
Bitcoin Futures Start with a Bang as Rally Trips Circuit Breaker - rayuela
https://www.bloomberg.com/news/articles/2017-12-10/bitcoin-futures-trading-opens-bringing-crypto-to-wall-street
======
LrnByTeach
I am trying to understand risks with arbitrage for professional traders with
BTC spot (at Coinbase gdax) and CBOE Futures contract.

Let us say, some professional trader "Short sell CBOE Future contract & Buy
BTC Spot at Coinbase simultaneously"

At the time of this writing, Futures contract short sell @ $18700 and BTC Spot
buy @ $16700 simultaneously. [http://cfe.cboe.com/cfe-products/xbt-cboe-
bitcoin-futures](http://cfe.cboe.com/cfe-products/xbt-cboe-bitcoin-futures)

you wait one month for the Futures contract to expire (Jan 17 th) , let us
examine two scenarios by contract expiry Jan 17 th .

case 1: Bitcoin price shoots to $25,000

case 2: Bitcoin price drops to $8,000

In both cases on the futures contract expiry date that is January 17 th 2018,
bitcoin Futures price and Spot price will be almost same ( give or take $100)

In both cases professional traders profit is $2000 for each futures contract
on the investment of $16,700 Spot + $10,000 future initial price.

That is $2000 profit on $26,700 investment for one month period , that works
as 7% return per month, annualized 84% . You may need to deduct cost of money
that is interest on investment or loan say 6% per year .

One risk I see is, on the Short sell Futures contract, if the bitcoin is keep
rising in price , trader needs to supply more money to meet the margin call (
just a technial issue because he is gaining on the LONG Buy bitcoin spot price
)

Am I missing some thing ??

~~~
d--b
As others pointed out, when you buy/sell futures, you risk counterparty risk.
But it's not that bad because that exchange is really good and people entering
the market pay margin calls every day.

There is also a financing cost (ie. the cash you use to pay for your margins,
transaction costs, and to buy the bitcoins will not pay you any interests over
the time of the position). But again, the effect is not very large.

What really makes arbitraging bitcoin futures difficult is the illiquidity of
bitcoins. "Simultaneously" is a hard thing to do in bit coin world where
transaction are slow to process and price is very volatile.

And you not only need to do this when you buy into the position, but also when
you want to end it. At the end of the contract, you're left with a bunch of
bitcoins, and some cash (or not). Now you need to liquidate all those
remaining bitcoins. This could take some time, and the price you get in the
end could be quite different from the price the future settled into.

That said, the difference between future and spot is likely to become closer
as the market professionalizes and more arbitragers get in.

~~~
mathgenius
The bitcoin exchanges have plenty of liquidity, and executions happen in less
than one second.

The real risk for arbitrage is with the crypto exchange itself: these can go
bust, or disappear overnight. You wanna keep $1M sitting on one of these
exchanges?

~~~
d--b
Mmmh, why do you need your coins sitting on one exchange? Can't you just take
them out once your transaction is done?

~~~
moduspol
From my experience, the way you find out there's an issue with the exchange is
when you see people posting on /r/bitcoin about having waited weeks for their
withdrawal to be processed. Meanwhile the exchange continues to accept
deposits.

~~~
pbhjpbhj
Presumably you can watch the exchange's wallets and see anomalous behaviour
relatively easily?

~~~
mattm
Do exchanges publicize their main wallets? Is there a listing somewhere?

~~~
pbhjpbhj
If you buy bitcoin, I assume it works that you receive btc from a wallet, and
that wallet belongs to the exchange. If you sell at an exchange then you send
your btc to a wallet, and ...

They could hide transfers by making new wallets, but that's strikes me as
massive red-flag behaviour that an exchange wishing to continue in business is
unlikely to take part in?

Someone step in and correct me?

------
gchokov
Can’t really wrap my head around the rise of BTC in futures trading, as they
are all cash settled. In other words, pure betting and gambling with the
futures, as they really do not touch the underlying BTC. I guess, just a
regular day in the massively manipulated crypto currency world...

~~~
gibybo
The markets are not as independent as they might seem. If the futures market
gets ahead or behind of the other BTC markets, it creates opportunities for
arbitragers to profit from the difference which has the effect of reducing the
gap. It doesn't matter that they are cash-settled.

