Cash and Carry
What is it? This is a term used to describe the arbitrage between the value of spot(crypto currencies) and the value of expiring futures(future contracts that end at a specified date). This is sometimes called basis trading. Expiring futures often have a higher value than the current value of the crypto currency and this allows you to buy a value of spot and sell and equal value of expiring futures. This will create a spot long and an expiring futures short. As time passes the value of these two positions will come closer together which will net you your profit from the positions you have made.
How to Start
- First you will need an account on an exchange like FTX which has these expiring futures available. (optionally use my referral link for discounted trading fees FTX Referral Link )
- Buy some spot currency that has expiring futures (e.g Bitcoin/Ethereum)
- Sell the equivalent value of the expiring futures
- Wait until the contracts expire and close both positions.
- You buy 1 Bitcoin at $38,500 (this is your spot)
- You sell 1 Bitcoin of the expiring Futures BTC-1231 which is currently trading at $41,250 (this is your short)
- You have now gained $2,750 ($41,250 – $38,500) which you will be able to collect when the contract expires
What are the risks involved?
The difference in price between spot and futures can vary and cause you to get liquidated if you do not have enough money to cover the difference. For example the above image shows the BTC price (Spot) as the blue line and the expiring futures as the red and green candles. If you started your cash and carry with 1 BTC, at point A ($2,000 difference) then, at point B($6,000 difference) you would be down $4,000 and if you didn’t have enough money to cover this temporary loss you would get liquidated.
Why doesn’t everyone do this?
This locks up your capital until the end of the contract (unless you close your positions early which you can do). Locking this money into this trade means you can’t use it anywhere else and can lead to missed opportunities on other crypto investments. You can also get liquidated if you do not have the capital to cover temp loses during larger deviations in price difference between spot and futures. I personally like this as you are locking in profit with minimal risk.