The BTC future will settle against a spot reference price so you cannot take delivery.
My big issue with this is if the reference price is manipulated by exchanges (there is a lot of speculation about that exchanges aren't being honest with their trades) there is no way for the future to correct this. Shorting the future would do nothing. The future is a prediction on that settlement index and not the actual price of BTC. The usual move would be to take delivery and sell elsewhere or carry the underlying.
I really wish BTC wasnt financially settled. I have no trust in the current BTC exchanges. They really don't deserve it.
> My big issue with this is if the reference price is manipulated by exchanges (there is a lot of speculation about that exchanges aren't being honest with their trades) there is no way for the future to correct this.
How would this manipulation be done by the exchanges in practice?
a) If they lie about the last trade price, their order book wouldn’t match this.
b) If they use deposited USD to buy up BTCUSD sell orders (to push up the price), their USD assets would no longer match their USD liabilities.
And if only a single exchange does b), its USD assets would quickly drain from the exchange, as arbitrageurs would 1) buy cheap bitcoins at the other exchanges 2) sell on the expensive/cheating exchange 3) withdraw USD from cheating exchange (draining USD that is already in short supply because of the cheating) 4) deposit USD at low-price exchanges and repeat 1).
I've worked in trading for a while now, and after talking to a could people specifically about bitcoin, inter-exchange arbitrage isn't as big as it should be. The issues tend to be around clearing and counterparty risk (BTC on two different exchanges have different prices reflecting the difficulty in moving BTC off the exchange). There is a lot of friction in BTC movement which really shouldn't exist.
Also you assume exchanges operating financial information is open and trusted which is definitely not the case.
It's easy for the exchange to paint the tape with false trades and it doesn't cost them anything. A large player getting a fee discount can self trade without much loss either.
I don't think the order books are to be trusted with these BTC venues.
I don't know how you call this massive volatility and fraud "protection" from me and my cohorts. BTC could use the depth provided by high volume electronic trading, and also the linkage between all the venues and alt coins.
Bitcoin price being manipulated is a popular and cool story. It is not real, though. Bitcoin is traded on a dozens of international exchanges, hundreds of small local ones, P2P with cash, by OTC for large players, against other cryptocurrencies...
You get the picture. It is not possible to manipulate it for a long period. Maybe a spike up or down? But that's it.
Except one of the exchanges is literally printing 100s of millions of dollars of fake money a month and using it to pump the price.
The ‘price’ of bitcoin on the largest exchange isn’t actually based on dollars it’s a cryptocurrency called ‘tether’ which is supposedly backed by dollars but isn’t.
Except that you are not a real person but a slightly improved AI that goes on the internet and start commenting.
If I don't need to have proof I can say anything.
How do you know the same is not happening with the big banks we have?
The difference in bitcoin is that trading is not limited to a single exchange. The amount of Tether is very small compared to the crypto market. (0.6bn to 250bn)
>How do you know the same is not happening with the big banks we have?
Whataboutism, and there is substantially less potential for everything to disappear, more transparency, and decades (centuries?) of regulation.
>The difference in bitcoin is that trading is not limited to a single exchange. The amount of Tether is very small compared to the crypto market. (0.6bn to 250bn)
Look at the tether volume vs. the BTC volume and you will get a very different story. It's misleading to talk about Bitcoin's market cap when such a huge amount of it is lost forever or not actively traded/moving the market.
It is not whataboutism. That would be true if I pointed that banks where doing something similar. What I pointed to is that you have absolutely no basis for your accusations.
If you are going to do that with every business, then you can't trust neither of them. Even rating agencies can be shady.
1) Will customers be able to sue JPMorgan Chase & Co. due to facilitating institutional trading customers access to these futures, when the CEO said that Bitcoin is a scam/fraud?
2) When the futures clear, you basically end up with dollars, which is odd to an extend as a future in oil will literally give you oil once it clears.
___________
On 1 I think that as long as those institutional trading investors are given a prospectus stating that Bitcoin could be a scam, invest in these futures at your own risk, it should legally shield JPMorgan Chase & Co.
The only time I can imagine JPMorgan Chase & Co. would be on the line is if they wrote an prospectus that said this is a good investment whilst the CEO is out in public talking about how much of a scam it is.
On 2, I would say this stops the CME Group Inc.'s futures exchange having to find a way to deal with actually running Bitcoin withdrawals that could open up hot wallet hacks, etc.. and in the long run this should bring down the overhead (fees) on the futures.
In addition what is the point of getting actual Bitcoin once the future clears? Obviously these customers do not want actual Bitcoin. I would say a future that ended with actual Bitcoins would scare away a lot of possible customers.
> When the futures clear, you basically end up with dollars, which is odd to an extend as a future in oil will literally give you oil once it clears.
Futures come in two types: physically settled and financially settled. Physical means the owner at expiration receives the product (in this case BTC). Financial means the owner at expiration receives the quote currency (in this case USD). Many futures contracts are financially settled, usually in the national currency where they are traded.
It would be possible to write physically settled BTC contracts, but that would be more complex for CME to implement (they'd need brokers to manage flows of cryptocurrency), and would be a less differentiated offering compared to existing cash exchanges.
I don't agree that people having some investment in Bitcoin without ever holding Bitcoin is a disadvantage.
Once of the things we used to talk about years ago with Bitcoin was that by the time Grandma owns Bitcoin in some way, it would be via several layers on top.
And we were not talking about technology layers like LN, we were discussing that eventually financial products would be built on top of Bitcoin.
I see this as the market maturing and even die hard Bitcoin fans should see this as a good thing.
It's unrealistic to expect everyone that interfaces/holds value in Bitcoin to actually use the raw layer itself.
But futures aren't like that; futures are supposed to be one of the lower layers of the financial "abstraction stack", not the top layer.
Grandma doesn't buy futures; grandma invests in a mutual fund that buys futures. But Harold the wheat farmer does buy wheat futures directly, because his whole business is delivering wheat down a manufacturing pipeline, and the wheat future delivers wheat just like his own fields will, so either can be used as an input to said manufacturing pipeline. That's the original point of [commodities] futures, after all—to let Harold hedge his wheat-growing risk. The fact that they can be traded like any other instrument to make money without ever coming into possession of any commodities at all, is just a weird side-effect.
