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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
by d--b 9y ago
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 9y agoThe 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 9y agoMmmh, why do you need your coins sitting on one exchange? Can't you just take them out once your transaction is done?
- jacobush 9y agoAnd that is precisely when the trickle begins... nothing ”at once” about taking them out.
- mathgenius 9y agoSure, but you still need to put funds into the exchange to buy the coin in the first place. And likely you would leave the coins there in case the trade goes the otherway. Managing that many coins in your own wallet is a whole other headache. But I guess your point is to not leave much on the exchange at any one time.
- d--b 9y agoTrue, you're exposed to the exchange at least to enter and exit the trade. But you'd expect sophisticated arbitrageurs to know how to manage their own bitcoin wallets. Perhaps the discrepancy is there because such people don't exist yet.
- moduspol 9y agoFrom 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 9y agoPresumably you can watch the exchange's wallets and see anomalous behaviour relatively easily?
- moduspol 9y agoMaybe, I guess? I feel like you'd almost need insider knowledge of the exchange to be able to tell what is anomalous.
- mattm 9y agoDo exchanges publicize their main wallets? Is there a listing somewhere?
- tzahola 9y agoYes. It's called "the blockchain".
- pbhjpbhj 9y agoIf 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?
- empath75 9y agogood luck: https://www.reddit.com/r/bitfinex/ https://www.reddit.com/r/bitfinex/ Nothing but complaints about withdrawals. You can't even withdraw anything from bitfinex less than 250BTC.
- mrb 9y agoBitfinex is one of the shadiest exchanges. Use reputable ones like Gemini or GDAX.
- bunderbunder 9y agoWrong kind of liquidity. Trading firms, hedge funds, etc. care care about liquidity of the "Can I convert this into the kind of money I use to pay taxes and employees and investors?" kind. BTC has basically zero of that, as evidenced for the fact that there isn't a deliverable version of this contract. I'm not sure a sensible institution would even consider BTC held at exchanges to be real BTC, just a kind of IOU. There may even be regulations preventing them from doing so. So they will probably want to hold the BTC themselves. Or with a clearer, which is likely to think about these things even more conservatively. And 20 minutes (the last figure I heard for how long it takes to execute a bitcoin transaction) is an eternity to an industry that is starting to think in nanoseconds.
- runeks 9y ago> I'm not sure a sensible institution would even consider BTC held at exchanges to be real BTC, just a kind of IOU. Nor should they. BTC held at an exchange is, by any sensible definition, an instantly redeemable promissory note denominated in bitcoins. Several exchanges have defaulted on these types of obligations.
- marshray 9y ago> BTC has basically zero of that, as evidenced for the fact that there isn't a deliverable version of this contract. How can anyone claim Bitcoin is a useful currency if it's less practical to deliver than, say, KC Winter Wheat? > And 20 minutes...is an eternity This is for a futures contract one month out. You would close your position at the same time that you agreed upon the rate for the blockchain transaction. When you sold the BTC you could verify receipt of the USD quickly (fiat FTW), whereas the blockchain propagation time is more of a risk to the BTC buyer.
- nonameisfinetoo 9y agoCBOE BTC futures are cash-settled
- d--b 9y agoRegardless of the settlement of the future, you still need bitcoins to enter the other side of the trade
- deleted 9y ago[deleted]
- bunderbunder 9y agoI'm more curious about market makers. I'll be a lot more willing to accept this as a sign that BTC is maturing once that happens.
- deleted 9y ago[deleted]
- jpmattia 9y ago> As others pointed out, when you buy/sell futures, you risk counterparty risk. Yes, but: There is a chain of companies that have to fail before you incur the loss. The clearinghouse will cover the default first, and bill it back to the clearing broker. So you need someone of the order of Goldman Sachs to fail before counterparty risk affects payments to you.
- d--b 9y agoyeah, what I meant by margin calls and "good exchange" if the CBOT goes bust, we'll have to worry about bigger problems than bitcoin futures ;)