Bitcoin contango might sound like a weird kind of dance that happens at crypto parties, it is actually a way of capturing the value of holding Bitcoin but offsetting the risks of volatility.
ContangoContango, also known as a cash and carry trade, is a way to earn a premium for owning an asset in a rising market by buying at the current spot price and at the same time selling using a Future price.
In a buoyant market, such as crypto, the expectation is that the future price will be greater than it is right now. One way to benefit, as described earlier in this section, is just to buy and hodl.
Historically, cryptocurrencies like Bitcoin have performed very well over the long term, but past performance doesn’t guarantee future success. Hodling clear has risk, but smaller investors are generally happy to accept that, hoping for what is called an asymmetric return.
A small crypto investor might buy a few hundred euros of Bitcoin or Ethereum, and sit tight hoping for another 10 or 20 times increase over a few years.
Institutions, in contrast – with client and investor responsibilities – want to manage and mitigate risk, and generate reliable income streams rather than try for big risky plays.
Fixed income returns are dictated by interest rates, which have been near zero since the 2008 financial crisis so money managers are looking to alternatives. Bitcoin has the potential for significant returns, but is still a volatile asset and in any case, its market cap isn’t big enough to enable Pension Funds to invest.
One way that institutional investors can capture value, but mitigate risk is through something Bitcoin Contango, because since 2017 Bitcoin Future contracts have been offered by the CME Group, later Bakkt and the Intercontinental Exchange.
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