Shorting bitcoin, whether as a hedge or in speculation, seems like the killer app here. And because of the ability to short, a successful futures market should reduce BTC's volatility. I'm personally uneasy with long-only futures funds, because it does seem that they might be able to distort the market. Oil is a great example.
Yes, each contract has someone on each side. With long-only futures ETFs and so on, large numbers of investors can get exposure to the futures markets, for example in physical commodities markets like petroleum and agricultural products, in the attempt to create diversity in their portfolios, and they usually want to go long, as if they were buying stocks, typically when the trend is up in the first place. Many economists believe that they then can help to exacerbate trends beyond a rational price (think, "bubble"). Hard evidence for this is inconclusive, but I personally tend believe it is quite possible.
So, for example, the price of oil may rise because of fundamentals (supply and demand for actual use), but this new source of passive, paper demand (trend-chasing long-only investors) can push the price farther than it could have gone otherwise. For example, $147/barrel West Texas crude oil was clearly impossible to sustain (and may have been the needle which finally made the financial markets go pop), but very possibly froth in the markets had helped pushed it up that far, because everyone wanted to get in on this amazing commodities super-cycle, and of course they wanted to be long. The supply and demand fundamentals were indeed bullish, but not up to $147, or, at the same time in 2007, $18/bushel of soybeans, a price that would imply widespread hunger.
Excuse me for going on like this, but it could be interesting to note that the justification for having speculators in futures markets at all is to provide liquidity to the markets and help in price discovery. That means, to me, that participants should go long or short with equal proclivity. Instead, many ETFs encourage stock and bond investors to take long-term, buy-and-hold style positions in the futures markets. There are short commodity ETFs, but they aren't popular like the longs. Therefore this class of speculator introduces too many longs, not enough shorts, often with the effect of distorting market movements, especially during trends.
Still, these aren't likely to be issues with bitcoin futures.
I cannot say that I disagree with what anything you wrote. I really don’t know how things are going to play out, it will be interesting to watch. Futures can create a disconnect between fundamentals and prices because they provide a way to get exposure to an asset that was not available before. But in the case of bitcoins it is already possible to buy them and there is no fundamental value to diverge from anyway... The demand for bitcoins is clearly high before futures are available and maybe having a new way to get the exposure will in fact relieve the pressure on prices (the notional long exposure can go up without pushing prices up as long as there are enough shorts). I don’t know and I don’t really care: I have no dog in the race, I’m just watching it for fun.
The bitcoin futures contract is worth 5 BTC. So if you own 5 BTC, you can short one BTC futures contract and lock in your current value. In fact, until you've done that, BTC are a highly uncertain store of value with a history of extreme volatility. To me, bitcoin's greatest weakness is its wild price swings.
It's interesting to say that you'd never short crypto. That means, in effect, that you'd never borrow money in BTC -- so no crypto credit. Why? Borrowers are effectively short the currency, lenders long. If BTC goes down, borrowers owe less (in dollars, for example). If BTC goes up, they owe more dollars (must buy the bitcoin back at a higher price, just the same as if they'd gone short futures). Because BTC can go up without limit, borrowers of bitcoin are exposed to limitless risk. This is true if you borrow in any currency, and makes exchange rate risk important in credit. With bitcoin you're almost guaranteed a wild ride -- so for now, credit markets based on bitcoin are practically impossible. So, borrowing five BTC from a bank is the same as going short one futures contract.
We have yet to see if the Chicago Mercantile Exchange contracts will become popular. If they do, the CME will likely create options on the futures contracts. Then, as a speculator, you could much more safely buy put options to short bitcoin, and be guaranteed of never losing more than you'd started with.
If you don't actually have the BTC you can't sell.
For example you are a miner and trying to lock in the correct BTC price or if you are expecting payment in BTC and don't want exposure to BTC price moves.
You could just sell the BTC, yes, but a futures contact might be faster, easier, and cheaper, though I don't trade BTC so I don't know, and we don't yet know if these contracts will be liquid. Many futures contracts never take off, so we'll see.
If you sell the 5BTC you’re done. If you short one contract and BTC doubles next week you will be $40k down on that position. It looks a bit risky... Of course your BTC will now be worth $80k instead of $40k so the math works out. But you will have to come with collateral to keep the position open (or get it closed and take the loss).
The put hedge is a fraction of the cost of the total BTC you currently hold. It's basically insurance on your current BTC holding and you're willing to pay the "premium" to dampen the volatility of BTC.
Shorting using futures has nothing to do with buying puts. You can think of buying puts as buying insurance (you pay now for the option to sell your BTC at a guaranteed price later), but buying/selling futures is esentially giving you the same exposure as buying/selling the underlying asset.
This is going to speak to my naivety around futures and how they work but if you're ending up with cash instead of bitcoin and there's no actual bitcoin wallets/bitcoins involved, what on earth are you actually buying when you buy a Bitcoin future in this manner? It sounds like the one, sure, answer is "not Bitcoin". Can anyone explain this to a neophyte like me?
Futures have something called open interest and an expiration. They come into existence because both a buyer and seller are willing to take opposing positions. When this happens, open interest increases correspondingly.
Let’s say you believe btc will rise and you bid to buy one CME futures btc contract at 42000. I am willing to sell (short since, let’s say, I don’t have any contracts to sell) at 42000 and we have now created the future contract out of thin air. Upon expiry money has changed hands between us daily (mark to market pricing) between our futures trading accounts (customer segregated funds at our respective clearing firms to be exact), and price was tied to the underlying (spot — the real btc market) price at all times.
All we did was bet against each other with the “score” being the actual btc price. The “cash settled” part means we don’t touch btc at all, we settle the bet between us in cash. If it sounds too obvious or if it seems like you’re missing something, you probably get it. It’s simple, and there are a lot of complexities underneath the surface (expiration months, cost of carry, contango and backwardation), but at the core it’s just a bet on the price with one party believing price will rise and other believing it will fall. Nothing less or more.
In practice there is interplay between futures and spot markets’ prices, and this opens up a can of worms about liquidity and how futures could be used to “stabilize” a commodity (read up on hunt brothers cornering the silver market for an example of govt intervention into a futures market)
On a very basic level, I get most of that. But in the cases you mention, you're actually buying a contract based in the actual asset/security you're targeting. In this case, it sounds like you're buying an asset that is priced based on the asset/security (BTC) but that outside of that price doesn't involve actually doing anything with BTC. Is my assessment here completely insane or am I somewhere near understanding what I've read in that article?
