How To Arbitrage Bitcoin Futures vs. Spot


One of the simplest and most profitable arbitrage strategies, is to earn the basis between spot and futures contracts. This post is meant to provide a step by step instruction on how to earn this basis using Bitcoin and BitMEX Bitcoin futures contracts.


Futures Contract: Gives the buyer or seller the economic benefit of owning or shorting Bitcoin.

Spot: The price of Bitcoin for immediate delivery.

Basis: Futures Price – Spot Price

The BitMEX futures contract that will be used in the following examples is the XBTZ16 contract.

XBTZ16 Contract Details:

Contract Value: 1 USD of Bitcoin at any price.

USD Contract Value: 1 USD

Bitcoin Contract Value: 1 USD / Bitcoin Price * Number of Contracts

Settlement Index: Kaiko BitMEX Index, 50% Bitstamp and 50% OKCoin USD, I will refer to this as the Spot Price.

Settlement Date: 30 December 2016 12:00 UTC

Step 1, Buy Spot vs. Sell Futures

Assume that the XBTZ16 price is $120, and the spot price is $100. The basis is $20.

The first step is to wire $5,000 USD to Bitsamp and OKCoin. Then you will by 50 Bitcoin on each exchange. You are now long 100 Bitcoin, and short $10,000.

After you have purchased the Bitcoin, send 20 Bitcoin to your BitMEX wallet. You now need to calculate the correct amount of XBTZ16 contracts to sell. You have bought $10,000 worth of Bitcoin. You will also generate the Basis * Number of Bitcoin Bought of profit.

Total USD to Hedge = $10,000 + ($20 * 100 Bitcoin) = $12,000

Since each XBTZ16 contract is worth 1 USD, you must sell 12,000 contracts.

XBTZ16 is leveraged so you do not need to send the full Bitcoin value of the order to BitMEX. The maximum leverage is 100x, but I advise the use of no more than 10x for this strategy.

Step 2, Calculate Your Profit

You have purchased Bitcoin for $100, and have sold it in the future for $120. You will earn the full basis regardless of where the Bitcoin prices is at settlement.

XBTZ16 profit and loss is based in Bitcoin. Assume the settlement price equals $100.

Bitcoin profit calculation = (1 USD / $100 – 1 USD / $120) * 12,000 = 20 Bitcoin

If the spot price is $100 on settlement date, then your 20 Bitcoin is worth $2,000. You have earned the $2,000 as predicted earlier.

Step 3, Settlement

On 30 December 2016, your XBTZ16 futures contracts will expire. Let’s assume that settlement price is $100. The settlement calculation period is 11:30 UTC to 12:00 UTC. A 30-minute time weighted average price (TWAP) is used; each minute the last price of the settlement index is stored, and an average of the 30 prices is taken to arrive at the final settlement price.

All Bitcoin that is not being used as margin must be sold in order to match the settlement price. Once the futures contract expires, the margin and the realised profit will be available to sell. At that time, withdraw the Bitcoin from BitMEX and sell these Bitcoin.

In the above example, we sent 20 Bitcoin to BitMEX as margin, and the remaining 80 Bitcoin we stored in our personal wallet. You will sell 80 Bitcoin between 11:30 UTC and 12:00 UTC. You will now have 20 Bitcoin of margin and 20 Bitcoin of profit to sell after XBTZ16 expires at 12:00 UTC.

Hopefully you will be able to sell all 120 Bitcoin, and match the settlement price of $100. You started with $10,000, and now you have $12,000. You have successfully used spot and futures contracts to generate a 20% return on capital.

BitMEX Arbitrage Lesson 3 Webinar

Topics covered in Lesson 3:

  • Constructing Futures Basis Term Structure
  • Curve Roll Down
  • Curve Directional Trades

The Webinar will air Thursday 21 January 03:00 GMT.

Webinar Link

You can listen live, and after the presentation ask questions. If you are unable to tune in, a recording will be made available shortly after the broadcast is finished.

Supporting Materials:

BitMEX Arbitrage Lesson 2 Webinar

Topics covered in Lesson 2:

  • Cash and Carry Arbitrage
  • Calendar Spreads
  • Basic Volatility Arbitrage

The Webinar will air Wednesday 13 January 03:00 GMT.

Webinar Link

You can listen live, and after the presentation ask questions. If you are unable to tune in, a recording will be made available shortly after the broadcast is finished.

Supporting Materials:

BitMEX Arbitrage Lesson 1 Webinar

BitMEX is committed to providing educational materials for the Bitcoin trading community. As more and more traders switch to futures trading, we want to help educate them on basic and advanced trading strategies. Our series of arbitrage webinars will focus on the basics of futures trading, arbitrage, and basis trading strategies. The webinars will be lead by Arthur Hayes the CEO of BitMEX.

