Bitcoin spot futures arbitrage

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Image Courtesy: TradingView. The above graph shows the price of bitcoin in blue spot price , the price of bitcoin futures contract expiring in April in green launched in February , and price of a bitcoin futures contract expiring in May in red launched in March.

How are Bitcoin Futures Priced?

A few important observations can be made from the above graph. At times, the price of futures may almost come close to the spot price arrow no. This is due to the relative differences between the blue graph spot price and the green and red graphs future prices at the marked locations.

Why do such differences occur? Aren't futures contracts said to closely follow spot prices? While the theoretical formula is good for the ideal case of no arbitrage, it does not account for the real-world perception of volatility and price arbitrage. This happens because the market participants perceive and include the possible impacts of volatility.

If there are only 2 days to expiry, the futures price calculation formula will simply tell us that due to only 2 days remaining, the price of bitcoin futures contract will remain very close to bitcoin spot price. However, due to high volatility, its spot price may shoot up or down significantly within hours. Additionally, there may be big events occurring, like a particular country like China announcing a ban on cryptocurrencies, which will change the perception of the market participants for the near term that is reflected in the spot price.

It is possible that futures price closed on Tuesday very near to the spot price, but overnight there was a development that spiked the bitcoin spot prices by 12 percent and hence Wednesday morning futures will open with a wide gap. Unfortunately, the theoretical formula does not account for such instances which have the potential to impact the futures prices drastically.

While spot prices can instantly reflect bitcoin-related developments, the perceived volatility and its impact over the remaining days to expiry makes futures pricing a guessing game. Despite all inconsistencies in the price discovery mechanism and the large variance of volatility impact on futures pricing, futures trading remains a high-stakes game. Nevertheless, bitcoin futures trading continues to draw interest as this volatility and uncertainty also allows for profitable opportunities.

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Bitcoin Futures Trading Strategies

Engle R Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models. If done correctly, the cash-and-carry strategy minimizes risk exposure for the investor. This reduction in risk exposure is due to the way in which this technique anticipates any market movement.

The main goal of this technique is to exploit pricing inefficiencies in the spot price. The first step in a basic cash-and-carry-arbitrage is to evaluate the market.

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You will need to closely monitor the percentage difference between the current spot price of Bitcoin and the price of Bitcoin Futures contracts. Begin making daily notes of the price percentage at a certain time per day. This data will allow you to compile a better awareness of how the two price points correlate.

Next, a Bitcoin Futures arbitrageur would make two purchases. The first purchase would be a long position in Bitcoin. Importantly, this is a direct investment into Bitcoin. The investor would then open a short Bitcoin futures contract at the same time and for the same amount.


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Critically, this contract needs to be at a price considered expensive by the investor. In most instances, you will notice the futures contracts experience more intense price volatility than Bitcoin directly. They also trade for a much higher value usually. However, there are instances where the Futures fall below the spot price as well.

You will need to use your chart to determine when the Futures price uncouples from the spot price.

How To Arbitrage Bitcoin Futures vs. Spot | BitMEX Blog

When the contract expires the investor fulfills their obligations using the Bitcoin originally purchased. This opportunity is present whenever the inflow from the short futures position exceeds the acquisition cost and carrying costs on the long asset position. It is true that the cash-and-carry method does limit risk in certain market conditions.

However, this strategy can do nothing to buff increases in carrying-costs. Keenly, you will want to monitor your fees and other factors such as margin costs. All of these can add up and chip away at your profits over time. In the inter-exchange investment strategy, you are seeking to make a profit off of the variability in futures prices from one platform to another.

There are many ways to accomplish this task. The simplest form is to find Bitcoin futures price gaps between platforms and trade your asset between each to earn the profit.

While this may sound simplistic, there are some additional risks to avoid. One of the first things you want to examine is the trading pairs offered by the platforms. You may find that a certain Bitcoin trading pair is overpriced compared to the competition. Some investors may even choose to examine three trading pairs to find inefficiencies.


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This technique is called intra-exchange triangular arbitrage. Today, there are a number of Dapps and bots in the market that can help simplify this process. Additionally, traders often build custom scripts to monitor the value of assets across different platforms. There are even instances of developers automating the entire process throughout the day. In this way, they can slowly stack up tiny earnings throughout their trading activities.

In this situation, you need to pay careful attention to the liquidity of the assets in question, the transaction fees, and the transfer times.