Do investors arbitrage cryptocurrencies? Two recent studies offer a “yes” answer, though they in certain other respects differ significantly in their conclusions. Specifically, one study shows that in one respect arbitrage has done its duty and effectively eliminated the opportunities for arb profits, enforcing efficiency. In other situations, though, the other study says: not so fast.

One of the two papers we want to look at comes from Takahiro Hattori and Ryo Ishida, and they look specifically at whether investors arb between Bitcoin and Bitcoin futures.

Hattori and Ishida are both with the Japanese Ministry of Finance in Tokyo. Their test case arises out of a development of late 2017: the launch of the Bitcoin futures market in December by the CBOE and the CME.

Their paper begins by going over some familiar ground. Bitcoin is the oldest and most prevalent of the cryptocurrencies, launched almost a decade ago after the appearance of Nakamoto’s famous white paper. At the end of 2017, Bitcoin’s capitalization exceeded $300 billion. Though there has been a decline since, in the middle of 2018 the capitalization of all cryptocurrencies was still in the range of $200 billion to $300 billion.

Arbitrage Mechanics

CBOE Bitcoin futures are cash-settled, referring to the Gemini auction price for Bitcoin at 4 PM ET. Thus, Hattori and Ishida use the 4 PM ET price of Bitcoin futures to match the timing. This matching is “especially critical to test the arbitrage condition because the intraday volatility of Bitcoin futures is huge.”

The aforementioned Gemini is a leading New York-based cryptocurrency exchange. It holds a Bitcoin double auction every day at 4 PM ET.

The mechanics of the arbitrage is, then, as follows: an investor can short the Bitcoin futures at 4 PM ET and make the forward contract of Gemini at the same time, with the same maturity as the futures.At maturity, the investor should deliver the Gemini price. This can in principle be funded by the amount of money received under the futures contract.