In an efficient market, prices in the futures and spot markets tend to converge. Bitcoin futures, however, are trading at a more than 10% premium compared to prices in the spot market.
In an efficient market, arbitrageurs spot price differences and make contra-trades in both markets, netting a profit without taking any risk. In this case, arbitrage traders can sell Bitcoin futures and buy Bitcoins in the spot market, locking in a profit irrespective of the way Bitcoin’s price moves. According to Bloomberg, Bitcoin futures command a premium of ~13% since trading began on CBOE on Sunday.
Edward Tilly, Chairman and CEO of CBOE, told Bloomberg
Arbitrage will close that 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.
While arbitrage opportunities present opportunities in an ideal market, the Bitcoin market is far from efficient. There are price differences between different exchanges, with Bitcoin trading at a huge premium in Asia and countries like Zimbabwe. However, traders are unable to take advantage of the price difference, because of capital controls imposed by various governments.
With the price varying substantially at different exchanges, it is important to consider the reference rate used in the futures contracts. The CBOE futures contracts is based on the exchange rate at Gemini, whereas the CME futures contract is based on an index of multiple exchanges. The proposed Nasdaq Bitcoin futures contract is expected to be based on Bitcoin’s price from over 50 sources.
The presence of circuit breakers also represents a difference between the spot and the futures markets. On Bitcoin’s debut on the CBOE market, two circuit-breakers were triggered, resulting in trading being halted for a few minutes. There was a 2-minute halt when the price gained 10% and a 5-minute halt at a 20% gain. The sharp increase in the price of Bitcoin futures almost result in a third circuit breaker (30% gain) getting triggered.
The high margin requirements, presence of circuit breakers and evolving nature of Bitcoin futures could be one reason why traders have not rushed into Bitcoin futures. The opportunity of arbitrage trading might tempt some of them to dip their toes in the Bitcoin futures market soon.