Future vs. Future Arbitrage With The XBU Chain

Arbitrage between different futures contracts with similar underlyings and payoff structures can be a very profitable trading strategy. The most common futures contract structure in Bitcoin is worth a fixed amount of USD and pays out in Bitcoin. BitMEX, OKCoin, BitVC, and ICBIT all have futures contracts using this structure.

BitMEX offers a XBU chain where each contract is worth $100 in Bitcoin, and quoted in USD. As the spot Bitcoin (XBT) / USD exchange rate moves up and down the contract’s worth stays fixed at $100. If you are long the contract, as the XBT/USD price rises the contract is worth less and less XBT; as the XBT/USD price falls the contract is worth more and more XBT.

The goal is to find two futures contracts that have similar structures. The below table lists the relevant details on the two contracts.

Exchange BitMEX OKCoin
Futures Contract XBUH15 BTC0327
Underlying XBT/USD XBT/USD
Multiplier $100 $100
Expiry Date 27 March 2014 27 March 2014
Expiry Time 10:00 UTC – 12:00 UTC TWAP on Bitfinex 08:00 UTC BTC/USD Index (an OKCoin constructed index)
Clearing Method Central Clearing Socialised Losses

The similar payout structure and expiry dates make these two contracts good candidates for arbitrage.

For the following example assume the following:

  1. The Bitcoin price on Bitfinex and the OKCoin BTC/USD Index is $395 and $392 respectively
  2. XBUH15 and BTC0327 are trading at $405 and $395 respectively.

The two contracts trade on different indices so to evaluate the arbitrage potential let’s look at the basis on each contract. Basis = Futures Price – Spot Price.

Futures Contract XBUH15 BTC0327
Futures Price $405 $395
Underlying Spot Price $400 $387
Basis $5 $8

XBUH15’s price is greater than BTC0327’s; selling XBUH15 and buying BTC0327 will yield a profit. But how much? The price differential is $10; however, BTC0327 uses a different settlement index than XBUH15 for which needs to be considered. Because we are selling XBUH15 we receive the basis or +$5, and we pay the basis or -$8 on the purchase of BTC0327. The total expected profit is $10 + $5 – $8 = $7.

At 08:00 UTC on 27 March 2015 the long BTC0327 contracts will expire. The long exposure the contract generated is now gone. From 08:00 UTC to 12:00 UTC, you are short XBT/USD because you sold XBUH15 contracts. For those four hours, you can either buy Bitcoin on Bitfinex and sell during the TWAP settlement period or run the short exposure until the XBUH15 contracts expire. Depending on the execution slippage and market movement the expected $7 profit may be higher or lower.