Under efficient trading circumstances, the prices in the spot markets and in the futures usually meet. However, Bitcoin futures are trading more than 10% higher than Bitcoin itself. Read on to discover why this happens.
In an efficient market, arbitrage opportunities arise where traders can identify the spot price gaps and go ahead to do contra-trades in both markets. What this means is simply buying a commodity in one place and selling it in another place at a higher price. With such opportunities, traders are able to make a profit with no risk. In the case of Bitcoin, arbitragers can sell Bitcoin futures and purchase Bitcoin in the spot market. This enables them to lock in a profit regardless of the prevailing value of Bitcoin. Currently, Bitcoin futures control a premium of nearly 13% since CBOE launched futures trading last week.
“Arbitrage will close the gap, but it will be days and weeks. It is not going to be the 12 hours or so that we have been up and trading. There is much to learn. There is a great deal from a liquidity-price perspective. That gap will close over time.” This is according to Edward Tilly, the Chairman and CEO of CBOE. He said this in an interview with the Bloomberg.
What about Spot Price?
All the same, it’s important to understand that arbitrage chances are only ideal in a perfect market, yet the Bitcoin market is not efficient. Difference exchanges bring different price differences. Besides, Bitcoin trades at a huge premium in countries such as Zimbabwe and in Asian countries. Even so, traders may not benefit much from the price difference because of capital controls and legislation imposed by various administrations.
With substantial price differences at various exchanges, traders should consider the reference rate to use in futures trading. For instance, CBOE used an exchange rate at Gemini while CME futures contracts utilized the index of several exchanges. Analysts envisage the planned Nasdaq Bitcoin futures will base its futures contract on the price of Bitcoin from more than fifty sources.
Circuit Breakers and Bitcoin Futures
The existence of circuit breakers also poses a gap between the futures and the spot markets. On Bitcoin’s first appearance on the futures market, two circuit breakers were activated. This resulted in trading being stopped for some minutes. Traders witnessed a two-minute halt when futures price gained 10% and another five-minute halt when it gained 20%. This quick increase in the price could even trigger another circuit breaker.
The existence of circuit breakers, high margin requirements, and the changing nature of Bitcoin futures are some of the reasons traders still have reservations for Bitcoin futures. However, the opportunities presented by arbitrage trading can lure some traders to test the waters of Bitcoin futures quite soon. Finally, yet importantly, analysts envision that Bitcoin futures will bring transparency and greater liquidity, and efficiency in price discovery all of which are important aspects of trading.
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