BITCOIN ROLL YIELD: a graphical way to digest market sentiment

25 thg 5, 2018

BTCUSD BITMEX:XBTM18

TOPS AND BOTTOMS: Bitcoin Guru's always tend to be able to do them effectively without any mis-steps or errors. When they're wrong; you should have done your own analysis, & when they're right; you're a noob if you didnt take that call. So why not just trade the opposite of what they say? is it possible to aggregate market sentiment and make informed trades against them?

Below is a simple study that can show us how easy it is to trade against market sentiment, that is to use caution when the market is too hot and to start getting aggressive when the market gets cold. We're using the roll yield (the premium in which a futures contract holds over spot) and comparing it to spot price. In this case, we've taken the near dated Bitmex bitcoin future XBTM18 and normalizing it in percentages (candles), and then plot that against price (area)

The results are self evident: it's often a good time to look to take on risk (go long) when the premium (roll yield) is below 0, and often a good time to take off risk when the premium (roll yield) is above 0. This is a very normal way to digest a roll yield, as often times when the market is in backwardation (a future's contract price is below spot price) it gives the person who is long with the contract a positive appreciation: Eventually that future's contract price will rise to the spot price. think of it as a gift from the market that gives the bullish speculator extra money for taking the risk of going long.

Of course, this type of analysis does eventually become irrelevant as the contract gets closer and closer to expiration because the future price eventually becomes the spot price, so it's important to know that any type of call based on this appreciation/deprecation (contango/backwardation) does become less evident and useful, so always be comparing multiple contracts in relation to spot.