In this article arbitrage by trading Bitcoin futures is discussed. If you would like to know what Bitcoin futures are and how they work please read here.

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What is Bitcoin Future Arbitrage?

Futures markets are used by different actors for different reasons. Looking at the different actors we can roughly divide them between speculators, hedgers and arbitrageurs.

Arbitrageurs take advantages of price differences between different markets. By taking advantage this way it is possible to capitalize upon the imbalance and profit from the difference between the market prices.

Bitcoin future arbitrage allows to exploit pricing inefficiencies for Bitcoin in the cash and Bitcoin future market and allows to make profit without risk.

Bitcoin future arbitrage is done by buying Bitcoin while shorting Bitcoin future contracts (Bitcoin futures). The arbitrageur subsequently holds the Bitcoin untill the Bitcoin futures contract expires and then “delivers” the Bitcoin against the Bitcoin futures contract.

Bitcoin future arbitrage is only profitable when the BTCUSD futures contracts trade at a premium to the spot price. The premium price means that the Bitcoin future is valued more, over that of another, or over the cash market price. The spot price is the price at which the Bitcoin/Bitcoin future could be transacted and or delivered right now. So far since introducing, Bitcoin futures have always traded at a premium to the spot price of Bitcoin. The fluctuations to the spot price of Bitcoin have been in the range of 5%-15%.

An arbitrageur can buy Bitcoin at spot price and sell Bitcoin futures of the same amount but for the premium price. The next thing is to wait for expiration of the Bitcoin futures contract to make the profit in Bitcoin. The Bitcoin can be changed for USD. Whether it’s a weekly, monthly, quarterly, or any futures contract, as long as it’s in a premium, an arbitrageur can lock the sales price and earn the arbitrageur profit.

Bitcoin Futures CBOE XBT

Please keep in mind that on the Bitcoin futures market of the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) are cash settled while other brokers settle the Bitcoin futures in Bitcoin.

Caution

  • Bitcoin future arbitrage is only viable if the cash inflow from the short Bitcoin futures exceeds the acquisition costs.
  • After buying Bitcoin there is the phenomenon of market price risk. The arbitrageur needs to short Bitcoin futures contracts for higher than the price of which it bought Bitcoin or there will not be a profit made.
  • Remember that while waiting for the Bitcoin transaction to confirm, the price could also drop, hereby leaving the arbitrageur without a profitable price.
  • Slippage is a problem in the order books. The arbitrageur can also put a limit order, but remember that the more times expires, the more market price risk.

 

Cryptocurrency / Bitcoin CFD trading explained here

Reviews on Cryptocurrency / Bitcoin brokers here (eToro), here (easyMarkets), here (simpleFX), here (WhaleClub) and here (Peppestone).

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