Bitcoin’s Market Symphony: Unveiling Arbitrage and Hedging Opportunities Across Spot and Derivative Markets

Discerning the dynamic interconnectedness symphony between Bitcoin’s spot and derivative markets in its embryonic contemporary landscape is imperative for unveiling the potential opportunities for arbitrage and hedging. So, this article is an attempt to explore the interconnectedness dynamics between spot market and derivative markets of Bitcoin, covering the period from January 2018 to May 2024 using conventional measures (Johansen’s cointegration test, VECM and Wald’s block-exogeneity test) and evolved measures (DCC model and wavelet coherence). Their empirical estimates discern significant long-term insistence and spillover effects between spot and derivative markets, significant one-way enduring causality from derivative market to spot market and significant two-way brief period causality from spot market to derivative market and from derivative market to spot market. These pieces of evidence of significant dynamic interconnectedness between the Bitcoin’s spot and derivative markets undermine the potential of arbitrage opportunities while affirming the hedge prospectus with more pronounced leading effect in its derivative market over the long term.