In his previous life, Arthur spent 5 years as the head Exchange Traded Funds (ETF) market maker on the Hong Kong and Singapore stock exchanges at Deutsche Bank and Citibank. He also ran equity index future arbitrage across the major Asian ex. Japan Australia markets.

Topics covered in Lesson 1:

  • Differences between spot, margin, and futures trading
  • Differences between quanto and inverse futures contracts
  • Basics of pricing quanto and inverse futures contracts

The webinar will air Friday 8 January 2016 at 03:00 GMT.

Webinar Link

You can listen live, and after the presentation ask questions. If you are unable to tune in, a recording will be made available shortly after the broadcast is finished.

Supporting Materials:

Crypto Trader Digest – Dec 8

How Will You Spend Your Helicopter Money?

How will you spend your helicopter money

Finnish lawmakers are ready for the nuclear option. A bill under consideration will hand out $900 to every citizen each month. In their desperate attempt to kick start economic activity, Finland will be the first developed nation to drop money from helicopters.

The theory is that each citizen will go out and spend their newfound wealth on goods which will spur inflation and economic activity. The poorer members of society will use this money on necessities, food and shelter. The economy will not magically produce more of these goods. Prices will rise and these members of society will be no better fed or housed than before. Only now they will clamor for additional free money to make up for the loss of purchasing power.

The wealthier members of society will watch the value of their savings decline. They will be searching for assets that can preserve their wealth. Real estate, gold, art, jewelry these are the conventional means of wealth preservation. Once these assets reach ridiculous prices, unconventional assets become attractive. Bitcoin tops my list as an asset that will gain favor amongst the wealthier members of society.

Lawmakers globally will watch and learn from Finland’s experiment with helicopter money. Citizens around the globe will demand that instead of handing free money to banksters, government’s hand cash directly to those most in need. Start hoarding now because as the helicopter money movement spreads, prices of conventional and unconventional means of wealth preservation will skyrocket.

It Begins: Desperate Finland Set To Unleash Helicopter Money Drop To All Citizens

The China Bitcoin Premium Is On The Rise

The China Bitcoin Premium Is On The Rise

The most important indicator for Bitcoin is flashing green once again. Over the past two weeks, as the CNY weakened, the China Bitcoin premium rose. The premium is now approaching 5% as USDCNY flirts with 6.40. All hell will break lose if the Fed raises rates as expected. EM currencies globally have been getting the stick all year as the dollar surged higher. EM countries will descend further down the mercantilist path as they try to defend what market share they have left of world trade.

China will not sit idly by and watch their competitiveness erode vs. Europe, Japan, and South Korea. Unlike most safe haven assets such as Gold that are priced in dollars, Bitcoin is priced in CNY. The PBOC will gradually allow the market forces to take the CNY lower. Up until now, they have gently guided the CNY lower by intervening in the spot markets on a daily basis to stem the selling pressure.

Apart from China, citizens of other emerging markets whose currencies are rapidly depreciating will be scrambling to purchase assets to preserve what wealth they still retain. Argentina and Brazil are two markets where Bitcoin trading volumes will increase rapidly. Argentina’s central bank is out of USD and is set for yet another default. Brazil is experiencing a political crisis, an impeachment trial of the president is set to begin. Concurrently, Brazil’s economy is collapsing due to falling world trade and commodity prices.

For the reasons mentioned above, A Fed rate hike on December 16th is positive for Bitcoin. I still have doubts whether the Fed will follow through on their promise to normalise rates. The calls for a continuation of the 0% status quo are growing. Yellen might still get cold feet in the face of the growing dissent from the likes of the IMF, World Bank, and Bank of International Settlements. Pay close attention to any public comments from Fed governors. If they indeed back down from a rate hike, they will attempt to telegraph their intentions to the markets in the days ahead.

It’s Raining Coin

It's Raining Coin

Goldman Sachs recently filed a patent for SETL coin. This crypto currency is meant to handle settlements of financial assets. Get ready for a slew of patent filings for various coins from major multinational banks. By now, most banks have an internal team working on various ways blockchain technology can help their business.

The banks certainly will not build tools and innovations on top of the Bitcoin protocol. Open source and decentralisation don’t jive with centralised rent seeking banks. They will each release their own coin aimed at performing similar functions. The battle of bank coins has begun.

Ultimately the regulators will choose the winner. After the GFC and the public outcry against the financial services industry, regulators will be loath to introduce radical changes to the financial system that might fail. As such, the various bank coins will be great PR exercises, but I highly doubt any real changes will be made any time soon.

Capturing The Liquidity Premium


The daily 100x Bitcoin future, XBT24H, is BitMEX’s most liquid product. The next most liquid product is the weekly 50x Bitcoin future, XBT7D. XBT24H exhibits a liquidity premium. The positive USD gamma associated with being long a quanto contract means that XBT24H usually trades at a higher annualised basis than XBT7D. Traders who wish to capture this liquidity premium while remaining price neutral should sell XBT24H and buy XBT7D.