No your assessment isn’t insane; instead you’re visualizing how they’re related and it’s important to understand it.
CME does daily mark to market pricing so the futures price will always fall back in line with the “bitcoin index” which is based on the actual spot market.
CME futures typically close once daily for a brief time (each market has its own schedule) and price settlement (the price adjustment) occurs around that downtime. This is distinct from most btc exchanges which as far as I know, operate round the clock (could be wrong on that point, I don’t actively use various btc exchanges).
If someone were to sell a whole lot of futures and drive the futures market price way down relative to the spot market, another participant could then come in as a simultaneous buyer of the futures and seller of the spot market, pocketing the difference knowing the price will be marked to market daily. Such a natural force helps to keep the prices correlated in soft real time.
Beyond that you’re correct it’s just a way to gamble on the side :) nothing to do directly with real bitcoin
There's a pretty decent explanation from the article
> If you buy an oil futures contract on the CME, and you hold it when it expires, then someone hands you 1,000 barrels of oil, and you have to find a place to put them. If you buy a bitcoin futures contract, and you hold it when it expires, nobody hands you the 5 bitcoins underlying the contract. Instead, CME computes a daily "Bitcoin Reference Rate," "which aggregates the trade flow of major bitcoin spot exchanges during a calculation window into the U.S. Dollar price of one bitcoin as of 4:00 p.m. London time," and if the Bitcoin Reference Rate at the expiry of your futures contract is higher than the Bitcoin Reference Rate when you opened the contract, you get paid the difference ... and vice versa. In dollars.
If you have any specific questions related to that paragraph, I'm happy to try and explain what I know.
So you nailed down the specific part that I wasn't grasping in that paragraph: the "Bitcoin Reference Rate". Again, this is an area where I'm horribly naive and wouldn't imagine investing in (partly because I don't have enough knowledge around how futures markets, in general, work/behave and partly because I do understand Bitcoin). However, if what they're trading in is the "Bitcoin Reference Rate", isn't this really a future trading in this "Bitcoin Reference Rate" rather than Bitcoin? Does that even really matter, here, or is that an irrelevant detail? While Bitcoin isn't treated like an actual "currency" (outside of those of us who think of it as one, it appears the financial powers-that-be think of it like a traditional security/commodity-like instrument), are other currencies handled in this manner -- or any other futures product for that matter (i.e. is this common or is this something that is very unique)?
Oh, and thanks for the offer to explain -- it's much appreciated. :o)
The one takeaway from futures trading is that you probably don’t have enough risk capital to do it right. Professionals use large risk capital bases and have access to better information. Retail traders who don’t know better sign disclosure forms then overutilize the generous performance bond requirements, mathematically ensuring most will perish.
This is probably the most practical takeaway that I can share with you, and it’s why they’re considered so risky. Leverage can kill.
I'll prefix by saying this is my best understanding and that I'm not an expert by any means. Hopefully someone can correct me if I make any mistakes
My understanding is that a "cash settled" Bitcoin future essentially conducts an exchange from USD to Bitcoin with the exchange on the Seller's end, and then from Bitcoin to USD on the Buyer's end.
So, imagine a normal future's market where the Seller and the Buyer both want fiat, and are willing to do their conversion from Bitcoin to fiat with the same exchange that conducts the transaction. So, when it's time to settle the futures contract we see the following transactions:
Seller Buys a Bitcoin
---------------------
Seller -> Exchange: $10,000
Exchange -> Seller: 1 Bitcoin
------------------------------
Seller settles Future contract
------------------------------
Seller -> Exchange: 1 Bitcoin
------------------------------------------
Buyer receives delivery of Future contract
------------------------------------------
Exchange -> Buyer: 1 Bitcoin
---------------------------------
Buyer exchanges bitcoin to fiat
---------------------------------
Buyer -> Exchange: 1 Bitcoin
Exchange -> Buyer: $10,000
The Exchange, however, doesn't want to be in the game of holding bitcoin or exchanging bitcoins. So they modify their contract to say that the Seller will pay them in USD (whatever the conversion rate of Bitcoin to USD is), and the buyer will receive USD (again, with the same conversion rate). Then we condense those transactions above:
Seller settles Future contract
------------------------------
Seller -> Exchange: $10,000
------------------------------------------
Buyer receives delivery of Future contract
------------------------------------------
Exchange -> Buyer: $10,000
Now the Seller, Buyer, and Exchange are only dealing with a fiat currency that they're familiar with. However, through the "Bitcoin Reference Rate", or the computed conversion rate, the Buyer and Seller are being exposed to the Bitcoin market.
So, you're right that what's really being traded are USD pegged to the "Bitcoin Reference Rate". However, since the Bitcoin Reference Rate should be a fairly transparent conversion into Bitcoin market conversion rates, it should exactly track if a Buyer and Seller traded Bitcoins and then immediately convert them to fiat dollars.
There are two possibilities when buying a commodity-backed security like this.
You could buy a representation of the actual commodity, such that every $X you own represents $X of Bitcoin. That's known as a "cash commodity", or an "actual", or various other terms.
Or, you could buy what amounts to a bet on the future value of the commodity. Those don't need to correspond to any actual amount of the commodity. Those are called "futures", which are one type of "derivative" (because they're derived from the value of the commodity without directly representing an amount of the commodity).
As one of the other commentators mentioned (and has been called out a few times), in the case of other futures, you are actually settling them with the commodity in question, but in the case of this product, you are settling with cash. I think I understand what you're saying, and I don't think I have any fundamental problem with it -- mainly because I don't invest in the futures market so it's simply "unimportant to me" how it works in this case -- but I'm curious: is this a normal practice?
Is it more common for a futures-based product to be settled with the product it's based on or is it more normal for it to be settled in this manner?
My curiosity, if the way they're executing on this is unusual, is "why"? I mean, take oil futures as a good example. It'd seem a whole lot easier to settle a BTC future with actual BTC than to settle an oil future with actual oil, so why isn't it the other way around? Heck, why wouldn't all of these futures-based financial products be handled in a cash-based manner -- what's the downside? (I'm not arguing for or against either method -- I really don't know).
