Click here for the old guide which assumes no fees and uses OKCoin as example.

Table of Contents

Jump down to the Bitcoin Arbitrage Calculator Tool
Example 1: Small Trader Using Bank
Key Lessons
Example 2: Medium Trader, Slippage, No Banks

Basic Cash and Carry Bitcoin Futures Arbitrage on CryptoFacilities


(DISCLAIMER: Totally hypothetical scenario. This is not investment advice or financial advice of any sort. Do not do this. I do not endorse this and neither I, CryptoFacilities, nor any other entities listed in this site are responsible for any losses.)

Note: This strategy only works when futures are trading at a premium and for the right type of contract: Inverse Contracts or any derivatives which can lock in the USD value somehow (OKCoin, Bitmex XBU, and CryptoFacilities).

In this guide we don't want to deal with social loss risk, so use the FCA-regulated, London-based bitcoin derivatives exchange CryptoFacilities. They offer contracts with 2% margin requirement (50x leverage) as well as a 15% margin requirement (6.5x leverage). They are 100% bitcoin based, but they don't accept US customers. Sign up here to get started:


CryptoFacilities offers Forwards contracts with no socialized losses. Optimal for arbitrage.

Making money arbitraging bitcoin futures can be extremely simple. Futures contracts typically trade at a premium, and all you have to do, starting with USD, is buy bitcoin at Spot price and sell futures of the same amount at premium price. Then just wait until expiration to make your arb profit in bitcoin (which you can then put in USD). Whether it's a weekly, monthly, quarterly, or any futures contract, as long as it's in a premium, you lock in the sale price and earn the arbitrage profit.

There's a lot of ins and outs which can get confusing in arbitrage trading. We won't go into the technicals of why futures contracts trade at a premium to spot price. You can read a full explanation here. If it's not of interest to you, all you need to know is that there's a tendency, the further out in time the futures contract expires, for the premium to spot to be higher and higher in nominal percentage terms.

The biggest problem is friction between steps along the way. There's fees, there's time you have to wait (which can be eliminated by see-sawing, but then you're not maximizing your capital utilisation), there's slippage in orderbooks, etc. We will go through all of these issues below.

I find it best to show by example and then as issues are encountered we will review the concepts underlying.

Example 1: Small Trader Arbing Under 1 Week with Bank Account

In this first example lets say you have $10,000 in your bank (you could also have $10,000 in cash you buy BTC from a friend, or €/£ equivalent of $10,000).

This example is to illustrate all the moving parts and risks that can occur in an arb play. Another example will follow with a different scenario.

Step 1: Get your fiat onto a spot exchange to get Bitcoin

  • Let's say the spot price is at BTC/USD = $700 and it's a Monday morning.
  • You need to get this $10,000 of fiat onto a spot exchange like Bitstamp, GDAX, Bitfinex, Kraken, or whatever local exchange you use in your own currency.
  • If you have EUR and use SEPA, you will only be paying about €1-2, which is a 0.02% fee on the $10,000. However, some banks , say in the US, can cost as much as $40 if it is sent to a foreign bank. This is a 0.4% fee.
  • In this example, let's say we paid a 0.1% fee getting our fiat onto an exchange, which means we have $9,990 deposited and ready to buy bitcoin
  • Step 2: Buy BTC

    Step 3: Deposit BTC to CryptoFacilities and Check Price

    Step 4: Short Bitcoin Futures to lock in the profit at premium price

    Step 5: Wait for contract expiration

    Step 6: Get back into fiat

    Summary

  • The total arb circle using the weekly contract expiring in a few days has resulted in a $36 loss.
  • We paid about $70 total in transfer and exchange fees. Which means in a fee-less environment we would have earned 70-36=$34
  • In order for this to be profitable, you have to have a big enough premium, in nominal percent, to cover the nominal percentage fees on Bank, Spot+Derivatives fees
  • The weekly premium was 0.33%. The Bank fee (charged in $) was 0.1% withdrawal, 0.2% spot buy, 0.08% derivatives settlement, 0.2% spot sell, 0.1% bank deposit, for a total of 0.68% fees.
  • The name of the game is maximizing the premium while minimizing the fees.
  • Key Lessons

    1. Choose a longer expiree to maximize the nominal premium
    2. Choose a spot exchange with low fees (or increasing your volume if theres incentives to reduce fee...)
    3. Pay high BTC network miner's fee to minimize market-price risk when getting BTC from spot -> derivatives exchange
    4. You might be thinking, wtf? I thought arbitrage was guaranteed money? Well, in reality there's lots of services facilitating this process which demand fees. Therefore, when you take that into account, you need to wait for the premiums on futures contracts to reach a sufficient level that it makes sense to go through this process.

    Example 2: Medium Trader Arbing 2 Week Expiration with no Bank Accounts Involved

    In this example we look at a trader who has $50,000 in capital already on a spot exchange ready to do arbing

    Let's still say it's a Monday and there's a contract expiring 2 weeks from now (11 days to be precise)

    Step 1: Buy BTC

    Step 2: Deposit BTC to CryptoFacilities and Check Price

    Step 3: Short Bitcoin Futures to lock in the profit at premium price

    Step 4: Wait for contract expiration

    Step 5: Get back into fiat

    Summary

  • The total arb circle using the weekly contract expiring in a few days has resulted in a $493 profit, almost a 1% gain in 11 days.
  • Fees dug into our profit again...We paid $50 to buy on spot, $39.72 to sell the futures into the market, $43.5 to settle the futures trade, and $50.6 to get the whole lot of BTC into USD on the spot exchange
  • These two examples are just a start to illustrate some of the key principles in executing REAL spot<->derivatives arbitrage trading.

    Everyone has their own setups with how much money they are comfortable using, which spot exchange they want to use, and whether they are patient enough to get lower fees/favorable prices with limit orders.

    Use the bitcoin arbitrage calculator below to see whether your planned arb setup can make money.

    Is My Arb Setup Profitable?

    This calculator below will help you figure out if your plan is profitable for arbing

    Cryptofacilities Bitcoin Arbitrage Simulation Calculator

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