Arbitrage Era Ends as Wall Street Retreats from Bitcoin Basis Trading
Original Article Title: Wall Street Pulls Back From Bitcoin's Money-Spinning Basis Trade
Original Article Author: Sidhartha Shukla, Bloomberg
Translation: Peggy, BlockBeats
Editor's Note: The once-considered "risk-free" Bitcoin basis arbitrage is quietly losing its appeal: The open interest of CME and Binance futures contracts is dwindling, with the spread narrowing to a point where it barely covers funding and execution costs.
Superficially, this indicates a squeeze on arbitrage opportunities; more profoundly, the cryptocurrency derivatives market is maturing. Institutions no longer need to rely on "brick-and-mortar" to generate returns, and traders are shifting from leverage to options and hedging. The era of easy high returns is exiting, and new competition will arise in more complex, sophisticated strategies.
The following is the original article:
A quietly significant shift is underway in the cryptocurrency derivatives market: One of the once most stable and lucrative trading strategies is now showing signs of malfunction.
The institutional favorite "cash and carry" trade, which involves buying Bitcoin spot while simultaneously selling futures to earn the spread, is on the brink of collapse. This not only foreshadows a rapid compression of arbitrage opportunities but also signals a deeper shift: the structure of the crypto market is changing. The open interest of Bitcoin futures on the Chicago Mercantile Exchange (CME) has fallen below Binance for the first time since 2023, further indicating that as spreads narrow and market access becomes more efficient, the previously lucrative arbitrage opportunities are rapidly eroding.
Following the launch of a Bitcoin spot ETF in early 2024, the CME briefly became the go-to venue on Wall Street to execute such strategies. This operational logic closely resembles that of traditional market "basis trades": buying Bitcoin spot via the ETF while selling futures contracts to profit from the spread between the two.
In the months following the ETF approval, this so-called "Delta-neutral strategy" often saw annualized returns in the double digits, attracting billions of dollars in funds—with these funds unconcerned about the direction of Bitcoin's price but solely focused on whether they could achieve returns. However, it was precisely the ETF that rapidly expanded this trade that set the stage for its demise: as more exchanges flocked to the scene, arbitrage spreads were swiftly narrowed. Today, the returns from this trade can barely cover the funding costs.
According to data compiled by Amberdata, the current one-month term annualized yield is hovering around 5%, reaching a multi-year low. Greg Magadini, Derivatives Lead at Amberdata, stated that just a year ago, the basis was close to 17%, but has now dropped to around 4.7%, barely enough to cover funding costs and execution costs. Meanwhile, the one-year U.S. Treasury bond yield is around 3.5%, diminishing the attractiveness of this trade rapidly.
Against the backdrop of a continuously narrowing basis, data aggregated by Coinglass shows that the open interest of CME Bitcoin futures has plummeted from a peak of over $21 billion to below $10 billion, whereas Binance's open interest has remained relatively stable, at around $11 billion. James Harris, CEO of digital asset management firm Tesseract, suggested that this shift more so reflects the retreat of hedge funds and large U.S. accounts rather than a wholesale exit from the crypto assets market since Bitcoin's peak in October.
Crypto exchanges like Binance serve as primary venues for perpetual contracts trading. Settlement, pricing, and margin calculation of such contracts are continuous and often update multiple times a day. Perpetual contracts are commonly referred to as "perps," with their trading volume occupying the largest share of the crypto market. Last year, CME also introduced futures contracts with smaller face values and longer maturities, bridging the crypto and equity markets and offering futures positions more aligned with the spot market, allowing investors to hold contracts for up to five years without frequent rollovers.
Harris from Tesseract noted that historically, CME has been the preferred venue for institutional funds and cash-and-carry trades. He added that Binance surpassing CME in open interest is a significant signal that the market participant structure is shifting. He described the current situation as a "tactical reset," driven by declining returns and thinning liquidity rather than a crisis of market confidence.
According to a statement from CME Group, 2025 marks a crucial turning point for the market: as regulatory frameworks become clearer and investor expectations improve in this space, institutional funds are expanding their focus from a singular bet on Bitcoin to tokens like Ethereum, Ripple's XRP, and Solana.
CME Group stated: "Our average daily open interest in Ethereum futures reached around $1 billion in 2024, and by 2025, this number had grown to nearly $5 billion."
Despite the Fed's rate cut to lower the cost of funds, the collective decline in token prices since October 10 has not been sufficient to trigger a sustained rebound in the crypto market. Current lending demand is weak, decentralized finance (DeFi) yields are low, and traders are more inclined to use options and hedging tools rather than directly leveraged bets on direction.
Le Shi, Managing Director of Market Maker Auros Hong Kong, said that as the market gradually matures, traditional participants now have more channels to express directional views, from ETFs to direct exchange access. This increase in choice has narrowed the price differences between various trading venues, naturally compressing the arbitrage space that once boosted CME's open interest.
Le said: "There is a self-balancing effect here." He believes that as market participants continue to concentrate on the most cost-effective trading venues, the spread will narrow, and the incentive to engage in cash and carry trades will weaken.
On Wednesday, Bitcoin briefly fell by 2.4% to $87,188 before paring losses. This decline temporarily wiped out all gains since the beginning of the year.
Bohumil Vosalik, Chief Investment Officer of 319 Capital, stated that the era of nearly risk-free high returns may be over, forcing traders to adopt more sophisticated strategies in the decentralized market. For high-frequency and arbitrage-driven institutions, this means they need to look elsewhere for opportunities.
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