Bitcoin Futures Tumble As Spot-Arbitrage Collapses

Update: The Bitcoin Futures-Spot arb spread has collapsed to around $600 in the early evening trading (led by Futures selling more than spot buying)...

From a premium of over 13% last night, Futures now trade at just 4.5% above spot as the arb-spread tumbles.

On a side note, we se that the Bitcoin Trust premium to NAV has also collapsed in recent days from over 140% to around 10%...

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Something just snapped in the cryptosphere. First, we noted that the spread between Bitcoin spot and futures was tumbling...

Something we would expect to close:

“Arbitrage will close that gap, but it will be days and weeks,” Cboe Chief Executive Officer Ed Tilly said on Bloomberg Television Monday, less than a day after launching the product.


“If you’re doing a cash-settled future, it’s just a bet,” said Aaron Brown, a former managing director at quant hedge fund AQR Capital Management who invests in the cryptocurrency and writes for Bloomberg Prophets.


“If that’s not related to any underlying physical transaction, the only people who want to do it are gamblers.”


The wide arb spread is “a big issue. It’s an illiquidity, it has to go away.” The price gap between bitcoin and bitcoin futures won’t last forever, said Dave Weisberger, CEO of CoinRoutes, a cryptocurrency data and order routing company.


“The futures will ping-pong between premium and discount,” he said. “I suspect at some point, potentially triggered by a negative event, it will flip. Markets go up and down, and bitcoin has been no different. It’s just been fast.”

At the same time as Bitcoin rallied so Litecoin and Ethereum tumbled:

And then Coinbase broke:

And when it came back online - huge volume spiked Bitcoin back above $17,000.

To a new record high on BitStamp

Meanwhile, the head of Japan's largest cryptocurrency exchange, bitFlyer, revealed to the FT what may be the secret sauce behind Mrs. Watanabe's unprecedented control over bitcoin: 15x leverage.

The Japanese exchange at the heart of bitcoin’s recent surge has said its investors are fuelling the cryptocurrency’s feeding frenzy as they buy in with leverage up to 15 times their cash deposit.

But don't worry: bitFlyer CEO Yuzo Kano also told the Financial Times that the liquidity on his Tokyo-based exchange — which has an 80% share of bitcoin trading in Japan and 20-30% of the global market — was deep enough to handle even the biggest market movements.

In truth, none of this should be new: back in May when the Chinese domination over Bitcoin was ending, we predicted that it would soon be replaced by Japan: specifically, we said that "just as the Chinese bubble frenzy in bitcoin is fading, it may be replaced with a new one, in which thousands of Mrs. Watanabe traders shift their attention away from the FX market and toward digital currencies" and added that "If the transition is seamless, there is no telling just how far this particular bubble can grow."

Back then Bitcoin was $1,650. It is now over 10x greater...  and demand is growing exponentially. And yes, Japan will continue leading until someone else takes over:

“I think Japan is leading the market higher,” said Mr Kano. BitFlyer, which ranks third for trading in the underlying digital currency, has also won authorisation to open in the US. Activity on bitFlyer points to a market where large inflows of yen from leveraged Japanese investors are colliding with minimal supply of underlying bitcoins to force the price higher.


Mr Kano said trading on the exchange was “roughly 50-50” between existing investors and new money coming in. “The scale of deposits is steadily increasing. It’s pretty large,” he said.

But the punchline was the following line from Kano, which we have ever intention of plagiarising in the future indefinitely:

Most of bitFlyer’s customers are private individuals from big Japanese cities aged 20 to 50. “There are lots of traders but some buy-and-hold investors. Actually, they are buy-and-buy,” said Mr Kano. The platform also hosts a small number of foreign hedge funds and arbitrageurs who trade actively.

Buy-and-buy: truly what better way to encapsulate the prevailing mood among cryptos. Then again, eventually even the most ardent buy-and-buy becomes sell-and-sell. And sadly, with the number of retail investors already involved, that particular bubble burst will be deadly.

As for ground zero - Japan - nobody appears worried:

Supply seems to come from Chinese bitcoin miners and a few early holders. “People who’ve owned them for a long time and have made a fortune. They have ¥10bn and they’re selling a little,” he said. Trading on bitFlyer is roughly 25% in actual bitcoin and 75% in derivatives, where customers make leveraged sidebets with each other on the bitcoin price. “We don’t take any risk. The trading is between our customers,” Mr Kano said. Arbitrageurs link the derivatives market to trading in underlying bitcoin.

