Coinbase to launch institutional fund for BTC arbitrage trading

What’s new? Leading US centralized crypto exchange (CEX) Coinbase will launch a new fund for institutional investors outside the United States on May 1. The product, called Coinbase Bitcoin Yield Fund, is designed to provide investors with returns on their bitcoin holdings, with net annualized returns projected at 4-8%.

Material by Bloomberg

What else is known? The fund will allow investors to earn a return on their bitcoin holdings, increasing its ability to compete with leading altcoins such as Ethereum and Solana, which already offer returns through a staking mechanism built into the blockchain. This involves rewarding users for locking up their coins and securing projects.

The fund will use a Cash-and-Carry arbitrage strategy to capitalize on the divergence between the price of bitcoin and the price of derivatives based on it, particularly perpetual swaps.

While these two prices should move in tandem, they often diverge, especially when bulls are looking to capitalize on a rising BTC price and are willing to pay more to keep their derivatives positions open.

The divergence of the underlying asset and derivative prices provides the greatest opportunity for profit when the price of BTC is rising. When prices fall, returns are likely to be smaller or even negative.

Investors will buy shares in the fund through bitcoin escrow and then be able to withdraw income in kind (in BTC) on a monthly basis.

The strategy the fund has chosen is relatively low-risk, but in the cases of other firms, it could lead to losses if they borrowed against their assets to provide higher returns. The Coinbase Bitcoin Yield Fund also intends to borrow, but the leverage will be small.

The fund will be managed by the exchange’s Coinbase Asset Management division, led by Sebastian Bea. While the company expects returns above 4%, it warns that “actual performance may differ materially.” However, it claims that the fund will be safer than competitors that “take too much investment and operational risks.” Clients’ bitcoins will be placed in custody with Coinbase and other qualified custodians.

“Coinbase AM believes that the next cycle needs better products to enable institutional investment in digital assets. We believe the Bitcoin Yield Fund is particularly well suited to the task, given its conservative and compliant investment strategy,” Bea concluded.

The fund has already received seed funding from a number of investors, including Abu Dhabi-based private wealth management platform Aspen Digital.