In the world of traditional finance, the market “risk-free” rate (or cost of capital) usually corresponds to -year US Treasury bonds, the yield of which is currently moment is 2,19%. In the bitcoin market, the risk-free rate usually corresponds to the spread formed from the difference between the market price of futures selling and the market buying price of spot when the market is in contango.

This also applies to the yearly moving basis of futures. As the bitcoin futures market becomes more speculative and demand increases, the price of futures rises relative to the spot price, creating a fairly risk-free spread arbitrage opportunity. declining demand in the futures market, and most recently we have seen a slight divergence between the spot and futures markets. There is now an accelerating gain in the annual basis as demand for futures returns to the market on the back of strong on-chain fundamentals. This raises bitcoin’s risk-free rate.

Note that the last hourly yearly basis chart is higher than the daily data we use below.

Bitcoin Risk Free RateYearly rolling basis for 3-month BTC futures contracts on an hourly basis

It is possible to continue the risk free rate of bitcoin by comparing the annual rolling basis of futures with the traditional risk free rate -year US Treasury bonds. At the moment this gives us a spread of 1,12%, which is the average daily annual rolling basis of futures at 3,19% is less than the current yield 2,% on 10-year bonds.

Bitcoin Risk Free RateContango yield for 3-month BTC futures contracts vs -year bonds

We can also use the implied risk-free rate , which traders or investors can get in the perpetual futures market. With a positive funding rate, longs pay shorts to keep their positions open; at a negative rate, vice versa. To get these rates, you can simply switch to the other side of the funding rate.

Currently, the 7-day average annualized interest rate in the perpetual futures market is around 2.03%. Using the same yield 12-year treasury bonds in the amount of 2,, the implied risk-free rate for the market is 0, %.

Bitcoin Risk Free RateAnnual funding rate of perpetual swaps compared to -Year Treasury Bonds

Below is the combined chart, showing the market rates of both of these derivatives.

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Contango yield for 3-month BTC futures contracts vs -year bonds

We believe that comparing the “risk-free” rates that exist in the bitcoin market with “ risk-free rate -year treasury bonds (cat which serves as the underlying cost of capital for the global economy) is quite insightful, in part because of the large amount of capital that is likely to be generated by a flight from bonds with negative real yields over the next decade, which will lead to its entry into the crypto market.

Thus, if we return to the current situation in the bitcoin derivatives market, we can see that speculative rates, in fact, do not exist. This is a fairly optimistic figure, given that excessive speculation in the derivatives market has led to many large drawdowns in the past.

Current Outlook


Bitcoin currently appears to be experiencing something of a bounce with short- squeeze, considering constant periods of neutral/negative funding rates in the perpetual swap market from the beginning 2022 of the year.

Bitcoin Risk Free RateBTC Price Weighted by Hourly Perpetual Futures Funding Rate base (top); Hourly BTC Perpetual Futures Funding Rate (Low).

Because funding in recent weeks/months was completely unchanged or even negative, a speculative rate that persisted for most of 2021 has disappeared entirely, partly attributable to risk sentiment in global markets in the face of rising inflation, lower growth prospects, and the Fed beginning to tighten policy.

Given the absence of a long-term leverage bias in the market, as well as constant selling pressure since November, it probably won’t take much capital to push the markets higher, and given recent geopolitical events, bitcoin’s long-term rally ( censorship-resistant, apolitical, utterly scarce digital cash) has never been stronger.

One of our beliefs is that the biggest alpha uses BTC as its own risk-free rate of return and unit of account, while almost all capital allocators continue to use depreciating fiat money for economic settlement. Exchange rate volatility in dollar terms will continue, but those who can withstand wild fluctuations (due in part to the volatility inherent in monetary regimes) stand to gain the most.



BitNews

disclaims any responsibility for any investment advice that may be contained in this article. All judgments expressed express exclusively the personal opinions of the author and the respondents. Any actions related to investments and trading in the crypto markets are associated with the risk of losing the invested funds. Based on the data provided, you make investment decisions carefully, responsibly and at your own peril and risk.

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