For example, if lots of money start pouring into Bitcoin futures, the futures
price will rise above the price on BTC exchanges. It will then be profitable
to sell the futures while buying Bitcoin on the exchanges, which drives the
price of Bitcoin up on the exchanges. When the future matures, you just sell
the Bitcoin on the exchange and pay your cash-settlement on the future for a
guaranteed profit.

~~~
pash
More precisely, it is possible to replicate the final value of a futures
contract (on Bitcoin or any other asset) up front, by trading in the spot
market, even though a futures contract’s payoff is uncertain until it expires.
Whatever the future’s value ends up being at its expiry, you can put together
in advance a portfolio of holdings that will have the same value simply by
borrowing a certain amount of cash and using it to buy in the spot market a
corresponding amount of the asset on which the futures contract is written; if
you do this, the value of your holdings in cash (after paying interest on your
borrowings) and in the asset are guaranteed exactly to equal the value of the
futures contract at expiry, _no matter what price the underlying asset ends up
trading at then_. So if there is any deviation in the value of the futures
contract (at any point in its lifetime) from the aggregate value of the cash
and assets in the portfolio that replicates its final value, then there is an
opportunity for a pure arbitrage. Consequently trading by arbitrageurs bounds
futures prices in a tight range determined by the variables that set the cost
of putting together this replicating portfolio: the price of the underlying
asset, the interest rate on cash and the yield on the asset (if any), the time
until the maturity of the futures contract, and cost of transacting in these
markets.

This arbitrage relationship is about as hard they get, so trading futures is
tantamount to trading the underlying asset itself, since changes in price in
the futures market will be translated directly via arbitrage into changes in
price in the spot market for the underlying asset, and vice versa.

~~~
pas
> by borrowing a certain amount of cash and using it to buy in the spot market
> a corresponding amount of the asset on which the futures contract is
> written;

So if 1 BTC@januar17 is priced 10 000 USD, you borrow 16 000 USD and buy 1
BTC. How does that help you?

> if you do this, the value of your holdings in cash (after paying interest on
> your borrowings) and in the asset are guaranteed exactly to equal the value
> of the futures contract at expiry,

Why? If the spot price at expiry is different from 10 000, let's say it sunk
to 5 000, then you have to give back cash and you have 1 BTC that is now worth
5 000.

Could you illustrate how the equivalence comes out?

~~~
zAy0LfpBZLC8mAC
> So if 1 BTC@januar17 is priced 10 000 USD, you borrow 16 000 USD and buy 1
> BTC. How does that help you?

You don't offer 1 BTC@january 17th for 10,000 USD if 1 BTC spot costs 16,000
USD.

> Why? If the spot price at expiry is different from 10 000, let's say it sunk
> to 5 000, then you have to give back cash and you have 1 BTC that is now
> worth 5 000.

You don't have to give back any cash. You sell the BTC, that gets you 5,000
USD, you give the 5,000 USD to the owner of the futures contract (cash
settlement of the value of 1 BTC), they pay you the agreed-upon 10,000 USD (in
reality, those two payments are netted, so they pay you 5,000 USD, that's it),
and you pay back your 10,000 USD loan.

------
thisisit
Is someone able to find how the cash settlement of these futures handle forks?
I can find CME's policy but nothing for CBOE:

[http://www.cmegroup.com/education/cme-bitcoin-futures-
freque...](http://www.cmegroup.com/education/cme-bitcoin-futures-frequently-
asked-questions.html)

> 31\. What is CME Group’s policy regarding hard forks?

> CME is developing a hard fork policy for capturing cash market exposures in
> response to viable forks. The policy may involve cash adjustments to
> position holders or listing related futures that are also issued to position
> holders.

~~~
provost
Sounds like if a fork were to happen soon (not that it will) they would have
to freeze the exchange, as they don't have a plan. I've noticed Coinbase does
this as well, though they email a clear explanation about each upcoming fork-
freezes and their intentions for each scenario.

~~~
where_do_i_live
Coinbase froze deposits/withdrawals, trading on the exchange often continues
normally.

------
generalizethis
It's ironic that wall street spent so many years saying Bitcoin is worthless,
but is buying-in when it's lost its use case to competitors within
cryptocurrency, and really is useless (except as a speculative vehicle or
"store of value"). I guess BTC can fork infinitely, so there's that.

~~~
em3rgent0rdr
Actually, Lightning Network will significantly increase Bitcoin's transactions
per second and reduce transaction cost.

~~~
theadamp
In 18 months ;)

~~~
Klathmon
To be fair, Lightning works, and it works now on the Bitcoin mainnet.

The idea is sound, the code is written and _somewhat_ tested, and it has been
used in a very controlled fashion on the real bitcoin network already.

At this point it's just a matter of further testing and validation that the
logic is sound and there isn't anything everyone is missing, and getting
vendors on board and adoption started.

Still no guarantee it will happen, but it's looking more likely that it will
at least make a good push, and it's no longer a vaporware promise of "in 18
months".

~~~
FireBeyond
I'm struggling to find references, so apply salt as needed, but I'm fairly
sure I've read multiple references to the fact that the LN developers
themselves describe it as pre-alpha and still a few years away.

Which, to be clear, isn't necessarily vaporware - I think most people are in
agreement that the concepts are sound, but that integration of the execution
into the mainstream are quite a ways off.