Trade Mechanics:

XBT24H usually trades at the highest premium during the first 6 hours of trading. XBT7D re-lists each Friday at 12:00 GMT. From 12:00 GMT to 18:00 GMT buy XBT7D and sell XBT24H in equal quantities. Each day when XBT24H expires, re-sell the same number of XBT24H contracts plus an additional amount to hedge the profit made. Each day you will earn the premium of XBT24H over spot. XBT7D also trades at a premium, and each day you will lose money as XBT7D decays to the spot price.

The compounded return from selling XBT24H each day will be higher than the loss from XBT7D after 7 days. Using data from November 27th to December 4th, I calculated the net return from selling XBT24H each day over the first six hours, vs. the loss experienced by buying XBT7D on November 27th and holding until the December 4th expiry. The compounded return earned by selling XBT24H was 3.74%. The XBT7D loss was 1.74%, for a net return of 2%. Depending on the amount of leverage used, the return on equity will be much higher. Using 10x leverage on both legs equals a 10% return on equity per week. Annualised that’s 520% without taking any price risk.

Daily Return XBT24H
Fri 0.86%
Sat 0.20%
Sun 1.08%
Mon 1.11%
Tue -0.02%
Wed 0.35%
Thur 0.11%

For those who prefer not the trade directionally, this is a safer risk adjusted strategy that generates positive returns.

XBT Spot

XBT Spot

$400 was breached momentarily this weekend. Bitcoin on the USD exchanges is now range bound between $390 and $400, and on the CNY exchanges Bitcoin trades slightly above $400.

The price will climb alongside the China premium. FOMO buying has not occurred yet. The slow and steady rally is healthy. Against a positive global macro backdrop, Bitcoin will continue climbing to the all important $500.

Trade Recommendations:

BitMEX 100x Daily Futures, XBT24H: Buy XBT24H while spot is $390 to $395, with an $405 upside target.

BitMEX 50x Daily Futures, XBT7D: Buy XBT7D while spot si $390 to $400, with an $410 upside target.

Risk Disclaimer

BitMEX is not a licensed financial advisor. The information presented in this newsletter is an opinion, and is not purported to be fact. Bitcoin is a volatile instrument and can move quickly in any direction. BitMEX is not responsible for any trading loss incurred by following this advice.

Cash And Carry Arbitrage With BitMEX Futures

One of the most common and profitable trading strategies when trading futures is cash and carry. Traders employing this strategy buy underlying asset and sell its corresponding futures contract. They hold the futures contract until expiry, and profit from the differential between the future and underlying asset.

There are two types of BitMEX futures one can use to execute this strategy. XBU futures have very low risk and low reward. XBT futures have more risk but more reward.

Futures premiums can vary widely depending on the optimism in the market. Executed correctly and at the right time, a cash and carry strategy can lock in guaranteed profit.

We’ll delve into the XBU (5x) futures first.

Using BitMEX 5x Leveraged Futures (XBU)

BitMEX offers a series of futures contracts that have 5x leverage. That means a trader who deposits 10 BTC can control a position worth 50 BTC. These contracts we classify as Hedging, and use the symbol prefix XBU. The contracts are worth $100 of Bitcoin. Put another way, no matter what the BTCUSD exchange rate is, the contract will equal enough Bitcoin such that its value is $100.

The below example will run through the mechanics and risks of a cash and carry strategy using these futures contracts.

Spot Bitcoin price = $200

March 2016 futures price = $250

Cash and carry profit = $50/Bitcoin

A trader will now buy spot Bitcoin and sell March 2016 futures contracts.

Assume the trader has $10,000. He buys 50 Bitcoin at a price of $200. He then must sell enough March futures contracts to hedge his long exposure.

March 2016 Futures Contracts = $10,000 / $100 = 100 Contracts

Quantity USD Value Bitcoin Value
Spot 50 BTC -$10,000 50 BTC
March 2016 Futures (XBU) -100 $10,000 -50 BTC
Total Exposure $0 0 BTC

The trader has locked in a risk free profit of $2,500 regardless of the subsequent BTCUSD exchange rate. The below example will illustrate why.

Assume that the spot price rises to $250. The below table shows the change in the USD and Bitcoin value of the spot and futures positions.

Quantity Price USD Value Bitcoin Value PNL Total USD Value Total BTC Value
Spot 50 BTC $250 -$12,500 50 BTC $2,500 -$10,000 50 BTC
March 2016 Futures (XBU) -100 $250 $10,000 -40 BTC -10 BTC $10,000 -50 BTC
Total Exposure $0 0 BTC

The trader makes USD PNL on the long spot position, and BTC PNL on the short futures position. The net effect is the total portfolio exposure does not change. Because the trader bought spot at $200 but sold futures at $250, he has actually profited the difference and no price movement will change that.

