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Our code of conduct is viewable here: titleix. Let’s get one thing straight right off the bat: this is not a post where I’m going to debate the merits of Bitcoin or discuss it in the comments. I want to talk about the effect that the launch of Bitcoin futures trading may have on Bitcoin. In case you missed it, the CME announced the imminent launch of Bitcoin futures. I would suggest checking out those posts if you’re looking for some arbitrage background. I am not an expert in Bitcoin, but I am pretty well versed in the concept of arbitrage, which is a constant across asset classes.
First of all, the fact that the BTC Future is cash settled does not mean that it doesn’t affect the price of the underlying, in this case: Bitcoin. In order for supply and demand imbalances in BTC-F to impact BTC, all we need is a mechanism to arbitrage the two products. So how easy will it be to trade the Bitcoin settlement price? 12 separate 5 minute periods, and then taking the arithmetic average of those 12 VWAPs.
Are you with me so far? So excess demand for BTC-F has a mechanism to clearly flow through to underlying BTC. How about excess supply of BTC-F? If everyone wants to sell BTC-F, and the futures trade cheap to their fair value, the arbitrageur will need to buy the futures and sell BTC.