My apologies if these are truly stupid questions -- I imagine I sound to someone who works/studies this sector like people sound to me who think "Facebook" and "The Internet" are interchangeable terms, but if you're willing to play along, here, I certainly appreciate it. :)
Keep in mind that most commodities futures contracts are never settled. They are closed before expiration (rolling into a new contract if you want to keep the position open). Many brokers will close your position before expiration, because they are not prepared to handle delivery, even if younwant to.
There are also some commodities futures that are cash-settled. Futures on financial indices, interest rates and such are usually cash-settled. But some futures based on financial instruments are “physically” settled, like US Treasury futures.
Even oil futures are still settled with actual oil though. The distinction here is they are cash settled, which is pretty weird for an asset that is easily delivered.
Depends on the contract. Whine CL on CME is physically settled, WTI on ICE is financially settled. Both are contracts for the same underlying crude (I've traded them one for one in various strategies).
I'm going to try though I'm a neophyte myself. So if we take the example of oil, if you need to buy oil in 6 months time and don't want to be affected by market volatility you can pay a small premium on today's prices to guarantee the price in the future. People that don't actually need oil but think that it will go up in value can also use the futures instead to bet on oil being more expensive and cash out the difference between what they paid and what the future price ends up being. Speculating on Bitcoin vs oil isn't so different, the only difference I can see is that where as there is use cases for hedging and one for speculating traditional futures there only exists the speculating use case for Bitcoin futures.
Related to this, does anyone know of a way to bet against bitcoin (or cryptocurrencies in general), without buying cryptocurrencies themselves?
There are lots of more-or-less sketchy cryptocurrency exchanges which allow you to shortsell bitcoin, but these all require buying cryptocurrency in the first place as collateral.
The upshot is that if you bet against bitcoin and win, you win a bunch of... bitcoin. Not so useful if you want to bet on a big collapse of crypto in general.
Selling bitcoin futures seems like a way to bet against bitcoin in the long term, using actual USD, although I don't think that will ever be an option for smalltime investors / individuals.
I recently sold a bunch of Bitcoin, and I believe it will go down, but I would never, ever short it.
When you are long you have limited downside because the price can never go below zero. When you are short your downside is unlimited because there is no limit to how high the price can go.
Bitcoin could easily quadruple in a few months before any crash happens, and your short would probably just be liquidated at a total loss to you even if a crash comes later. As we all know, markets can remain irrational longer than you can remain solvent, and these markets are very irrational right now, as clearly demonstrated by the nonsensical valuation of recent scam Bitcoin forks "Bitcoin Gold" and "Bitcoin Diamond".
What is a crash though? Even at current levels, if it quadrupled and then crashes down 50%, is that a crash? Depending on when you acquired your initial position, you might not care much.
Apple added 250bn in market cap this year. The entire crypto space is about 250bn in market cap. That does put things into perspective. Given crypto is completely global, this space is still tiny. Visa has a $250bn market cap.
My assumption is, if it does end up being a massive bubble and mania, it will run high (like the .com bubble -- into the many trillions) but there will a major correction at some point.
But how likely is it that will be any time soon? And are todays prices still cheap then? I would wager digital gold is probably worth more than $150bn in total market cap, even after a major correction.
Not exactly the best comparison. Obviously you would pick the shares since they are less volatile -- if they could magically appear in your brokerage account.
However, say I had a net worth of $50m, then I'm quite certain I would rather own $5m in Bitcoin or Ethereum today than own $5m in Visa shares.
My point is that if you magically owned Visa tomorrow, you’d be very rich. If you magically owned all those cryptocurrencies tomorrow, would they be worth anything? Why would anyone want to buy them from you?
Visa is a company and produces profit from people using it, and the people using it don't need to be shareholders, so if you're the only shareholder, you're not reducing the utility for anyone else.
If you own all of the cryptocurrency in the world, nobody else can use it. Obviously it becomes worthless. The same would be true of any currency. That's just a small part of what makes a currency different to a company.
Companies are different in comparison to commodities though. That said, you're right -- it is still early, and people aren't exactly sure how much exactly these things are worth. But part of the value derived comes from having a network of people using it.
If tomorrow you owned all the gold in the world and no one would be able to get or buy more gold -- that gold wouldn't be worth much.
But for bitcoin the situation is much worse. Gold would still be worth something. It is a physical object, a collection of atoms with some nice properties. It has industrial uses and the bling-bling factor wouldn’t disappear. If anyone needs or wants gold he would have to mine it, an expensive thing to do, or buy it from you. You could always sell it marginally cheaper.
Anyone could easily come up with an alternative cryptocurrency and what advantage would yours have over the others?
I can follow your reasoning, but: 1) just because something is digital does not make it worthless, 2) those gold use cases are really exaggerated when it comes to price setting. Gold derives its value mostly from the fact people say it is valuable, not from jewellery and industrial purposes.
One way to think about it: you have video games. There are marketplaces where people can buy and sell digital skins / clothes / gold etc. Every year, people buy and sell for more than $50bn in digital goods through these marketplaces. Ten years ago, I sold a top notch World of Warcraft character for a sizeable amount of money. Are all these people crazy? Maybe.
But how is value of these items set? Supply and demand and network effects. Why did a World of Warcraft character sell for €10,000 easily 10 years ago, and now it goes for a fraction of that? Less people are playing the game.
The same applies to cryptocurrencies -- you have two major cryptocurrencies: Bitcoin and Ethereum. Bitcoin has limited use cases, and yet, most of money flows into it, due to its network effect and brand recognition. It has all the properties of gold, that you also described. It was created in the image of gold.
You could create something similar no doubt. But would it get traction? Unlikely. These are for the most part winner takes all markets for a specific value proposition. For Bitcoin, it's digital gold. Ethereum is smart contracts, etc.
I'm not saying investing in crypto is a sure thing. It is very risky and speculative -- a bet on the future, with great upside if things work out. But at the current stage crypto is in (at least Bitcoin and Ethereum), in comparison to say a high risk investment in a startup or in a risky small cap stock, it seems (to me at least) to be a less riskier when looking at the potential upside.
If it doesn't end up being digital gold, it will most likely be worthless. But institutional money wouldn't be looking at buying in if they didn't think there was a decent chance of success.
Again, not investment advice, just a personal opinion.
