A Word About "Arbitrage"...

I believe you're right on the Korean but the Japanese premium was a true arbitrage, though, $20M of profits every day

Sam's a billionaire now, through his FTX exchange and defi endeavors, but I guess this is when/where he got started

 

Well I'll cosign everything he said. This was a major profit driver for me along with basis and the shit I got from banks you wouldn't believe.

 

Money Matthew? I thought that was you. Where are you hanging your hat these days?

 

I think the jist of discussions in this thread is that indeed as you identify, true arbitrage opportunities are rare and ad hoc, i.e. hard to build a consistent income around.

You raise some interesting points on quasi-arbitrage, particularly in relation to buying physical commodities and selling futures in a favorable term structure. Good point on storage space being a risk here. Will these quasi-arbitrage opportunities become more readily available with commodity tokens (digital assets)? What is the use case for commodity tokens in the first place?

 

Commodity tokens (in theory at least) could provide some interesting opportunities.

Which will be rapidly exploited and arbitraged to zero.

 

Actually I think it's different. Real arbitrage opportunities are persistent because not everyone can exploit them.

 

I guess I'm a little late to the party here, but I'm actually pretty active in spot/futures trading as well as spreading this stuff.

To shed some light on what's actually happening and provide something useful in between my regular shitposts, here we go:

as @bone already said, this is not an arb. It's called a basis trade and therefore you have basis risk. If you locked in MAR21 basis back in October 2020 at a whopping 8% annualized and leveraged that trade a bit, your account would have blown up during the rally as you stared at 30%+ annualized premiums.

Basis in BTC futures is much more volatile in % terms than the underlying itself and it moves with spot. Since you're not trading an interest rate futures, a 5% absolute basis with spot at 10k is a mere 500$ or 2500$ per CME contract.

With spot at 30k, you are already looking at 1500$ or 7500$ per CME contract.

buy 5 BTC at 10k, sell 1 contract at 10500$ for a 2500$ gain, then go check your account 2 months later with spot at 30k and absolute basis at 15%.
You made 100k with your spot position but your futures position is down 120.000. Add some leverage and your margin issue won't be your main problem.

So again: not an arb.

2nd you have to look at how futures - regulated or unregulated - are margined. If it's USD margined as it is for CME contracts or stablecoin settled derivatives, your requirement moves with spot. Spot up, more margin.

For BTC settled contracts aka. inverse futures, margin requirement doesn't change, no matter where spot trades. However, they have convexity so they are not easy to price.


3rd, and I feel this is where most people struggle, is your actual position. By selling futures against spot you have a synthetic USD position (you sold USD for spot BTC but then you sold BTC at a higher price for USD). So the yield is NOT on BTC. The yield is on your USD position. What you're actually doing is you give the market an USD loan and receive interest.

Now you're asking "heck I get 1% on my savings account, why would someone pay 30% annualized?"
Simple answer: The nascent market structure doesn't allow the required amount of fiat money to be injected into the system. That's why tether exists and that's why the interest for the existing pool of USD is so insanely high.

Different to traditional markets you cannot ask your clearing house to give you a credit line over 500m to lock in that juicy 2% that you get for carrying bonds against treasury futures. Those 500m are just not there for you...and that's why you compete with 1000 other guys over the 50m that are available at the moment and drive up the interest rate.


So again, don't call it an arb. And don't call it free money, because it isn't. It's called a basis trade and this is the kind of stuff that commercials are doing in commodities.
Grain elevators are trading basis, oil suppliers are trading basis. It's the only way for them to carry so much inventory without the price risk of the outright market.

If you understand FX, you might get crypto. The market is much more complicated than you think and you have to be really good to structure risk free trades.

Hope that helps

 

Extremely well articulated. Props.

 

Thanks Mav74

 

well, but no.
Wouldn't want to take credit for someone elses contributions