If you look at, e.g. the best offers at the 420 BTCUSD strike price (this was as-of 4:15 pm EST on November 14, 2013), or at the "How It Works" page for Future Block, it seems like there is a violation of the No Arbitrage Rule.

For example, from the "How It Works" example. Suppose I sell one BTC's worth of "up" contract (I get 1 BTC) at 80% payout (I pay back 1.8 BTC if price is above strike at expiry).

Next, I sell one BTC's worth of "down" contract at the same strike price (I receive another 1 BTC), at 50% payout (I pay back 1.5 BTC if price is below strike at expiry).

If the price is above the strike, the "up" contract clears and I received 2 BTC but pay back 1.8 BTC (netting a gain of 0.2 BTC for me). If the price is below, the "down" contract clears and I receive 2 BTC minus the 1.5 I pay back (netting a gain of 0.5 BTC for me).

Obviously, these example offers may not be close enough to the best offer to attract buyers, but apart from that I can't see any specifications for transaction costs to the seller, fees, etc. Even if there were fees, wouldn't they need to adjust according to the payout rates a seller could command selling on both sides of a strike price?

I think I am probably missing an obvious detail; any help correcting my mistake would be great!


To clarify, the puzzle here is that at about 4:15 yesterday, the best offer for up and down contracts roughly matched the example I give above, using numbers from the "How It Works" page to illustrate a Dutch book offer selling on both sides of the strike price. That this can happen is not a mystery per se, but that the live best offers reflected that it was a viable live strategy even when there was resonable volume in the market is a puzzle. Either there was simply no volume at all on one side of the strike price (which should have immediately led to better offers on that side) or else there was actually not much participation and the volume data was incorrect / misleading, or both. (Assuming that early adopters of BTC options can't be that irrational... after all, they'd have to know a lot about bitcoin and that particular options platform even to participate. So it seems implausible that buyers were so irrational as to be buying at such prices on both sides of a strike price).

1 Answer 1


It is a well-known observation that Bitcoin exchanges are not efficient (in the academic sense of well-approximating what you call the No Arbitrage Rule). The reason is simply that there are real world barriers that academics usually assume not to be present. If you do consider the risk associated with depositing funds at a Bitcoin exchange, there is an obvious reason why someone would demand a high return for taking such a risk. If you look e.g. at the difference in exchange rates between big exchanges (try Mtgox, Bitstamp, BTCE) you'll see that a difference as large as 10% can persist on the timescale of a year.

The risks include having the exchange hacked and leaving it unable to return your deposit (have a look at Bitfloor) or having its bank accounts frozen during legal investigations and hence unable to return your deposits during the first 6 month or so (check bitcoin-24.com). And then there's the combination of it all with (presumably) enough reserves not to shut down the operation right away (e.g. mtgox). And that's not even considering the risk that the operator is dishonest and gets tempted to defraud customers...

On top of all this, consider that even moving Bitcoins around is not instant. You run the additional risk that during the transfer time the situation changes (e.g. a crash in Bitcoin exchange rate). And the transfer time between bitcoin trading sites can be surprisingly long, since some legislation (e.g. anti money laundering) typically seems to compel them to insist on verifying your identity. This process may, depending on the site, occur in a somewhat surprising fashion, so you never know if they will instantly, or at least within the first days, allow you to continue accessing your bitcoins (or real money) that you gave them.

  • I'm not sure that I buy that any of these points (which have perfectly suitable analogs in many other low-liquidity, risky markets) matter unless bitcoin options buyers are especially ignorant of properties of bitcoin. If the buyers are remotely rational / knowledgeable about the tech, then something as simple as no arbitrage should be immediate. Plus, the volume numbers at FutureBlock seemed reasonably high.
    – user8776
    Commented Nov 15, 2013 at 14:21
  • If there is real risk, it does not require ignorance. And if there wasn't, then I suppose this should be a decent suggestion: How about you take advantage of the arbitrage opportunity, and tell us about your experience once you've been at it long enough to have statistic evidence about what risks you took to get these profits?
    – user6049
    Commented Nov 15, 2013 at 15:59
  • I think you're misunderstanding. There would be no risk to the seller. That's the problem. I could offer to sell on both sides such that my offer was the best offer for both the up and down contracts, and as long as there is one buyer for each, I am guaranteed to make money. Yes, there is liquidity risk, as in many other markets, which ought to be "priced-in" if the buyers are not especially irrational.
    – user8776
    Commented Nov 15, 2013 at 16:22
  • I see. You have zero risk that FutureBlock runs away with your Bitcoins, breaks its promises, or otherwise defrauds you. And you have zero risk that whilst there's no fraud there is some misunderstanding that ends up costly or otherwise tedious to clear up. You also have zero risk that, say because of a large change in Bitcoin price, your indeed gained Bitcoins will not be worth anything anymore. Lucky you! If I were to trade on the opportunity you found, I'd feel like I was taking on a significant risk and would want to insist on a large return for that.
    – user6049
    Commented Nov 15, 2013 at 16:28
  • 1
    I understand. I do not believe that exchange insolvency risk explains this instance and am seeking other explanations. Or, legitimate evidence that it is exchange insolvency risk preventing additional sellers from taking advantage.
    – user8776
    Commented Nov 15, 2013 at 16:52

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