Today the two major cryptocurrencies are bitcoin and ethereum. The two major cryptocurrencies two weeks ago were bitcoin and bitcoin cash. Three years ago they were bitcoin and ripple. Four years ago [1] the two major cryptocurrencies where bitcoin and litecoin. The next two major cryptocurrencies were peercoin and namecoin (they are 50-75% down over the last 4 years). Will bitcoin remain on top forever? Maybe. But it doesn’t have the properties that give some intrinsic value to gold. It’s not just the network effect. You cannot replicate gold, but you can create new cryptocurrencies (how many hundreds do exist already?) which are just as good as bitcoin or better. Why does the network effect matter anyway if it’s not used for transactions?
A high market cap (for wealth transfer bandwith and lower volatility), high hash-rate (for security) and large number of people willing to accept it as money (for conversion use) also give it value. Hence it isn't exactly true that you can just copy it, these other network effect metrics matter.
I agree, comparing the total quantity of bitcoin or dogecoin or dentacoin in circulation with the market capitalization of a traded stock (or the valuation of a private company, for that matter) is pointless.
Interactive brokers accounts can trade cme futures. Whenever these come out it will be just what you're looking for. The margin requirements allow you to short with a lot of leverage too.
Oh, sorry. I believe one of the main exchanges (bitsane/bitfinex Maybe?) was going to make options and margin accounts available, don’t remember which one. There’s also cex.io, but it’s in the UK.
I guess you’ll have to wait for JP Morgan’s fund to go live...
I'm exploring buying options with the publicly traded Bitcoin based funds. No way do I want to depend on one of the Bitcoin exchanges. Plus, if things really go south, I'm sure I'll still be able to get paid using the stuff on the nyse or nasdaq.
Because it seems like an obvious bubble, with little / no real value?
Bitcoin was / is a pretty cool technological innovation. But the main use-case seems to be buying illegal things or laundering money, and vast majority of transactions are just speculators.
Also, the fact that it is difficult to short is further evidence of a bubble.
2) Even if this whole thing does collapse, never short something like Bitcoin unless you have unlimited cash to support such a short. Even if you're right, can you continue to sustain your short if the peak is $100,000 a coin before the collapse? (And the new bottom is $10,000, still higher than right now)
If the price goes there, can you afford the short?
>* Traders will devise a suitable risk management plan prior to initiating a short position. Unlike the media driven nonsense about a large activist shorting a bull market permanently, many traders can and do make leveraged long and short trades all the time, with the intention of exiting at a loss if the trade doesn’t go immediately (for some definition of immediately) in their favor. *
In my experience working at prop firm that was trading (speculating) on futures, this is the case. We would enter leveraged short/long positions based on some kind of signals with some kind of risk framework for all assets in the portfolio.
Good luck with that. I mean no disrespect, but I'm guessing you don't have much experience in this sort of thing if you're asking how to short bitcoin and claiming you've predicted the top of the market when it's been steadily climbing for 7+ years. It doesn't matter what reasoning you've come up with, markets are rarely driven by reason. As a wise man once said, the market can stay irrational longer than you can stay solvent.
If you want to make money, buy BTC. You might win and you might lose, but your odds are far better than if you try to short something that has made a 1000% gain in the last 12 months.
No, not really. It makes it useful for criminals, and a small number of people who might have good reasons to buy things, but that doesn't mean it should have a market cap of billions.
I'm not saying there are no good uses for bitcoin, of course. For example, if someone used bitcoin to import prescription drugs from Canada to the U.S, that's great. But it doesn't justify a $100B+ market cap, and as it stands, the hard part of doing that is importing the drugs, not exporting the money.
Similarly, just because Tor is useful mostly to criminals and a few human-rights advocates or privacy enthusiasts, I don't expect the Tor Browser to ever gain a major market share.
Ok, so you have no clue about this market and are making investment decisions based off your gut intuition and wild guesses. I’m sure you can find someone willing to sign the other side of that contract. Just don’t hurt yourself or gamble more than you can afford to lose.
Heh, I get the sarcasm implied here, but I think the bigger issue is that a lot of "futures" are based on things that have reasons[0] for the price moving the way that it does. Oil futures, while unpredictable at times, have an element of research that can be done to make an informed "bet". Crop futures are affected by weather predictions and almost all futures are affected by overall economic outlooks for the sector they occupy.
But cryptocurrency? I have yet to find someone who can give me a "good"[1] reason for prices of BTC to even bet at USD$100, let alone USD$8,000. The probability that in two months the price is $0.01 or the price is $19,000 are equal without a reasonable, data-backed explanation about why the price, today, is $8,000.
[0] As in reasons that exist outside of the bubble of "other people are buying it and they're paying that much". Hell, 80-90% of people who work in technology/programming/software development couldn't properly explain how the blockchain actually works -- and I don't mean "they mostly get it but make some technical errors/couldn't write a working example", I mean they are "deer-in-the-headlights lost" with regard to explaining how any of it works. And it's been my (anecdotal) experience that those who can wouldn't dream of putting money into it.
[1] Good, as in something other than the early "Well, there's that drug market that takes it and it's popular" or "Algorithms are trading it without human intervention and the price just keeps going up" or "Look at that! (pointing upward at the right-hand side of the price graph)". There's simply no explanation that I've heard that dares market a benefit to owning Bitcoin beyond the fact that it can be turned back into cash and the amount of cash that it can be turned into is inexplicably more than the amount of cash it could be turned into last week.
Why is gold $1,288 per ounce today? Purely because it acts as a store of value. But gold is only valued at its current valuation, because people say gold is gold and that has a certain value. You could have picked any other rare metal, or say, diamonds. Gold has limited real world uses.
The same could (not saying it will, but could) apply to Bitcoin. It seems to be growing into digital gold / a digital store of value.
The price of gold globally is $7.8tn. Bitcoin is worth $150bn(ish). If there is a 50/50 chance that Bitcoin does become digital gold, then at current valuations it will be cheap. Is it not worth investing $1 today, to potentially make $10-20-30 IF it does succeed? Those are decent odds with great upside.
This is not investment advice, just my personal opinion.
What I think will happen when these futures will be listed:
- the institutional investors who wanted to go long on BTC, had (and still have) the opportunity to buy BTC
- considering that the ways to short BTC now comes at high costs and pretty high counterparty risks I'd say it's a pretty big chance that most of the institutional investors getting into trading BTC derivatives, will go short.