~~~
Klathmon
It is still "early alpha" but bitcoin developers use that term as it was meant
to be used.

"early alpha" is just that, early access to a fully working product with all
the features that are needed, and it needs a LOT of testing and validation.
And because of the "network" nature of it, it needs people or vendors that are
willing to try it out before it can even be tested outside of controlled
areas.

I agree that we are probably a few years (probably more than a "few") from
Lightning being the "default" way to use bitcoin, but I fully expect by Q3 of
next year there to be a few vendors which accept lightning natively, and a few
"consumer friendly" wallets that have some integration.

In my opinion, I wouldn't want to call it "beta" until there are a few
implementations with "user friendly" UI that abstract away the dirty details,
and until there are at least enough people on the "network" that it would be
feasible to actually use it.

If you want, [0] is a video from last week that shows lightning network
running on mainnet. It's a bit of a "fluff video" with nothing really
substantial in it, but it at least shows that it's working, and if you compile
the tools he used in the video yourself (to target them at mainnet) then you
could do it right now too, but without anyone to "network" with, it's kind of
pointless right now...

[0]
[https://www.youtube.com/watch?v=a73Gz3Tvx3k](https://www.youtube.com/watch?v=a73Gz3Tvx3k)

------
hknecht
I think Bitcoin will become the principal store of crypto value.

There will be other cryptos for different uses and Bitcoin will serve as a
medium of exchange among them and as a long term store of value, it probably
won’t become the everyday currency we all want to use.

Hopefully these futures will reduce its volatility and help stabilize the
price

~~~
jacobr
It's not very good as a medium of exchange due to the high transaction time
and costs.

There is a theory that a recent bump in Litecoin prices was due to traders
wanting to move Bitcoin between exchanges and Bitcoin is too slow.

~~~
etr-strike
I hate to break it to you but none of the existing cryptocurrencies know how
to scale transactions yet. There are, however, many proposed solutions.
Bitcoin is aggressively pursuing those solutions.

The worst proposal, increasing blocksize, is not currently being considered
because of its impact on centralization.

~~~
nscalf
Have you heard of bitcoin's lightning network? There is a layer they're
working on that, as I've heard it, allows 1 million transactions a second for
a fraction of the transaction cost. It's not VISA, but it's a huge
improvement, and makes Bitcoin much more viable. They've been showcasing
successful tests, but are open about it not being 100% ready. Still exciting.

~~~
bduerst
Lightning doesn't scale with users. It can handle 1 million transactions
between 2 people in seconds, but 2 transactions between a million people would
take weeks.

------
Havoc
The concept of layering futures on top of BTC is equal parts crazy and
promising on the entertainment front.

All we need now is someone adding leverage and hilarity shall most certainly
ensue

~~~
Erlich_Bachman
You can already trade cryptocurrencies with leverage on many major crypto
exchanges.

~~~
banderman
Correct. All of the big unlicensed and unregulated exchanges that provide no
transparency of their ownership, or as to how customer balances are held allow
significant margin trading. And they have no impartial 3rd party proof of
reserves.

~~~
Erlich_Bachman
Many major exchanges have financial institution licenses. It's not a banking
license, but it's a license that still means a lot of regulation. (Also the
history has shown that a banking license is in no way a guarantee that a bank
cannot fail.)

------
juanmirocks
AFAIK, the CBOE Bitcoin Futures exchange uses a specifically-built index from
Gemini exchange to track the BTC price. However, I cannot find a link.

 __Where is the link for the CBOE Bitcoin Futures index ? __

(Where did Bloomberg get the index data
from?[https://www.bloomberg.com/news/articles/2017-12-10/bitcoin-f...](https://www.bloomberg.com/news/articles/2017-12-10/bitcoin-
futures-trading-opens-bringing-crypto-to-wall-street))

~~~
jpmattia
[http://cfe.cboe.com/cfe-products/xbt-cboe-bitcoin-
futures](http://cfe.cboe.com/cfe-products/xbt-cboe-bitcoin-futures)

> _XBT futures are cash-settled contracts based on the Gemini 's auction price
> for bitcoin, denominated in U.S. dollars._

------
a_imho
How would a bitcoin crash look like? Any far reaching consequences? Can one
safely ignore bitcoin and remain ignorant?

~~~
tehlike
if you want to hedge against a significant rise, you might wanna hold an
amount you are comfortable losing.

~~~
fernandopj
This. And it is what I say when friends & family say it "must be a bubble" or
"journal X say stay away". Investing/risking is not a binary, all or nothing
bet. Just set aside some money you have not immediate use for, and you won't
regret losing or many nights without sleep, if a crash comes. It is still
early enough, and one can learn a lot of crypto technology, which won't be
going anywhere regardless of future prices.

