• The analysts noted prices for shorter-dated Bitcoin futures on the CME exchange are cheaper than longer-date contracts.
• The findings indicate an arbitrage opportunity exists to generate returns higher than the borrowing costs of money.
• The unusual price-action is partly because CME futures are derived from Bitcoin prices on multiple spot exchanges, among which spot prices can still fluctuate significantly.

Analysts from Goldman Sachs have highlighted some unique characteristics to Bitcoin futures contracts which started trading on the CME exchange in December.

“For the majority of bitcoin futures trading since their launch in December, the futures curves have been in steep contango, meaning that near-dated prices are below longer-dated prices,” the analysts said.

Put another way, that means traders entered into contracts where the price to buy Bitcoin one month in advance was lower than longer-dated contracts.

The analysts said a similar situation occurs in the more mature market for gold futures — but there’s a key difference.

Due to the fact that gold is a physical commodity that requires storage, traders are often happy to pay a small premium for the right to have the gold delivered further down the track.

The higher price paid for longer-dated gold contracts “is just enough to cover the cost of borrowing money to buy the gold to deliver in the future”, Goldman said.

However, the increase in gold futures contracts is tied directly to the the rate of borrowing costs.

But according to Goldman, the recent price action in Bitcoin futures implied higher prices for longer-dated contracts — far in excess of the cost to borrow money.

The difference is illustrated in the chart below:

The numbers in the chart indicate an arbitrage opportunity in Bitcoin futures markets, where traders could make a return of 5.4% by purchasing at spot prices and selling Bitcoin futures.

“Why would such an arbitrage opportunity exist? In our view the answer is the structure and early stage of the market,” the analysts said.

“Bitcoin spot trading still takes place among a highly segmented investor base and on many different spot exchanges.”

“With no large institutions operating across exchanges, there is likely an insufficient scale of arbitrage to drive spreads out of the market.”

“Bitcoin futures are also settled in US dollars — in our view, this largely reflects the difficulty that many institutions currently face in handling bitcoin,” the analysts said.

“These risks include compliance risks (e.g anti-money laundering), and the risks and costs associated with warehousing bitcoins — both physically, including risks of hacking, as well as balance sheet risk — for a still highly volatile asset class.”

As part of their analysis, Goldman compared the parameters for Bitcoin futures contracts on both the CME and the Cboe exchanges.

Of particular note are the high margin requirements — at least 40% of each contract — due to the perceived levels of risk and volatility still apparent in the new market.

Cboe futures contracts are also just based on one exchange — Gemini, run by the Winklevoss twins — whereas CME futures are based on a Bitcoin reference rate derived from an aggregate of major exchanges:

The comparison is summarised in the table below:

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