- this creates a big opportunity for crypto currency whales to go long on the derivatives, pump the BTC price and earn some millions.
If you watched the crypto currency markets in the last days, you can notice that lots of alt coins are increasing in price. It means that somebody buys lots of them. I think they're getting ready to buy bitcoin with them when the derivatives will be listed, in order to pump its price even more.
Before futures work, you need forwards. There are no bitcoin forwards because the entirety of the current bitcoin ecosystem is built on and around fraud. If we are to remove fraud and clearly currently defined as illegal activities from this ecosystem bitcoin and its value will collapse through the floor.
In order for forward market to be viable you need to have a stick big enough where pulling out of a forward contract is impossible for anyone without them going to jail and ( not or ) still having to perform under this contract.
The really funny part is that the feeding on the suckers ( i.e. retail pansies ) is so profitable and regulators are so pathetic that those who based on their other dealings should not touch BTC with a hundred yard pole (i.e. VCs, exchanges, law firms ) are jumping into it not just with both feet but on all fours.
I went to a BTC investors/tech people meet up not long ago. Some of the people were household names in this "community". No one could describe a difference between POS and POW; no one could speculate on internally consistent basis what kind of outcomes would be possible based on the actions of China's central bank. But everyone was very excited about all the conferences they were going to and all the money they were making off the suckers.
It really reminded me of months before the dotcom crash.
I'm a little surprised you're getting downvoted so much, but I suspect it has to do with:
> the entirety of the current bitcoin ecosystem is built on and around fraud. If we are to remove fraud and clearly currently defined as illegal activities from this ecosystem bitcoin and its value will collapse through the floor.
While I agree with pretty much everything else you've said about BTC being somewhere on the not-so-good end of the "insanity" spectrum, and I've had similar experiences talking to technologists regarding PoS vs. PoW (heck, finding one who could coherently explain either was an exercise in futility). You sound like someone who probably knows the difference and it's also been my experience that those who do, generally believe the state of BTC (with regard to its current price) is overvalued[0].
I disagree that the ecosystem, as a whole, is built around fraud, or that the technology/purpose of BTC is generally for fraud. I look at BTC the same way I look at paper money. The same kinds of fraud can be performed with paper money. The same kinds of problems, such as permanent loss due to failure to secure it, can happen with paper money. The one, major thing, you can't do with paper money (easily, anyway) is buy something online with it. You can do that, in a lot of places, with BTC (and to a lesser extent, other cryptocurrencies). You can buy illegal drugs with cash and BTC but your local drug dealer doesn't take Visa (or maybe they do, now ... I don't buy illegal drugs).
I fully subscribe to the belief that we're going to see a large crash happen, probably in the near future. Any time you have something that looks like an investment that's skyrocketing as much as this has and the "investors" can't tell you the first thing about "what" it is they're investing in, that's the pretty much the secret formula for a crash. And I don't think (outside of the large amount of lost money) that a crash would be a bad thing. The fact that the price continues to soar is hampering the ability for the BTC and other cryptocurrencies to be used as anything other than as something to hold onto hoping for it to grow in value as it has for the last year.
There's another side to this, though ... I've been saying BTC would/should crash since it was about USD$100 and I've been wrong. I'm willing to accept that I'm wrong here, but unwilling to bet my own money on that chance.
[0] Where by "overvalued", I mean, more overvalued than anything in the history of the known world.
the difference between futures and forwards is the pricing - futures price off the risk neutral measure because your margin is marked every day, forwards price off the forward measure because there is only one other cash/asset flow event at expiry.
How can this ever become an efficient market unless CME accepts BTC as collateral?
If I sell futures contracts against 10 BTC, and I have 10 BTC in my Bitcoin wallet, I’m fully hedged, and I take no risks (provided the wallet in question is sufficiently secure).
If CME requires USD as collateral, how would I hedge my position? If the BTCUSD price rises 10%, I can’t sell my BTC for USD (to use as collateral) because then I’d expose myself to further price increases before expiration.
Unless I’m missing something, this will become an inefficient market, bottlenecked by the ability of contract sellers to come up with USD collateral.
A solution could be to collect a Bitcoin public key for contract buyers, and require sellers to send the BTC amount covered by the sold contracts to a "collateral BTC address" which can be redeemed in two of the following ways a) by the contract seller, e.g., 7 days after expiration of the contract b) by the contract buyer+CME (2-of-2 multi-signature) after expiration of the contract. CME would keep the USD proceeds, from selling the contract, in the seller's account at the CME. If the Bitcoin USD settlement price doesn't rise to more than the contract selling price, CME would simply transfer the settlement price USD amount from the contract seller's to the buyer's account. If the price rises a lot, the buyer of the contract would be able to (by CME providing a signature as well) redeem the bitcoins sitting at the "collateral BTC address", and sell the bitcoins at the current market price (which the contract buyer would have 7 days to do before the contract seller can redeem the bitcoins himself).
This way, CME doesn't store any bitcoins themselves, and contract buyers are responsible for keeping their own private keys safe (optimally, private keys should be generated on an offline device, and the public key safely transferred to an online computer). In order to steal BTC collateral, an attacker would have to steal both the contract buyer's and CME's private key.
You simply cover your futures position before expiration (buy as many contracts as you'd previously sold). At the same time, you can sell your BTC for USD.
In futures markets, almost no one takes delivery, but instead they close ("cover") their positions before expiration. For example, airlines use heating oil contracts as proxies for jet fuel, because they are similar products whose prices move together. But airlines will never but heating oil on the futures markets to put in their Boeings and Airbusses.
What you're asking, in typical futures terminology(1), is how the futures market can function if futures positions and spot/physical positions are not cross-margined. This is actually typical in commodities futures. The same issues apply to crude oil and corn futures (physical settlement) and live hog futures (financial settlement). So how does the market function? If you're in the business of cash and carry arbitrage, either you have a lot of money, or you borrow it. At scale these types of strategies require a lot of capital to purchase the spot side, so a relationship with a lender is important even without the margin. The lender knows about both sides of the trade, so you can generally get good terms. And your margin balance pays interest, so the extra borrowing to cover the margin doesn't cost you that much.
