[fishtank]

Originally Posted by bdub

"figured out how to generate returns of 12% with minimal risk: Lend U.S. dollars to hedge funds so they can buy Bitcoin.

Some of the largest non-bank firms in cryptocurrency including BitGo, BlockFi, Galaxy Digital and Genesis are stepping up to meet investor demand for dollars amid a long-standing weariness by banks to lend to individuals or companies associated with Bitcoin and other digital assets. In this case, they’re lending to hedge funds that need cash to buy Bitcoin for a trade that is almost guaranteed to pay out at annualized returns that have recently hit 20% to 40%."

"how the trade works. It starts with the price discrepancy between the spot price for Bitcoin and the value of derivatives contracts that come due months in the future, what’s known as a basis trade. On March 15, Bitcoin traded for $56,089 while the July future contract on CME Group Inc. was at $60,385.

A hedge fund could buy Bitcoin at that spot price and sell the July futures, meaning the derivatives would gain value if Bitcoin fell. Doing so on March 15 locked in a 7.7% spread between the cash and futures price. Annualizing that over the 137 days between March 15 and July 30 when the futures contract expires equates to a 21% annual return.

The hedge fund, however, needs cash to buy the spot Bitcoin, so would be willing to pay what seems to be exorbitant rate of 12% for the loan as long as it can earn 21%, or a 9% profit, on the trade."

So I wonder what happens when these contracts go from contango into backwardation? The entire carry cost of the trade is speculation that the price of bitcoin increasing into the future will offset the borrowing costs, all this on an asset that has no real intrinsic value. I get the headache just thinking about it and what could go wrong. When I hear stuff like minimal risk, and almost guaranteed to payout it raises red flags for me.

Liquidity squeeze and dominos...( just a side note - what if the firms are lending out these bitcoin that customer deposit or selling future option on it like a bank would with your deposits .. are these firms regulated and audited ? )