Bitcoin futures arb game, at what point is it no longer worth it?

D

Daal

I was looking on this site for info on how the futures arb trade is going
https://bitcoinfuturesinfo.com/market-share-and-futures-curve

The June contract is the one that seems to have the most overlap. I did a spreadsheet with the data bellow:

upload_2021-4-16_7-23-11.png


It looks to me that most of the yield out there is just exchange risk. IIRC the CME trade was paying 20% a few months back. And of course, the CME trade is not risk free because you can always get hacked and lose the spot Bitcoin. So the trader has to take custody risk (whether with himself or with a company) but not get all the upside that crypto has, not to mention all the time spent monitoring margin requirements and moving funds around. With limited gains of 12.5% a year.
At what point this is no longer worth it? I really doubt the CME yield will converge to really low yields (like with lots of futures), crypto custody is still on its infancy and it is not easy
 

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Perhaps when it gets less than 15%.

As for margining, not a problem if it's 1 to 1, no need for adjustments. Buy 1 BTC, sell a slightly larger amount of Bitcoin futures (due to the basis as the returns are paid in BTC). Correct me if I'm wrong but receiving the premium in USDt makes margining slightly more complex if BTC has a major move.

As for moving funds around, work out how much you're earning for doing that work? One guy I know has $3m+ on this basis trade, probably takes him less than an hour every month to manage.
 
10-15%. Returns in that range are doable in Defi and riskier Cefi. No need to put on an active basis position when passive lending will return that.
 
AbbotAle said:
Perhaps when it gets less than 15%.

As for margining, not a problem if it's 1 to 1, no need for adjustments. Buy 1 BTC, sell a slightly larger amount of Bitcoin futures (due to the basis as the returns are paid in BTC). Correct me if I'm wrong but receiving the premium in USDt makes margining slightly more complex if BTC has a major move.

As for moving funds around, work out how much you're earning for doing that work? One guy I know has $3m+ on this basis trade, probably takes him less than an hour every month to manage.
More...

What scares me about this trade is that the futures can pretty much trade at any price. Kraken has had some flash crashes where BTC, ETH, DOT and other coins have collapse an huge amount. For a futures arb'er this would have been great if they had small bid orders out. But there is nothing to prevent the opposite from occuring, that is the premium to flash crash up to unreal amounts

BTC has had +40% days before, what's to prevent in a day like that, huge liquidation of shorts driving the futureus to +200% premiums or even more unreal prices for a few minutes? At that point, most on that side are wiped out. Also, on most houses, the winners are responsible if the losers can't pay

I was looking at the terms and conditions of different futures houses and Kraken and Binance apparently do not go after funds of clients that are still in debit after liquidations (other than the funds on their account), FTX seem to still hold the client liable. In any event, this wouldn't happen at the CME where the trades would surely be busted
So that's the risk of this trade, when liquidity air pockets, the futures can trade at any price and when that happens, a short is risking all his collateral in order to earn that 30%. So your buddy is risking all his $3M in order to generate yield on it. Is it worth it? I dont know but I think few truly understand the risks involved
 
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Daal, put the numbers in a spreadsheet.

If the P&L is paid out in BTC then there's zero price risk re margin as the trade is always 100% covered. Doesn't matter if the price flash crashes to $0.01 (rumours of heavy bids at that level) or high ticks to $1m.

Now, if the P&L is paid in USDt then I believe the trade is not 100% covered from a margin POV and a flash crash could cause all sorts of problems.

The trade my mate is doing is very simple, buy 1 BTC spot at say $10k and sell $11k of the June futures. The extra 10% short in the future (the 10% basis amount) is due to how the BTC is paid out via the quanto future. If BTC goes down a futures contract (or Perp) pays out more in BTC than if it rallies.

The risk to the trade comes from the Exchange getting hacked or closed down. Both are tiny in my view as the big crypto brokers probably have the best online security of any business sector, and if closed down the government or authority that does it will return the BTC and other cryptos to their rightful owners otherwise it's pure theft. The way to part mitigate those risks is to spread the trade around with 4-5 brokers.
 
But what's to prevent the futures premium from going to unreal numbers temporarily? I think you are assuming the link between spot and futures will hold, under market distress it might not. Heck in regulated markets (like in 1987 US stock crash) the S&P500 futures was completely detached from the index. In that case shorts were happy but I consider as probable that in a market frenzy, we could see some of that to the upside
 
I see your point D.

If the premium implodes (and maybe go negative) then it's free money as you're short the future.

But if the premium explodes (strange things can happen in crypto) then things might get interesting.

Anyone have a spreadsheet of the workings of the trade? Including margining, that would help explain some of the finer points.
 
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