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We need a futures market for crypto currencies. It would massively aid in hedging and price discovery. It would be easier for the price to adjust down to since

We need a futures market for crypto currencies. It would massively aid in hedging and price discovery. It would be easier for the price to adjust down to since there would be an easy way to short them too.

kcanini 9y ago
Possibly dumb question: What is the point of a futures market for a currency? I understand why futures markets exist for e.g. oranges (seasonal production cycles) and jet fuel (to avoid storing a years' worth yourself). But currencies are available 24/7/365 and have zero storage cost.
- dfabulich 9y ago
  1) You may not be aware that there are futures markets for all fiat currencies, e.g. the USDX for dollars. 2) Currency futures markets exist to allow you to bet that the value of the currency will decrease, by offering to sell you the currency at price below the current market rate in the future. In markets where there's no easy/legal way to bet that prices will decrease, asset bubbles are common, as "bulls" bid up the price, and "bears" just sit on the outside waiting for the bubble to pop. If bears could bet that the value would decrease, this would lower the price of the asset today. In this way, price signaling can allow the market to reach an optimal shared opinion about the "true value" of an asset. There are a lot of cryptocurrency bears who think that the long-term value of Bitcoin and Ether are approximately zero, that cryptocurrencies are in an asset bubble, and that this is wasting valuable time and money that the economy should spend on other things. By betting against cryptocurrency, bears could help to end the bubble in a safer and slower way. (Or so they say. Sometimes future markets can exacerbate price instability when the whole market behaves irrationally.) (The other reason futures markets exist is to allow people holding the currency to reduce ("hedge") the risk that the value of the currency will decrease. Thus they can make small bets against the currency, and if it rises, they'll still make money, and if the value falls, well, at least they'll win their bet.)
  - kcanini 9y ago
    Example: 1 USD is currently worth 0.79 GBP. If I wanted to bet that the USD would decrease in value against the GBP, I could enter into a futures contract (assuming the existence of a wiling counterparty) to purchase 0.75 GBP for 1 USD at a date 3 months in the future. If I was right, and the exchange rate drops to 1 USD = 0.7 GBP, then I profit 0.75 - 0.7 = 0.05 GBP. Instead, I could have just bought the 0.79 GBP immediately and then waited 3 months, and then I would have profited even more: 0.79 - 0.7 = 0.09 GBP. What does the existence of the futures market allow me to do that I can't already do in this scenario? My point was that in cases where production is cyclical or storage fees are nonzero, it might be difficult/impossible to trade on the spot market, or it might be prohibitively expensive to hold the item yourself. But currencies don't have either of these problems.
    - asdfaoeu 9y ago
      What if you don't have any USD? You can also instead by 10 futures contracts and make 0.50 GBP. Additionally futures aren't just for "betting" they are also for offloading risk. For example a company might expect an sale in another currency and might want to "convert" that earlier to offload the risk of making another purchase in a different currency.
      - kcanini 9y ago
        I guess I'm assuming you can always borrow USD if you want to make this type of trade on the spot market without actually owning USD in the first place, or if you want leverage.
    - nivertech 9y ago
      1. What you describing is a forward contract, not futures. 2. Holding spot currency position is not "zero storage cost", you need to pay daily interest - futures has this built-in in their price. 3. Futures are leveraged 4. Futures contracts are standardized - which makes finding counterparty much easier and allow market makers. 5. Futures traded on regulated exchanges (CFTC in US), unlike spot FX - which is more similar to how crypto exchanges operate.
- bradleyjg 9y ago
  Suppose I have 1MM USD payment expected in six months and owe my vendor 1.3MM CAD the same day. If I have them, I could take other dollars and convert them to CAD at today's spot. I could wait six months and convert then. Either way I'm taking on currency risk. I can choose instead to offload that currency risk to a counterparty for a small fee. It's classic hedging.
  - kcanini 9y ago
    > I could take other dollars and convert them to CAD at today's spot. I could wait six months and convert then. Either way I'm taking on currency risk. I see how the second case (waiting six months to convert USD to CAD) involves currency risk. But I don't understand how the first case involves currency risk. If I converted some USD into 1.3MM CAD today, and then held it for six months before paying my vendor, what currency risk did I incur that is eliminated by the futures contract?
    - bboreham 9y ago
      If you exchange now, you risk the price could get better over six months and you missed out. An FX future has the same currency risk profile as exchanging now. What is different is you trade on margin, and you have interest rate risk in a different currency. People who actually want to fix an FX rate in the future would use a 'forward', simply a contract to exchange at a later date. Again no change in FX risk. The true hedge is an FX option, where you can lock in a price (for a fee) yet still back out if you want to.
- lordnacho 9y ago
  The futures market for anything (including FX) is a convenient way to get risk without doing daily settlements. You know what the cost of carry is up to the futures expiry date, so you use that (non arbitrage) to set the adjustment for the futures price. So then when you trade the future, you're not in need of settling some item (currency, bonds, cows) against some payment each day. Currencies are indeed available each day, and are easily settled each day, but there's a number of reasons why you might want the future: - If you settle each day, your account PnL depends on interest payments. With futures, it's just the difference between the prices traded. So easier to account for. - Futures tend to be cheap to trade. Depends on your agreements. You have to pay interest on one side and receive it on the other side if you settle currency. And guess what, your prime broker gives you a crap rate on both!
technotony 9y ago
You can short on Polinex and Bitfinex...
- jnordwick 9y ago
  How? What are the carry costs? This would essentially be a bitcoin loan - I've never heard of such a thing, but i don't follow them very much (I do work in finance and trading though). Literally, what is the bitcoin interest rate? Is there even enough volume ooh these lower tier exchanges to support shorting the spot on them? EDIT: i didn't find the interest rates but i did see that Bitfinex offers the ETH-BTC cross which is good so somebody can bet the relative value. I still think a futures market weighs be really useful for hedging purposes and reduced shorting fees and slippage.
  - technotony 9y ago
    Yeah, you can lend out your bitcoin. for a daily interest rate and set the loan length to between 2 and 60 days. Lenders principle is in theory protected by a margin account. Interest rate is between 0.1% and up per day, which probably reflects the risk. I believe market depth is about 4,000 btc, so enough for an amateaur to play but not a hedge fund.
    - jnordwick 9y ago
      So that means you are essentially having to go to the market at least every 2 months and pay the spread and tx costs to roll your position? And the way they describe how they automatically choose the loan with the lowest rate they could pick one where you need to return BTC in 2 days even. That sounds horrible.
      - joosters 9y ago
        Yes, even 'random' spikes and dips in obscure exchanges can force-close positions on some other exchanges. 'We use the average price of 5 difference exchanges to calculate the current BTC price' - then one of those random exchanges goes haywire and BTC trades near 0 on them for a few seconds. Ooops, the average BTC price just dropped 20% so we had to close your position due to lack of margin. Sorry! (This has happened several times in the past few months, for instance...)
verroq 9y ago
You can on bitmex.
Animats 9y ago
Where in the cryptocurrency world would you find a counterparty with enough financial strength to pay up when they lose?
- runeks 9y ago
  This can be solved through requiring collateral, and margin calls, which leads us to the real problem: cryptocurrencies are so volatile that too much collateral would be needed, and even then there'd be a rather large risk of default in case the market moves by too much.
- deleted 9y ago
  [deleted]
- jnordwick 9y ago
  In future markets every day your position is marked and your balance updated with your profit or loss. You have margin requirement and when you no longer have enough in your margin account your position is liquidated so you don't wind up losing more money than you had put in.
crypt1d 9y ago
Lykke comes to my mind with their LKK1Y coin: https://www.lykke.com/city/blog/what_is_lykke_forward https://www.lykke.com/city/blog/what_is_lykke_forward https://www.lykke.com/ https://www.lykke.com/ The original, LKK coin, is essentially a representation of the company's shares. LKK1Y is a derivative which you can stake and receive the same amount of LKK in 1 year time. Do note that as of now, Lykke wallet is unavailable in the US as they are still working out the regulations.