------
beberlei
How can you buy those futures as a regular joe? CBOE seems to be aimed at
certified traders

~~~
Arnt
You can't, on purpose.

The idea is that there are two kinds of investors: Sophisticated ones who can
look out for themselves, and regular joes, who are protected against being
ripped off by extra regulations and extra paperwork. Bitcoin futures aren't
the kind of product for which anyone will go though those regulations and do
that paperwork.

Now, how do you become a sophisticated investor? First of all, have a spare
million or tow. Next, fill out a quite simple form.

~~~
Cthulhu_
I can imagine bitcoin will one day become tightly regulated and only available
to sophisticated traders; the network only supports 15 transactions per
second, limiting who can do trades is one way to deal with it. NYSE can do
about 11K a second (based on [https://www.quora.com/What-is-the-average-total-
number-of-tr...](https://www.quora.com/What-is-the-average-total-number-of-
trades-daily-on-nyse))

~~~
jstanley
The amount of transactions the bitcoin network can handle is totally unrelated
to the amount of trades that can be performed on exchanges.

~~~
CoryG89
Correct, however, the number of transactions that can be handled does matter
when it comes to moving BTC out of or between exchanges.

------
basicplus2
So what happens when the entire earth's energy production is required to
produce the next bitcoin and there is therefore no further bitcoin mining?

~~~
sametmax
Bitcoin is limited at 21 million coins. After that, no more btc, and people
will trade in btc divisions such as satoshis. But there are hundrerds of
bitcoin alternatives now, some very interesting.

~~~
Cthulhu_
If there's no more miners / mining, who verifies the transactions? (iirc
that's what miners did, but correct me if I'm wrong and miners only generate
currency and don't verify transactions)

~~~
jamiegreen
As far as I understand, the process of mining is verifying the transactions as
well. The miners are generating bitcoin as part of the process of verifying
the transactions. After the 21 mil limit is hit, they will be rewarded from
the transaction fees. (Someone with more in depth knowledge feel free to
correct me if I am wrong).

~~~
theadamp
You're not wrong. They currently get the block reward and the transaction
fees. When there's no more reward to be had they will get just the transaction
fees.

------
aaroninsf
What a grisly circus.

Everyone thinks they're going to win.

No one is going to win.

Get out while there is a way of doing so.

------
joering2
tldl (too long didnt listen)

\- low volume \- technical glitches related to frontend as many investors, out
of curiosity wanted to see how it plays out.

------
idibidiart
Is this just legalized gambling?

~~~
sametmax
That's pretty much what people use stock market for anyway. Most investors are
no warren buffet, they bet at best on educated guesses.

~~~
esarbe
You are talking about speculators. Anybody that holds an financial instrument
for less than five years (my definition) is a speculator.

Warren Buffet is an investor. He buys a business (he thinks) he understands
and then holds on to it while it generates profit.

It really bothers me that - in business terms - investors are nowadays just
lumped together with speculators.

Investors try to build something while speculators just try to make money, no
matter the cost to anybody else.

~~~
sah2ed
> Investors try to build something while speculators just try to make money,
> no matter the cost to anybody else.

Based on your definition, what would you call Carl Icahn then?

I tend to agree with John Bogle's definition that both types of people are in
it for the money, the only fundamental difference is the time horizon either
is willing to wait to reap the returns from their investment.

[0]
[https://en.wikipedia.org/wiki/John_C._Bogle#Investment_philo...](https://en.wikipedia.org/wiki/John_C._Bogle#Investment_philosophy):

 _The main difference between investment and speculation lies in the time
horizon. Investment is concerned with capturing returns on the long-run with
lower risk, while speculation is concerned with achieving returns over a short
period of time. Bogle believes this is an important analysis to be taken into
account as short-term, risky investments have been flooding the financial
markets._

~~~
Simon_says
> what would you call Carl Icahn then?

Asshole?

------
xHopen
Buy Ethereum

~~~
etr-strike
The Ethereum network is imploding under its own weight. Running an ethereum
node has become quite expensive and requires very state of the art hardware
just to keep up. There’s a reason bitcoin chose the constants it did.

~~~
vvillena
What? 2GB of RAM and 15GB of decently fast storage (preferably SSD) are the
only hard requirements. That's not state of the art by any means.

~~~
xHopen
They don't know what they say , but what the news tell them. I run an Ethereum
node in a crappy hardware just for the network. and , as they may not know,
you can run light ethereum nodes as they
[https://slock.it/ethereum_computer.html](https://slock.it/ethereum_computer.html)
do. They are all focus in price , we are focus in technology and of course
MOON