Assume that the spot price falls to $150. The below table shows the change in the USD and Bitcoin value of the spot and futures positions.

Quantity Price USD Value Bitcoin Value PNL Total USD Value Total BTC Value
Spot 50 BTC $150 -$7,500 50 BTC -$2,500 -$10,000 50 BTC
March 2016 Futures (XBU) -100 $150 $10,000 -67 BTC 17 BTC $10,000 -50 BTC
Total Exposure $0 0 BTC

The trader makes USD PNL on the long spot position, and BTC PNL on the short futures position. The net effect is the total portfolio exposure does not change.

Once a trader has bought spot and sold futures contracts, there is nothing else to do but wait until expiry. This is a pure cash and carry strategy. For this reason, the XBU (5x leveraged futures) premium to spot will be much less than the XBT (25x leveraged futures) premium to spot.

Using BitMEX 25x Leveraged Futures (XBT)

BitMEX’s other Bitcoin futures have 25x leverage. That means a trader who deposits 10 BTC can control a position worth 250 BTC. These contracts we classify as Speculative, and use the symbol prefix XBT.

XBT contracts are differently structured. The contracts pay out 0.00001 BTC per $1 movement of the BTCUSD price. Put another way, if the BTCUSD prices rises by 1% the Bitcoin value of the futures contract rises by 1%. All profit and loss for the futures contract is paid out in Bitcoin.

The below example will run through the mechanics and risks of a cash and carry strategy using these futures contracts.

Spot Bitcoin price = $200

March 2016 futures price = $300

Cash and carry profit = $100/Bitcoin


A trader will now buy spot Bitcoin and sell March 2016 futures contracts.

Assume the trader has $10,000. He buys 50 Bitcoin at a price of $200. He then must sell enough March futures contracts to hedge his long exposure.

Given no volatility, the trader would profit 50 * ($300 – $200) or $5,000. But there will be volatility, so there are some considerations.

March 2016 Futures Contracts = 500 BTC / ( $200 * 0.00001 ) = 25,000 Contracts

We use the spot price of $200 to calculate the number of contracts to hedge instead of the futures price of $300. This is because you are holding the future until maturity, so it should be valued at the spot price.

Quantity USD Bitcoin
Spot 50 BTC -$10,000 500 BTC
March 2016 Futures (XBT) -25,000 $10,000 -500 BTC
Total Exposure $0 0 BTC

Because of the return profile of the futures contract, this trade is not risk free.

Assume that the spot price rises to $250. The below table shows the change in the USD and Bitcoin value of the spot and futures positions.

Quantity Price USD Value Bitcoin Value PNL Net USD PNL
Spot 50 BTC $250 -$12,500 50 BTC $2,500 $2,500
March 2016 Futures (XBT) -25,000 $250 $15,625 -63 BTC -13 BTC -$3,125
Total Exposure $3,125 -13 BTC -$625

To flatten the exposure to 0, the trader would need to buy 13 BTC at a price of $250. In addition, he is locking in a loss of $625.

Assume that the spot price falls to $150. The below table shows the change in the USD and Bitcoin value of the spot and futures positions.

Quantity Price Value Bitcoin Value PNL Net USD PNL
Spot 50 BTC $150 -$7,500 50 BTC -$2,500 -$2,500
March 2016 Futures (XBT) -25,000 $150 $5,625 -38 BTC 13 BTC $1,875
Total Exposure -$1,875 13 BTC -$625

To flatten the exposure to 0, the trader would need to sell 13 BTC at a price of $150. In addition, he is locking in a loss of $625.

Due to a long spot vs. short futures position, as the price moves the trader must buy high and sell low to have no exposure to the Bitcoin price. Every time he hedges his portfolio he is losing money, meaning he is short volatility. If the price moves too much between now and March 2016, the cost of hedging his portfolio will outweigh the premium earned by selling the future above the spot price.

By employing this cash and carry strategy, the trader is selling volatility for a premium. To determine the trader’s break even volatility, we must solve for the upper and lower bound where the trade ceases to become profitable.

Solving the following quadratic equation will give the upper and lower bound

F = Future Price, in this example $300

S = Spot Price, in this example $200

Sqrt = Square Root

Upper Bound:

[ -2 * F – Sqrt( 4 * F^2 – 4 * S * F ) ] / -2

In this example, $473.21.

Lower Bound:

[ -2 * F + Sqrt( 4 * F^2 – 4 * S * F ) ] / -2

In this example, $126.79.


