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...