger the premium gap is, the more people invest, and hence the gap vanishes quickly.

According to Bloomberg, Genesis Capital’s Chief Executive Officer Michael Moro stated:

“We are trading at 50% of the Bitcoin all-time high right now, so people are still saying that they are weary, but I guarantee the narrative changes dramatically when the price is back up.”

As it stands, Genesis Capital’s cumulative originations as of 2019 were a humungous $3.1 billion. Q4 saw an addition of $1.1 billion in loans, thus breaking a previous record of $870 million in Q3.


Akash is a full-time cryptocurrency writer and an analyst at AMBCrypto. He is an engineering graduate with an avid interest in finance and economics. Attracted to the chaos of trading, Akash has invested in BTC, ETH and XRP for educational purposes.
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