Assume there are 180 days until the March 2016 future expires. That means the trader sold volatility at this level:

( $473.21 / $126.79 -1 ) * Sqrt ( 365 / 180) = 386.40% Annualised Volatility

If the trader rebalanced his portfolio once daily, the price would have to move at greater than a 386.40% annualised volatility for the trader to lose money. For each day that the realised volatility is lower than 386.40% annualised, the trader makes money. This is the daily carry that he earns.



Cash and carry is a valuable strategy that can lock in great returns.

On BitMEX, cash and carry strategies using XBU have no price risk. For this reason, expect XBU contracts to have less premium over spot.

Doing cash and carry arbitrage on the XBT series carries more risk, but may have much more reward.

Crypto Trader Digest – July 27

BitMEX Happenings

Zero Fees:

From now until September 1, 2015, trading fees across BitMEX are now zero!

25x Leveraged Bitcoin Futures:

BitMEX has raised leverage on our XBT Bitcoin / USD futures contracts to 25x.

New Simplified UI:

The new Simplified UI is now live. Traders may now choose from the “Basic” or “Advanced” layout.

25x Leveraged Bitcoin Futures Contracts

Screen Shot 2015-07-27 at 10.02.06 am

25x Leverage:

BitMEX aims to serve the entire crypto trading community. The return profile of our XBT quanto Bitcoin futures contracts is ideal for speculators. Starting today, we have raised the leverage to 25x for all XBT contracts. For example, if you wished to open a position worth 100 Bitcoin, you only need 4 Bitcoin of margin.

High-leverage instruments are high-risk. During fast moving markets, it is possible that some traders may go bankrupt. To ensure a zero sum system, BitMEX developed the Dynamic Profit Equalisation system. Traders can withdraw realised profit from the system subject to an adjustment.

Profits are held until settlement or rebalancing of a particular contract. The system loss is calculated, and trader’s profits are adjusted proportionally. Using BitMEX’s state-of-the-art trading engine, BitMEX is able to calculate the projected loss percentage in real-time, giving traders the chance to make trading decisions based on the anticipated systemic loss.


The implied profit adjustment, if any, is displayed on the order book at all times. We want users to enter into trades with full knowledge of the state of the system.

Manipulation Prevention:

To discourage traders from attempting to manipulate the futures market with the intention of causing margin calls, the futures contracts for margin and unrealised pnl purposes will be marked at the Bitfinex spot price plus an exchange set offset. The mark price will generally be set to match the prevailing futures last traded price. It will change in real time with the movement of the spot price. If a trader attempts to aggressively push the last traded price away from the mark price, traders will not be liquidated. The mark price has no effect on realised pnl.

To learn more about the DPE system, please read the blog post Dynamic Profit Equalisation.

Bitcoin Escapes The Commodity Carnage


Last week, the global commodity complex got choke slammed. Gold and silver were monkey hammered through key support levels. The world is afraid of a strong dollar and a less investment-focused Chinese economy. The Australian dollar (the purest play in currency land on commodity strength) is in free fall.

The world economy is not well. Apart from super luxury homes and apartments, people can afford less and less with their stagnating or declining incomes. China is transitioning away from breakneck industrialisation. Chinese electricity consumption (this is about the only statistic you can somewhat trust coming from China) grew at the slowest pace in 30 years.

Bitcoin, the newest monetary commodity on the block, stood its ground. The only global growth area is financial repression. Governments are ratcheting up their efforts to sequester and steal their citizens’ wealth. More and more people are waking up to the fact that the socialist utopia promised by their elected or unelected kleptocrats is a chimera. Governments with their backs to the wall will always steal their citizens’ money with capital controls and inflation. Bet on this one area of global growth by going long Bitcoin.

I Told You So


f you repeat something enough, people will get the message. Many economic pundits globally have been warning Greeks since the beginning of 2015 that a depositor bail-in was coming. The recent Greek capitulation to their European overlords has changed nothing for ordinary citizens. The capital controls remain in place. Businesses cannot import the goods they need. And with each passing day probability and magnitude of a depositor bail-in grows. Now Reuters predicts that capital controls will last for months.

The Europeans have refused to hand over fresh Euros to recapitalise Greek banks. They fear their domestic populations will balk at tax dollars going into the black hole that is the Greek banking system. The capital controls remain, and as a pre-condition for any bailout it is almost certain that ordinary depositors will not see a portion of their wealth ever again.

At this juncture, the Greeks have only themselves to blame. They elected Syriza on the promise of repudiating the austerity platform. That was the moment to pull money out of Greek banks and spirit it away abroad. The wealthy Greeks got out of Dodge and left the plebes to fend for themselves on 60 Euros per day.