It is a real cost of doing business though, which is why margins are generally so low/allowed leverage is so high in futures world compared to securities. Should be interesting to see how they margin the bitcoin futures, because bitcoins are an order of magnitude more volatile than most other products.
(1) The money you post to a futures clearing firm to guarantee against default is called either margin or a performance bond. Same concept as collateral, but the word collateral is usually only used in the context of guaranteeing payment of a debt.
It's been fun watching Bitcoin as a whole and especially watching financial folks try to wrap their brains around Bitcoin, its price and seeing them try to define exactly "what it is". Even my in-laws are investing a small amount in Bitcoin and Litecoin ... the two of them have a Verizon Wireless internet connection and a computer from 2004 -- read: not technically savvy in the least.
As someone who's done about 20 years worth of investing in stocks and mutual funds and has a very low tolerance for gambling[0], I wouldn't dream of investing in Bitcoin. Last year, however, I did mine Ethereum. The result of that mining turned out quite well for me, costing a little in electricity[1]. I further rationalized it by the fact that I could put the video cards I purchased to work for me in other ways -- I might not have purchased the card that I did were I not targeting price/watt in mining, but the cards I purchased were slightly better than the ones I would have and I'm very happy with them for rendering and some of the fun I'm having playing with ML using CUDA, and hey my ffmpeg transcodes are quite fast, too! I jumped on ETH mainly because of the fact that I had played with Bitcoin in the early days and managed to mine about 20 of them which I lost due to reloading a server[2] and not caring about my USD$0.25 worth of BTC[3].
All of that aside, I don't mine any longer -- the difficulty is too high and with my setup, the best I can hope for is to get a couple of Ether a year. I started mining ETH because they were doing something different from BTC and I had the sense that the price would go up (though, again, didn't expect it to hit $475 as it has today). The thing of it is -- nobody can answer the question "why" in a way that makes me comfortable. It's, effectively, a bet that someone elses' imagination will feel that the price of these bits are worth more than they are now. While I've gotten the sense that a lot of investing works this way, at least from time to time it appears to track with real-world things, like earnings and the state of the overall economic sector that the company is a part of.
I think at least some of the price movement has to do with the fact that Bitcoin is wildly unregulated (and I believe when the inevitable hammer of government steps in, that price won't soar or remain as high). The fact that my in-laws have money in the game (though, for practical purposes, it's pocket change) tells me the days of free-wheeling non-regulation are very numbered, though I have a hard time figuring out how you even regulate something like this (particularly a product like ZCash). And the worst of it is that from a regulatory standpoint, it'd be easy to argue that a lot of the transactions taking place look a whole lot more like money laundering and a whole lot less like "a digital equivalent to cash[4]". The fact is, the treasury components of our governments love that we hate carrying around pieces of easily lost paper and prefer to use regulated intermediaries that helpfully provide reports to them about our incomes and spending habits which can be used to ensure we're operating according to the law. The numbers of traditionally "Cash Only" businesses are approaching zero which is starting to put any transaction that doesn't involve one of these regulated entities into the "questionable" category.
I'm fascinated by all of this, personally. It's mostly played out as I have expected -- when the value of BTC started exploding, the numbers of cryptocurrency and cryptocurrency related products started exploding as did the number of thefts, viruses/criminal elements specifically attacking or using cryptocurrencies. And, of course, the scammy-sounding me-too start-ups trying to find some way to use buzzwords from the cryptocurrency space (though the "ICO"s surprised me quite a bit both in the sheer number of them and the number of people willing to buy into them). Most of the off-shoot cryptocurrencies were nearly identical to one of the leading products with ZEC and ETH being outliers with unique features and spawning their own copy-cats (I'm also watching PIRL with curiosity[5] since it seems centered on improving transaction speeds, more stability around management/updates and focused early on getting an actual marketplace up -- plus, it's based on ETH, which I find very interesting as a technology).
[0] I brought $20 to Las Vegas with the full intent of losing it. It took four days for that to happen and I still felt badly about having wasted it despite it providing me with several hours of entertainment across a variety of video poker machines.
[1] As a guy who has three servers running in his basement and likes to keep the air conditioning set at a frigid 68 degrees, the difference between my already outrageous electric bill and my slightly more outrageous electric bill wasn't something my budget noticed. The servers were mostly idle, anyway, so why not have them doing something while they're not doing anything?
[2] I found the technology interesting and mined more as an academic experience. I don't remember the exact date, but it was within a few months of when the network went live ... I didn't even use a pool and managed to net somewhere around 20-25 of them in a couple of months. I loved the "idea" but wrote it all off as a cypherpunk's wet dream, not something that would actually have value in the future. Oops!
[3] IIRC, there wasn't even a way to see the price of BTC in USD because the only way to turn them into cash was to find someone who wanted to buy them from you.
[4] As in, similar anonymity and similar risk -- you lose or have your wallet stolen, your cash is also lost. Unfortunately, people won't see it that way when it's their money.
[5] I even ended up firing up my mining rig, though that was mostly because I was feeling the itch to delve into CUDA, again, so I took some time to add some optimizations to the mining code I had tweaked last year. I don't expect to make money from it, just I like didn't expect to do so for ETH, but I'm enjoying playing around with code and technologies that I don't normally get exposure to in my day job.
> Of course this makes sense, because handling bitcoins is mostly terrible. The fate of every bitcoin exchange, I often say around here, is to have its bitcoins stolen, so CME is quite sensibly launching a bitcoin exchange without any bitcoins to be stolen.
This is a strawman. Only fools keep substantial Bitcoin balances in exchange wallets.
Edit: OK, fools and ordinary people. But this is an article about investors in Bitcoin futures. The author could have at least mentioned offline wallets. Also, it's true that you need exchange wallets for speculation. But there's the Kelly criterion, and you can keep most of your winnings offline.
Though, there is no shortage of attacks against electronic wallets on personal computing devices either. The average, technologically moronic user might actually be safer storing his Bitcoin on a trustworthy exchange, as opposed to a personal wallet protected by a weak passphrase, if any, on the same computer/phone where he surfs, reads email and runs software of dubious origin.
Best way to protect against unauthorized use of your funds, as the article notes, is to go really old school and print your private keys out on a piece of paper, and store it in a physical vault.
