Understanding the interplay inbetween USD and Bitcoin rente rates is critical to understanding the spot and derivatives market structure. The difference inbetween where you can borrow and lend unsecured USD vs. unsecured Bitcoin can tell you many valuable things spil a trader. The surplus of this postbode will explore how rente rates affect the price of spot and derivatives.
Using borrowed money to buy an asset is the bedrock of finance, and is no different with Bitcoin. A trader who is very bullish Bitcoin, would borrow USD, sell USD, then buy Bitcoin. Traders who expect the price of Bitcoin to appreciate more te percentage terms than what they are paying on the USD loan. The 2nd script is borrowing Bitcoin to sell it brief on the market. The brief seller hopes that Bitcoin will fall by a greater percentage than the rente rate on their loan. The differential inbetween USD and Bitcoin rente rates tells traders about whether the market thinks Bitcoin will appreciate or depreciate ter the future.
Besides observing USD and Bitcoin rente rates separately, the premium or discount a futures contract trades at signals whether USD or Bitcoin rente rates are higher. For Bitcoin/USD futures contracts, if the future is more expensive than spot it means that USD rente rates are higher than Bitcoin ones. Conversely if the Bitcoin/USD futures contract is cheaper than spot, it means that Bitcoin rente rates are greater than USD ones.
Covered rente rate parity describes the relationship inbetween a futures contract, the spot exchange rate and the rente rates of the huis and foreign currency.
F = S * (1 + R_f) / (1 + R_h)
F = Future price, S = Spot, R_f = Foreign currency rente rate, R_h = Huis currency rente rate
A plain example will illustrate how this process works. Jane is a foreign exchange trader. The spot price of Bitcoin is $100, while a futures contract expiring te one month has a price of $200. Jane knows she can borrow money from the handelsbank at 100% vanaf month rente. Jane’s friend James is looking to borrow Bitcoin to sell it brief. He is willing to pay 25% vanaf month te rente. Jane’s other friend Jack wants to sell Bitcoin ter one month’s time for $200 vanaf Bitcoin. Jane sees an arbitrage, if she borrows USD from the handelsbank, buys spot Bitcoin, lends hier Bitcoin to James, and then sells it forward to Jack, when the futures contract expires she stands to make $50.
Jane goes to hier local handelsbank and takes out a loan for $100. The bankgebouw charges hier 100% to borrow the money for one month. Jane voorwaarde pay the bankgebouw back $200 te one month’s time. She takes the $100 and buys 1 Bitcoin. James borrows Jane’s 1 Bitcoin and will pay hier back 1.25 Bitcoin at the end of the month. Jane promises Jack that she will produce 1.25 Bitcoin te one month’s time for $250.
After one month, Jane gets hier 1.25 Bitcoin back from James. Jane then produces 1.25 Bitcoin to Jack and receives $250. Jane then pays back hier canap loan of $200, the $50 left overheen is profit.
Plugging ter the numbers to the formula, Jane’s arbitrage chance becomes demonstrable.
$100 * (1 + 100%) / (1 + 25%) = $160
If Jane can sell Bitcoin forward at a greater rate than $160, she can make a risk free profit. Are there arbitrage opportunities ter Bitcoin like the one introduced above? Of course. The USD rate at which speculators are willing to borrow at and margin trade is much higher than the Bitcoin borrow rate brief sellers pay. The market believes Bitcoin will appreciate te the future and speculators are willing to pay a high rente rate to leverage their positions.
For the fortunate traders who can borrow USD below the rate speculators are paying on margin trading platforms, can make effortless risk free profits. Arbitrageurs give up the potential massive upside te Bitcoin’s value for constant non-volatile profits.