In the past 2 years, the first world has been given two concrete examples of capital controls and depositor theft. If you haven’t gotten the message by now, I don’t know what will convince you that money in a bank isn’t yours. This doesn’t mean you should rush to store all your wealth under your mattress or start setting up offshore bank accounts. Recent events have shown that storing 100% of your wealth in your domestic banking system is risky. Diversification is key.

Bitcoin is one pillar of a proper diversification strategy. Capital controls and banking closures are usually the precursor of violence. If you had to relocate, possessing an asset that can be exchanged globally for other currencies or goods is prudent. In addition to your cache of gold and silver coins, consider a Bitcoin wallet filled with emergency funds. The beauty of Bitcoin will make itself apparent during a breakdown of polite society.

Increase Your Bitcoin ROE With Futures Arbitrage


There are now a few platforms offering Bitcoin futures products. In any new market, there are sometimes large price discrepancies between similar products. Traders with sufficient knowledge can employ arbitrage strategies and profit from market inefficiencies. Futures vs. futures arbitrage is one strategy that can increase the return on your dormant Bitcoin.

This strategy is geared towards traders who have a core holding of Bitcoin that they don’t plan on selling. Assume that there are two futures contracts that have the same return profile and expire on the same date. Futures A and B trade at $100 and $110 respectively, and expire in one month. Each futures contract requires margin of 20% in Bitcoin.

You decide to buy future A and sell B to capture the $10 premium. On an annualised basis, you have earned ($110 / $100 – 1) * 12 = 120%. The good thing about futures is the use of leverage. 120% is your un-levered return; however for this trade you only had to put up 20% equity on each side. Your real return on equity (ROE) is 120% * 1/40% = 300%.

Weekly Review: Bitcoin Investment Products

image (3)

image (4)

Week Ending GBTC Avg Volume WoW % Chg % Premium XBT Avg Volume WoW % Chg % Premium
7/17/2015 760 XBT 6.03% 1,441 XBT -0.17%
7/24/2015 311 XBT -59.07% 8.71% 295 XBT -79.55% -0.32%

XBT Spot

Screen Shot 2015-07-27 at 4.27.18 pm

Chop, Chop, Chop. Bitcoin exited the $270’s with a bang straight on through to $295. Ever since, the price has been dancing to the tune of LTC, and chopping up trader’s portfolios in the process. $300 looms large, but the battle for that mountaintop is proving intense. It is a tough call to discern whether Bitcoin will collapse to $200, or rise above $300-$320.

The temporary removal of a formal Grexit has left Bitcoin searching for a narrative to carry it higher. In the absence of a new strong narrative, expect the price to languish. The longer it spends within striking distance of $300, the more vulnerable it is to a well executed bear raid.

One last attempt to breach $300 in this rally is likely. Failure to scale this peak will give the bears a perfect opportunity to inflict a severe mental and economic blow to the bulls. The past attempt and failures at $300 were followed by a swift downdraft. Expect the operators to go for blood and attempt to puncture $200 once more. In the absence of a global macro wobble, unlevered buyers should wait for cheap pickings in the low $200’s.

Trade Recommendation:

Buy XBTN15 while spot is below $290. The upside target price is $300. If the price trades below $280 again, close the long position.

Crypto Trader Daily – 14 March 2015

Price Action

After a brief recovery above $290, the price sank to a low of $281 on Bitfinex. Trading for the rest of day was range bound between $281 and $285. Expect an attempt to test $280. If it holds the bull market will live on, otherwise watch out below.


Trade Idea

XBUU15 prices have proven to be quite sticky. After the price fall, the difference between XBUU15 and spot has widened to $20. Consider selling XBUU15 and buying spot as an arbitrage trade.


In the News

China can’t get enough Bitcoins (Bloomberg View)

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.



BitMEX Hosts Bitcoin Arbitrage Webinar

Bitcoin Arbitrage Webinar

In conjunction with David Moskowitz of Coin Republic, BitMEX CEO Arthur Hayes will be hosting a webinar covering Bitcoin arbitrage trading strategies. The webinar will take place on Monday 27 October 2014 at 20:00 Eastern Standard Time.

Topics covered include:

  • Cash Exchange Arbitrage
  • Futures vs. Spot Arbitrage
  • Covered Interest Rate Parity
  • BitMEX Derivative Contracts

Arthur will explain how traders can employ these simple strategies and make Bitcoin volatility work for their portfolio.
Coin Republic has more details on the webinar.

Materials for the Webinar

If you have not already done so, please visit the BitMEX Testnet and set up an account. Arthur will demonstrate how to properly execute these strategies using BitMEX derivative contracts. 

Please download the Arbitrage Pricing Excel Spreadsheet so that you may follow along. Arthur will describe the math behind the strategies step by step.

Arbitrage Made Easy, Lesson 1

The Arbitrage Made Easy lessons will present simple yet profitable arbitrage strategies that can be employed by traders using a combination of spot Bitcoin trading and BitMEX derivatives contracts. The Bitcoin/USD exchange rate will be referred to using the symbol XBTUSD.