Of course, none of this would be a problem if the exchange acted as a trusted ledger and could simply revert any unauthorized transactions on the user's funds. Like a traditional bank, but just with all the crypto hype!</s>
One can have numerous Bitcoin wallets. I have dozens of active ones. I'm not a speculator, so I don't keep anything substantial in exchange accounts. Unless you're holding more than a few Bitcoin, you don't even need to go full offline. Linux VMs on Linux hosts are not likely pwned. You clearly wouldn't keep much on a phone.
> Only fools keep substantial Bitcoin balances in exchange wallets.
Or, "regular folks". My in-laws who have no idea what it actually is that they purchased use Coinbase and have no idea that doing so is not much better than giving your wallet to a stranger and asking them to keep the money safe and have it available when you want to go to McDonald's.
Is it all that much better than them keeping it in a local wallet for them? I wouldn't trust my in-laws to keep their computer safe from the myriad of threats that the Internet has to offer. I wouldn't trust my parents to use a password more complicated than one originating from the Spaceballs movie to protect their private key (let alone them understand with any level of accuracy what a "private key" actually is). I'd put more faith in Coinbase handling that for them, despite being a radically larger target than they are as individuals.
For us? Yeah, it's an insane proposition. My ETH lived in my Coinbase wallet from about the time that I noticed the transaction went from Pending to Completed to about the time it took me to fill out the form to turn it into cash to deposit into my savings account at my local bank. And the first time I used Coinbase, I moved the first couple of coins one at a time just to limit my losses if something went horribly wrong.
The thing is, to secure it well, locally, you have to do quite a lot. My wallet keys and wallet aren't even stored on a computer -- I've got them on three encrypted thumb drives, one in a safe at my house, one in a safe at my parent's house and one handy. I fire up a VM started from a checkpoint just after installation (after running updates) which itself is stored on an encrypted volume when I need to move money from my wallet to reduce the risk that my machine was compromised with something looking for those keys -- ready to swipe them on access[0]. My parents inherently trust the software and their computer to not become their enemy and wouldn't take even the most basic precautions around protecting their key from loss (Hi, son, I was wondering how to reset my password on my wallet; I forgot it) let alone protect their key from folks who write malware designed to steal it.
[0] All the while not being sure something exists out there for ETH, but knowing that if the price continues to go where it's going, it absolutely will.
Thank God, no. And, of course, there are plenty of safe options for storing Bitcoin. I don't own any Bitcoin (what little cryptocurrency I do own is all ETH), and while I did look at some of the HSMs out there for myself, at the time I looked, there weren't any that were designed around ETH (that I could find, anyway) and I felt pretty confident about my own ability to secure things with existing, open, technologies.
That said, even though there are plenty of options for securing BTC, there are exactly 0 options that my family would use over the convenience of Coinbase/a "service that looks like a bank" because they fully trust the entity involved. And if they didn't, they'd fully (incorrectly) trust their ability to keep their wallet safe on their own home computer that is protected by exactly nothing. Convincing them that they need to spend additional money to gain that security and accept with it the inconveniences that it introduces would be impossible. Never underestimate the power of "It won't happen to me".
They probably also think that lots of other valuable stuff is "safe on their own home computer that is protected by exactly nothing" :( On the plus side, though, updated Windows 10 PCs weren't vulnerable to WannaCry. And SSDs seem more reliable than HDDs.
I think many people are missing the inherit value of a decentralized currency. You trust your government today, and you have a stable currency. If that is not the case tomorrow, you will wish you held crypto.
Is it possible that the concept of "money" has been upgraded? That cryptocurrencies are simply better as a store of value than dollars, for reasons A through Z? For example, people don't like the costs and regulations associated with fiat currencies - therefore, crypto is better for them. It's like trying to ban alcohol or drugs - people still like them, so you can never ban them, no matter what the government wants. So crypto will never be banned (longterm).
It's still such early days in this area, if you are curious at all, buy some BTC and ETH and sit on it.
That sentence alone nicely illustrates why people loath bitcoin enthusiasts.
> people don't like the costs and regulations associated with fiat currencies
I have a savings account. It doesn't cost anything. The only regulation that matters to me is that it is insured against loss and theft.
> trying to ban alcohol or drugs - people still like them, so you can never ban them
Illegal drugs are banned. Hence illegal.
> no matter what the government wants.
Governments don't "want" things. People do–and elect governments to do it. The overwhelming majority is against legalising heroin. If you believe you can run a mainstream currency with the power requirements of a small country without and not be subject to government regulation, you are delusional.
Look: Nobody is currently using Bitcoin as a "store of value". Nobody but drug dealers is currently using Bitcoin as a transactional currency. The only reason anybody is buying bitcoin is speculation, or, if you will, FOMO. With transaction costs in the double digits, and a security story worse than leaving a bag of money on a public bus, Bitcoin has zero underlying value as anything but the air in a bubble.
Illegal drugs are banned, but anyone who wants them can still get them. The point is, what the government wants and what society wants don't need to be synced.
Your argument has been said when Bitcoin was $1, $10, $100, $100, $10,000. You will keep saying it at $100,000. And no one cares - the only way you can be proven right is if / when BTC goes to $0. And if it never does, you can keep saying the same old arguments, waiting patiently forever until it happens.
But the costs associated with Bitcoin transactions are massive compared to credit cards, and as far as regulations, Bitcoin’s policy-making is quite centralized within a few groups (big mining pool operators, mega-exchanges, Core developers). On top of that, the throughput is orders of magnitude less than the credit card networks. And it’s not all that anonymous, either.
The blockchain is a revolutionary technology, and I think one way or another it’ll change the world. But Bitcoin? I’m just not seeing it.
The first implementation of a revolutionary technology does not often look like the implementation that ultimately changes the world.
I think people forget that when they buy Bitcoin, they’re not betting on the usefulness of blockchains, they’re betting on this specific implementation of one.
It’s a little like buying a bunch of dot-com IPOs in 1998 because you’ve figured out that the Web is the future.
Your vision is right, but you’re still going to lose all that money.
My big issue with this is if the reference price is manipulated by exchanges (there is a lot of speculation about that exchanges aren't being honest with their trades) there is no way for the future to correct this. Shorting the future would do nothing. The future is a prediction on that settlement index and not the actual price of BTC. The usual move would be to take delivery and sell elsewhere or carry the underlying.
I really wish BTC wasnt financially settled. I have no trust in the current BTC exchanges. They really don't deserve it.