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CBOE/CME futures and arbitrage

December 13, 2017

Someone asked me…

Do you know why the XBT futures price is always 1xxx higher than the spot XBT? Does it mean we can simply take arbitrage if we long spot and short the futures at CBOE?

The reason bitcoin futures are higher on CBOE than spot is that there are large numbers of people that want bitcoin exposure but can’t hold bitcoin directly.  This includes corporates and high net worth individuals who don’t have the expertise or interest to hold physical bitcoin.  Or people that want to for example have bitcoin exposure as part of a US retirement account.

And yes, shorting futures and holding spot is a viable strategy, but there are some dangers.

The big one is that if the price of bitcoin spikes upward, the futures price and spot price are likely to diverge as people want to pull into bitcoin.  The absolute worst situation is if you get margin called on your short position, and you can’t sell and move the bitcoin from your spot position fast enough, since you’d have to sell your bitcoin, move the cash and cover the margin.  You can run into a situation where everyone does this at the same time, the price spikes because of a short squeeze, and then after your margin position is closed, the price crashes.

(By the way, if it sounds like I’m talking about this because it happened to me before…. Well….  It turns out that when people hear that I trade bitcoin, they assume that I’m a lot richer than I am, because I’ve learned dozens if not hundreds of ways of losing money.)

There are also operational issues.  Getting hacked.  Exchanges goes under.  Exchanges getting hacked.


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