Lesson 1 will focus on the arbitrage of price differentials between spot XBT exchanges.

After spending some time trading XBT, traders will notice that sometimes there are large differences between exchanges. Savvy traders can capture these price differentials in a riskless manner. This lesson will assume that the trader’s home currency is USD. Therefore, the trader wants zero risk in USD terms. Traders will use a portfolio of USD and XBT to capture arbitrage opportunities risklessly.

During this lesson we will refer to the “cheap exchange” as exchange A, and the “expensive exchange” as exchange B. The goal as with any trade is to buy low on exchange A, and sell high on exchange B.

Step 1: Construct a Portfolio of Half USD and Half XBT

The arbitraging of spot exchange requires traders to buy XBT cheaply on exchange A, and sell XBT expensive on exchange B simultaneously. If a trader started with just USD the following steps would have to be taken to conduct the arbitrage:

  1. Wire USD to exchange A
  2. Sell USD buy XBT
  3. Transfer XBT to exchange B, wait for 1-6 confirmations
  4. Sell XBT for USD on exchange B
  5. Remit USD from exchange B to home bank account
  6. Repeat

There are several problems with that trade flow. Wiring USD can take upwards of 5 business days depending on the bank and country. By the time the funds reach exchange A, the arbitrage opportunity could have disappeared. In step 3, the price of XBT could move against the trader before he is able to sell on exchange B.

The optimal structure would be to have a portfolio of USD and XBT spread out across the relevant exchanges. When an opportunity presents itself, traders can act immediately and capture the arbitrage before it evaporates.

Going forward a XBT spot price of $500 will be assumed. A portfolio of $5,000 and 10 XBT has been constructed. The total portfolio value is $10,000 = $5,000 + 10 XBT * $500.

Step 2: Sell XBT Futures Contracts to Eliminate Price Risk

The home currency is USD, traders do not want to have any exposure to XBT exchange rate fluctuations. Trading BitMEX futures contracts is the best way to eliminate currency risk. BitMEX offers a futures contract that locks in the future USD value of Bitcoin, called the XBU series.

Step 2a: Selling XBUU14 Futures Contracts

Each XBUU14 (BitMEX USD / Bitcoin September 26, 2014) is worth $100 of Bitcoin. The underlying is the XBTUSD spot price. For this lesson, the current XBTUSD price is $500. The current price of the XBUU14 contract is $500. To determine the proper amount of contracts to sell, the trader should consider the USD value of XBT that he wishes to hedge. The current USD value of the 10 XBT held is $5,000 = $500 * 10 XBT. The portfolio needs to sell 50 contracts = $5,000 / $100.

Now the sample portfolio looks as follows:

$5,000 cash

10 physical Bitcoin

Short 50 XBUU14 contracts

The below table shows the USD value of the portfolio as spot XBTUSD changes:

XBTUSD USD Cash Physical XBT XBT Profit XBUU14 USD Portfolio Value
300 $5,000 10 XBT 7 XBT $10,000
400 $5,000 10 XBT 3 XBT $10,000
500 $5,000 10 XBT 0 XBT $10,000
600 $5,000 10 XBT -2 XBT $10,000
700 $5,000 10 XBT -3 XBT $10,000

Because of the XBUU14 hedge, the portfolio value stays constant at $10,000 no matter the XBTUSD price. Now the Bitcoin price volatility will not affect the returns from this arbitrage strategy.

Step 3a: Full Circle Arbitrage Between Exchanges A and B

Now that the portfolio has been constructed and hedged to eliminate currency risk, it is time to capture riskless profits. Exchange A trades at $480, while exchange B trades at $500. The below steps describe how to arbitrage the two exchanges.

  1. Deposit $5,000 onto exchange A; deposit 7 XBT onto exchange B
  2. Buy 7 XBT on exchange A for a cost of $3,360 = 7 XBT * $480
  3. Simultaneously sell 7 XBT on exchange B and receive $3,500
  4. Withdraw $3,500 from exchange B, then wire $3,500 to exchange A
  5. Transfer 7 XBT from exchange A to B
  6. Repeat

The above trade generated $140 in gross profit. USD deposit and withdrawal fees as well as exchange trading fees must be deducted. The result will be the net profit from this arbitrage trade. The amount of times the portfolio can be churned is limited by the speed of USD wire transfers and the size of price gap between exchange A and B.

Notice that only 7 XBT could be used as working capital for the arbitrage opportunity. This is because BitMEX requires margin to be posted against the short 50 XBUU14 contracts. BitMEX requires an initial margin of 30%, given short 50 XBUU14 contracts are worth 10 XBT (1/$500 * $100 * 50 Contracts), 3 XBT must be deposited as margin with BitMEX leaving 7 XBT for arbitrage purposes.

