A Word About "Arbitrage"...

[misterkel]

OK, that sounds like a good explanation of why it would tend to try to move in a direction, but that's not what we're talking about here. What we're talking about is the explanation for why any deviation in either direction isn't arb'd away in seconds? The risk free rate on short term treasuries is sub .1%, this is 10% plus, two orders of magnitude larger. If Mr. Market didn't think there was any risk, that would be arb'd away in a heartbeat, just like any deviation in the S&P futures from spot taking into account the risk free rate and dividends is. Or any of the other financial futures, all of which trade within a hair of the equation that governs the risk free arb condition. The only difference between them and Bitcoin futures trading on unregulated exchanges is the requirement to entrust money to an unregulated exchange. Even the flash crashes don't impact you when you've got BTC and BTC futures at the same broker collateralizing each other unless you've got some serious lag on futures following spot and a hair trigger autoliquidation algorithm going on.

Yeah, the auto-liquidation is problematic and a LOT of people have been rekt on Bitmex because of it. But the better exchanges have improved those engines quite a bit.
My explanation is that capital flows directionally are so much larger that the arb cannot match it. Arbs on conventional markets are mostly institutions and they don't trade on unregulated exchanges because they can't. Retail arbs don't have the firepower to match the retail directionals.
Second, arbing at too low a point can put you in the red when the markets move becase the spread in the term structure will widen massively as the price shoots up. On ftx, at least, you also go into margin against USD because of the short on BTC. (as I found out the hard way.)

But, I agree, I don't know why more traders don't take the arb when the markets are hot, but the lack of trust doesn't make sense. Otherwise, the term structure would always be in massive contango according to that theory because the mistrust is a constant which is causing it. But that's not what happens.

I suspect it's because most conventional arbs are settled rather quickly, but a futures arb requires waiting until expiry, so most traders simply don't want to hold it that long.

 

[misterkel]

None of this answers a basic question: If Bitcoin has no carrying costs, then the futures should trade exactly in line with eachother.

Why are they in contango?

This is not an answer I'm 100% on, but it is the strongest theory I've got.

$1000 in capital = $1000 in spot.
$1000 in capital = $100,000 in futures buying power.

That's a 100 to 1 ratio in directional buying power vs arbing power. Directional buying overwhelms arbing because of massive leverage.
I don't think I can explain it much more clearly, sorry.

 

[newwurldmn]

This is not an answer I'm 100% on, but it is the strongest theory I've got.

$1000 in capital = $1000 in spot.
$1000 in capital = $100,000 in futures buying power.

That's a 100 to 1 ratio in directional buying power vs arbing power. Directional buying overwhelms arbing because of massive leverage.
I don't think I can explain it much more clearly, sorry.

no. The arb community would not let that happen. The spread is 3percent over like 4 months. There’s some other reason.

 

[misterkel]

no. The arb community would not let that happen. The spread is 3percent over like 4 months. There’s some other reason.

Well, the burden of proof is on you. I've provided my theory with evidence.
I've also done this trade multiple times successfully. I don't see how such solid arb returns would be ignored based on mistrusting an exchange that has never lost client money despite virtually constant attempts to hack it.

 

[newwurldmn]

Well, the burden of proof is on you. I've provided my theory with evidence.
I've also done this trade multiple times successfully. I don't see how such solid arb returns would be ignored based on mistrusting an exchange that has never lost client money despite virtually constant attempts to hack it.

There is literally a hundred billion dollars at work looking for arbitrages like this.

I’m not referring to your spot vs futures trade. I’m saying futures vs futures where I don’t have to hold bitcoins or worry about basis between exchanges. Unless there’s a carrying cost, the futures curve is arbitragable.

I can get that futures trade at a premium to spot just on accessibility.

btw - burden of proof is on the person posing the theory. Not the person questioning it. If I call you a pedophile, it’s not your job to disprove the statement, it’s my job to prove it.

 

[tsznecki]

There is literally a hundred billion dollars at work looking for arbitrages like this.

I’m not referring to your spot vs futures trade. I’m saying futures vs futures where I don’t have to hold bitcoins or worry about basis between exchanges. Unless there’s a carrying cost, the futures curve is arbitragable.

If you don't have to hold bitcoins, then you are restricted to CME/BAKKT only. Spot exchanges will force you to put up collateral in mostly the underlying crypto or in some cases a stablecoin.

My guess is look at the margin reqs for CME BTC futs, that's why no one puts them on in size. Have you seen the volume on the product? I've said it before, no one trading crypto seriously is on the "regulated" exchanges.

 

[misterkel]

There is literally a hundred billion dollars at work looking for arbitrages like this.

I’m not referring to your spot vs futures trade. I’m saying futures vs futures where I don’t have to hold bitcoins or worry about basis between exchanges. Unless there’s a carrying cost, the futures curve is arbitragable.

No, it's not. The futures curve can invert, leading to a loss. It's not predictable. That's because the curve is not stable. It flips, which would turn the trade into a loss. That, by definition, is not an arbitrage.
If you're referring to the perpetuals, they have a synthetic carry cost depending on whether they are above or below spot. That cost is re-figured every 1 to 8 hours, depending on the exchange. The cost can frequently be higher than the futures premium if it sustains, so it's not arb either.

 

[newwurldmn]

If you don't have to hold bitcoins, then you are restricted to CME/BAKKT only. Spot exchanges will force you to put up collateral in mostly the underlying crypto or in some cases a stablecoin.

My guess is look at the margin reqs for CME BTC futs, that's why no one puts them on in size. Have you seen the volume on the product? I've said it before, no one trading crypto seriously is on the "regulated" exchanges.

exhange margin for a spread varies from 3k to 20k. It’s negligible

 

[misterkel]

exhange margin for a spread varies from 3k to 20k. It’s negligible

Unclear meaning. Please add details to clarify.

 

[traderjo]

Partial list of Bitcoin "exchanges" hacked/shut down/turned out to be frauds in just the last 3 years!
Altsbit
Upbit
VinDAX
Bitpoint
Bitrue
GateHub
Binance
DragonEx
Bithumb
CoinBene
CoinBin
Coinmama
Cryptopia
QuadrigaCX
MapleChange
Zaif
Coinrail
Bitcoin Gold
Taylor
CoinSecure
Bitgrail
Coincheck

List of U.S. regulated exchanges hacked/shut down/turned out to be frauds in the last 3 decades:

There's a reason there's a risk premium on unregulated "exchanges". Some may well be "legit", but recent history shows us that there are a heck of a lot that aren't. Where as regulated exchanges are batting 100% on reliability since CFTC was established. Hard to argue with that.

Yes I agree with you and Sig
and although what misterkel has sown might be doable how do we know following
- The exchange is acting purely as an exchange and does not have a Prop / market maker arm that gets some sort of preferential treatment like what happened with FXCM USA and they were shot down by CFTC
- The fact that fix can;t offer futures under CFTC regulation
Hence the apprehension
and 1015 agree with Sig's comment below
But I'd advocate that claiming there is no risk, and furthermore claiming that anyone who claims there is risk is doing so from a position of ignorance, isn't terribly helpful in advancing the discussion. Refusing to acknowledge even the possibility of any minuses is more a sign of being caught up in a bit of a cult in my experience.