Perhaps they have good reason for this: BitFlyer automatically closes client positions when they lose half their initial margin. For example, a customer who used ¥10,000 to buy ¥150,000 of bitcoin would be forced to sell if its value fell to ¥145,000, a drop of slightly more than 3 per cent, something futures traders in the US will find out soon enough.

Just who is Yuzo Kano: the man behind Bitcoin's spectacular surge?

A former Goldman Sachs trader, he founded bitFlyer in 2014, when Tokyo’s ill-fated Mt Gox was still the world’s dominant bitcoin exchange. Following that fiasco, Japan moved to regulate bitcoin, opening it to the country’s gung-ho retail traders.

Some more details on BitFlyer:

BitFlyer is regulated by Japan’s Financial Services Agency and has raised $36m in venture capital from blue-chip backers including Mitsubishi UFJ, Mizuho and Sumitomo Mitsui banks.  Some exchanges have recently lost bitcoin to hacking attacks. Mr Kano said that unlike many rivals, bitFlyer runs entirely on private, closed-source software, making it a harder target for intruders. It holds most bitcoin offline in a “cold wallet”.


Mr Kano hopes the technological sophistication and deep liquidity of his market will attract US customers, especially if regulators allow him to link Japanese and American traders.

Still, as the FT notes, one risk is that, in a market panic, there might not be enough buyers to close all the long positions, but Mr Kano said he was not concerned. “We have a huge amount of liquidity. No matter how big the position we can close it out. If bitcoin rose 20-fold in a day then I don’t know. But a day with a 30 per cent fall would be no problem.

For the sake of millions of Mrs Watanabes, let's hope he is right...



rbianco3 marysimmons Mon, 12/11/2017 - 19:00 Permalink

This is the second time time I'm thankful I reached my Coinbase weekly sell limit as I would have taken more profits at $200.Considering I just bought the LTC yesterday, scalping it all between $135 & $140 I am thrilled! But still have over ten grand of it that I can't sell. A tip: Watch Bitfinex market for the trend, GDAX tends to be more 'retail' than the former. Sometimes on way up Bitfinex will overtake GDAX. Works for all coins. 

In reply to by marysimmons

Drachma FakeNewsBandit Mon, 12/11/2017 - 17:36 Permalink

How exactly is that happening? Seriously. Could you please explain how this in any way is deleterious to the banker class? I'm not asking for theories and the ostensible virtues of cryptocurrency for the masses. Please give specifics of damage being caused. I'm just asking for a cogent detailed argument. Haven't seen one yet. Kudos to those making real profits off this speculation, but I still think this an ad captandum agenda, the end result of which will not be in the plebeian's favor. Cheers.

In reply to by FakeNewsBandit

2rigged2fail Drachma Mon, 12/11/2017 - 18:50 Permalink

The bankers want you to leave your $$ in the bank so they can lend it out to infinity.  If a decent percentage catch on to the bullshit getting of getting .001 % on savings it makes them even more unstable, IE a BTC bank run.  Why do you think they smash gold and silver constantley, it should be like BTC but they control it with BS paper gold.  Now they can't do that to BTC and are panicking.   Finally when the big reset does occur they will not be able to pull BTC to use as a bail in...that WILL eventually happen.

In reply to by Drachma

Drachma 2rigged2fail Mon, 12/11/2017 - 18:54 Permalink

Thanks for the input, but no bank runs in history have ever weakened the banking powers one bit. They may have transferred, consolidated and concentrated power, but never diminished it. How will it be different with cryptocurrency? I don't think it will. If people think that the bankers never saw cryptocurrency coming a mile away and prepared for all contingencies, even steering the progress, I think they are deluding themselves. Cheers.

In reply to by 2rigged2fail

Radioactive Ideas Drachma Tue, 12/12/2017 - 08:40 Permalink

This is one more step towards a cashless society. When, I say WHEN not IF, this crashes it will be at the hands of the squid and Jamie "I'll fire anyone caught trading Bitcoin" Dimon's teams. Then everyone will scream for regulations. And we will get exactlt what we asked for. Now, I'm not saying you can't profit along the way, but don't be fooled into thinking this is dfferent this time. In a world of Bad Actors, the two worst have set up camp right in the center of Galt's Gulch.  

