Why Bitcoin Futures Can Trade Above Spot Amid Market Frictions
Summary
The document discusses why newly listed CBOE Bitcoin futures traded at a premium to a cash Bitcoin reference price, despite the author's expectation that an upcoming hard fork might push futures to a discount. The response attributes the premium partly to easier access to regulated futures and perceived counterparty safety relative to cash exchanges. It also notes that arbitrage requires shorting futures and holding Bitcoin on exchanges, exposing traders to custody, transfer, settlement, and currency-conversion risks.
Limited short selling can further impede arbitrage and allow a basis to persist. The response also describes margin financing as a source of upward pressure on futures and other leveraged synthetic exposures, and compares the phenomenon with premiums or discounts in markets with trading frictions. These are proposed market-structure explanations, not a measured decomposition of the observed premium; the discussion is tied to the conditions and platforms of that period.
Key ideas
- Regulated futures may be more accessible and appear safer to some investors than cash exchange holdings.
- Custody and transfer risks can make cash-and-carry arbitrage costly or risky.
- Constraints on shorting the futures contract can weaken arbitrage pressure.
- Margin financing can contribute to a positive futures basis in markets with frictions.
- The discussion offers possible explanations rather than quantifying their relative effects.
Tags
Full text
# Bitcoin CBOE futures listed today. Why its premium to cash product? # Bitcoin CBOE futures listed today. Why its premium to cash product? Today, CBOE Bitcoin futures were listed. I checked the price and was surprised that it has a premium to the cash price (Gemini exchange price from product specification) and am very shocked. I understood: Future Bitcoin = Underlying price + Inventory Cost (I thought like commodity futures, there is a cost to keep bitcoin from cyber attack etc) + Interest cost (if any??) - Implied potential hard fork coins value + demand/supply A hard fork will occur from now on so I thought futures price discount but do you have any ideas why the pricing? ## Answer by Lliane (score 5) https://quant.stackexchange.com/a/37321 There's two reasons for that - It is easier to buy the future than the cash products - It is less likely that CBOE will be hacked than any of the existing exchanges It is very hard and risky to arbitrage the spread (shorting the future and being long on an unregulated exchange) due to the risks of getting hacked, moving the money on shoddy platforms, long delays in transactions (bitcoin transfer/bitcoin USD fx/USD transfer). Notwithstanding bitcoin's volatility, a rational investor would rather have its exposure in a regulated established exchange that it can sue rather than on an offshore unregulated platform. Also most brokers refuse do not allow short selling on that bitcoin contract, even for institutional investors. A position which seems justified given the first few hours of the contract. Futures contracts on deribit were usually trading at a premium as well (except when there were hard fork rumors), a situation caused by margin financing pushing up the basis for long synthetic leveraged positions (both for CFD financed overnight at your usual retail CFD brokerage and term contracts (futures) on crypto platforms). This is a common situation for market with frictions (Chinese ETF and futures have been alternating between premiums and discounts for instance).
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.