Today, CBOE Bitcoin futures were listed.

I checked the price and was surprised that it has a premium to the cash price (Gemini exchange price from product specification) and am very shocked.

I understood:

Future Bitcoin = Underlying price + Inventory Cost (I thought like commodity futures, there is a cost to keep bitcoin from cyber attack etc) + Interest cost (if any??) - Implied potential hard fork coins value + demand/supply

A hard fork will occur from now on so I thought futures price discount but do you have any ideas why the pricing?

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    $\begingroup$ fyi, it's hard fork. $\endgroup$ – will Dec 11 '17 at 7:41
  • $\begingroup$ What hard fork are you talking about? $\endgroup$ – Bob Jansen Dec 11 '17 at 11:24
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    $\begingroup$ I think due to the 10% limits that applies for the CBOE contracts, the future is not an effective instrument on the short side given the volatility. Thats a possible reason for a premium in the market. $\endgroup$ – vanguard2k Dec 11 '17 at 14:15
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    $\begingroup$ At the moment the market is in Contango, but this might change. With a new market like this it can take a little time for things to sort themselves out, cf. Adaptive Market Hypothesis. $\endgroup$ – noob2 Dec 11 '17 at 18:45
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    $\begingroup$ Also of note, is that the margin requirements for shorting bitcoin are huge - see here. 40K margin per short contract. $\endgroup$ – will Dec 16 '17 at 11:25

There's two reasons for that

  • It is easier to buy the future than the cash products
  • It is less likely that CBOE will be hacked than any of the existing exchanges

It is very hard and risky to arbitrage the spread (shorting the future and being long on an unregulated exchange) due to the risks of getting hacked, moving the money on shoddy platforms, long delays in transactions (bitcoin transfer/bitcoin USD fx/USD transfer). Notwithstanding bitcoin's volatility, a rational investor would rather have its exposure in a regulated established exchange that it can sue rather than on an offshore unregulated platform.

Also most brokers refuse do not allow short selling on that bitcoin contract, even for institutional investors. A position which seems justified given the first few hours of the contract.

Futures contracts on deribit were usually trading at a premium as well (except when there were hard fork rumors), a situation caused by margin financing pushing up the basis for long synthetic leveraged positions (both for CFD financed overnight at your usual retail CFD brokerage and term contracts (futures) on crypto platforms). This is a common situation for market with frictions (Chinese ETF and futures have been alternating between premiums and discounts for instance).

  • $\begingroup$ Lliane, thanks very much for your comment. Similar thing but found FT article quite interesting.link $\endgroup$ – Kaz Dec 11 '17 at 8:25
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    $\begingroup$ I agree that brokers not allowing shorts provides a price bias. I don't agree with the robustness of the marketplace and the ease of access to influence the price higher (it provides those same benefits to short sellers). $\endgroup$ – Jared Dec 11 '17 at 8:59

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