In reply to by Drachma

JuliaS 2rigged2fail Tue, 12/12/2017 - 13:11 Permalink

Fiat is modern day alchemy. When fraudsters failed to print gold they realized, that they could instead print themselves unlimited permits to other people's gold. And here we are today, when banks own all of the money they invent, and pretty much everything money can buy, including gold.Likewise, with bitcoin, nothing is preventing them from pulling off the same con. They control the medium that buys bitcoins and they can issue permits at will, and by extension, they can own it and control it if it serves their goal. The bet wins - they collect. The bet goes South - they let the money printed dilute the wealth out of the economy. Everyone's a loser.Bitcoin introduces nothing new and doesn't keep banks from doing anything that haven't been doing already. All it does is give them one more thing to buy with fiat that they print, if they choose to do so. Their hands aren't tied. Yours are. If you own cryptos, enjoy your designated safe space on the Titanic.

In reply to by 2rigged2fail

RockySpears Drachma Tue, 12/12/2017 - 03:58 Permalink

Seems fair to me.  Your BTC are worthless, UNTIL they becom $$ you can do stuff with (yes, yes, a few RE places and a car store).  When you get $$ whose hands does it travel through to your account? Can't see how Banks lose anything.  If some one buys BTC, some one sells and holds the $$, nothing new. RS

In reply to by Drachma

SDShack 2rigged2fail Mon, 12/11/2017 - 16:20 Permalink

There is s paradigm shift to crypto all right... untill the Deep Security Financial State declares war on it. When crypto starts to be entrenched with the masses, the elites will engineer the ultimate crisis to panic the masses by blaming crypto.  The sheeple will be so paniced they will demand govt intervention, and miraculously a "govt solution" to "protect the people" will appear overnight. The result will be the final govt solution to create a perpetual debt slave class.

In reply to by 2rigged2fail

FreeNewEnergy SDShack Mon, 12/11/2017 - 17:12 Permalink

You know, I'm so sick and tired of hearing how the deep state will do this or do that and that will be the end of crypto, or gold, or freedom, or whatever, I'd like to take the other side of that bet.How about crypto wrecks the deep state? How about people finally realize how the government and banks screw them over on a daily basis and take action against it.Crypto, silver, lead, brass, growing your own food, etc. are all ways in which regular folks fight back. If you'd take action instead of finding fault withe the actions of people who are willing to take risks, who are tired of being ruled and ruined by people "in power," hwo about applauding their efforts and joining up?Or, are you so scared and wetting your pants that the government will take your hard earned money, your pension, your home, that you're willing to play along with the status quo?I contend that you - and all those who decry the efforts of those in the crypto space or any other advertursome alternative - are just a closet statist. Sure, your gold is cool, so is my silver. But, having watched the central banks destroy all markets over the past nine years, I'm looking for viable alternatives. I appluad the people who made hay with bitcoin and urge them to do more. I'm not jealous of their success.So, either buy more gold, silver, bonds, stocks, padd your 401k, or do whatever you do, but get off the backs of people who are unafraid of the evil cartel deep state.I think I've said enough.

In reply to by SDShack

moobra 2rigged2fail Tue, 12/12/2017 - 01:03 Permalink

God I luv another "this time is different" phrase like "paradigm shift to crypto". It's so "new economy" that I heard right up until dotcom tanked. yep, it's always different. Blockchain will run the world just so US voters can really find out where their money is spent ongovernment secret weapons, black ops, poppy growing, arms and drug trading, plus the occasional assassination and coup. Yep, nerds know that public key encryption will always protect them from having their gonads burned with electrodes fromserious people who like the world order exactly like it is. LOL. "paradigm shift" my ass. Power, torture, rape, pain and death are the dominant paradigm and always will be. That beats any encryption key by a country mile.

In reply to by 2rigged2fail

moobra currentsea Tue, 12/12/2017 - 01:06 Permalink

Until the crash.I knew plenty of people in dotcom who were right where you are now. No diference. You just like to believe a sales pitch of a "new world order" where the psychopaths running the world give power to an algorithm.Will never happen. They know where you live and everyone you care about or who even just knows of you.

In reply to by currentsea