Step 3b: Exchange A and B Spread Trading

Instead of withdrawing USD from exchange B and transferring again back to exchange A, a trader can play the spread between the two exchanges. Exchange A trades at $480, while exchange B trades at $500. The below steps describe how to spread trade.

  1. Deposit $5,000 onto exchange A; deposit 7 XBT onto exchange B
  2. Buy 7 XBT on exchange A for a cost of $3,360 = 7 XBT * $480
  3. Simultaneously sell 7 XBT on exchange B and receive $3,500
  4. Prices on exchange A and B equalise at $500
  5. Buy 7 XBT on exchange B for a cost of $3,500
  6. Simultaneously sell 7 XBT on exchange A and receive $3,500
  7. Exchange A now contains $5,140
  8. Exchange B now contains 7 XBT
  9. Wait for the spread between A and B to widen again and repeat

The above trade has generated $140 in gross profit. USD deposit and exchange trading fees must be deducted. The result will be the net profit from this arbitrage trade. Spread trading does not require the withdrawal of USD from exchange B and subsequent deposit onto exchange A which reduces fees paid. However, traders must wait for the spread to collapse before the portfolio can be rebalanced.

Bitcoin and Interest Rates

Understanding the interplay between USD and Bitcoin interest rates is critical to understanding the spot and derivatives market structure. The difference between where you can borrow and lend unsecured USD vs. unsecured Bitcoin can tell you many valuable things as a trader. The rest of this post will explore how interest rates affect the price of spot and derivatives.

Using borrowed money to buy an asset is the bedrock of finance, and is no different with Bitcoin. A trader who is very bullish Bitcoin, would borrow USD, sell USD, then buy Bitcoin. Traders who expect the price of Bitcoin to appreciate more in percentage terms than what they are paying on the USD loan. The second scenario is borrowing Bitcoin to sell it short on the market. The short seller hopes that Bitcoin will fall by a greater percentage than the interest rate on their loan. The differential between USD and Bitcoin interest rates tells traders about whether the market thinks Bitcoin will appreciate or depreciate in the future.

Besides observing USD and Bitcoin interest rates separately, the premium or discount a futures contract trades at signals whether USD or Bitcoin interest rates are higher. For Bitcoin/USD futures contracts, if the future is more expensive than spot it means that USD interest rates are higher than Bitcoin ones. Conversely if the Bitcoin/USD futures contract is cheaper than spot, it means that Bitcoin interest rates are greater than USD ones.

Covered interest rate parity describes the relationship between a futures contract, the spot exchange rate and the interest rates of the home and foreign currency.

F = S * (1 + R_f) / (1 + R_h)

F = Future price; S = Spot; R_f = Foreign currency interest rate; R_h = Home currency interest rate

A simple example will illustrate how this process works. Jane is a foreign exchange trader. The spot price of Bitcoin is $100, while a futures contract expiring in one month has a price of $200. Jane knows she can borrow money from the bank at 100% per month interest. Jane’s friend James is looking to borrow Bitcoin to sell it short. He is willing to pay 25% per month in interest. Jane’s other friend Jack wants to sell Bitcoin in one month’s time for $200 per Bitcoin. Jane sees an arbitrage, if she borrows USD from the bank, buys spot Bitcoin, lends her Bitcoin to James, and then sells it forward to Jack, when the futures contract expires she stands to make $50.

Jane goes to her local bank and takes out a loan for $100. The bank charges her 100% to borrow the money for one month. Jane must pay the bank back $200 in one month’s time. She takes the $100 and buys 1 Bitcoin. James borrows Jane’s 1 Bitcoin and will pay her back 1.25 Bitcoin at the end of the month. Jane promises Jack that she will deliver 1.25 Bitcoin in one month’s time for $250.

After one month, Jane gets her 1.25 Bitcoin back from James. Jane then delivers 1.25 Bitcoin to Jack and receives $250. Jane then pays back her bank loan of $200; the $50 left over is profit.

Plugging in the numbers to the formula, Jane’s arbitrage opportunity becomes obvious.

$100 * (1 + 100%) / (1 + 25%) = $160

If Jane can sell Bitcoin forward at a greater rate than $160, she can make a risk free profit. Are there arbitrage opportunities in Bitcoin like the one presented above? Of course. The USD rate at which speculators are willing to borrow at and margin trade is much higher than the Bitcoin borrow rate short sellers pay. The market believes Bitcoin will appreciate in the future and speculators are willing to pay a high interest rate to leverage their positions.

For the lucky traders who can borrow USD below the rate speculators are paying on margin trading platforms, can make easy risk free profits. Arbitrageurs give up the potential massive upside in Bitcoin’s value for steady non-volatile profits.