kcanini 9y ago

Possibly dumb question: What is the point of a futures market for a currency? I understand why futures markets exist for e.g. oranges (seasonal production cycles) and jet fuel (to avoid storing a years' worth yourself). But currencies are available 24/7/365 and have zero storage cost.

dfabulich 9y ago
1) You may not be aware that there are futures markets for all fiat currencies, e.g. the USDX for dollars. 2) Currency futures markets exist to allow you to bet that the value of the currency will decrease, by offering to sell you the currency at price below the current market rate in the future. In markets where there's no easy/legal way to bet that prices will decrease, asset bubbles are common, as "bulls" bid up the price, and "bears" just sit on the outside waiting for the bubble to pop. If bears could bet that the value would decrease, this would lower the price of the asset today. In this way, price signaling can allow the market to reach an optimal shared opinion about the "true value" of an asset. There are a lot of cryptocurrency bears who think that the long-term value of Bitcoin and Ether are approximately zero, that cryptocurrencies are in an asset bubble, and that this is wasting valuable time and money that the economy should spend on other things. By betting against cryptocurrency, bears could help to end the bubble in a safer and slower way. (Or so they say. Sometimes future markets can exacerbate price instability when the whole market behaves irrationally.) (The other reason futures markets exist is to allow people holding the currency to reduce ("hedge") the risk that the value of the currency will decrease. Thus they can make small bets against the currency, and if it rises, they'll still make money, and if the value falls, well, at least they'll win their bet.)
- kcanini 9y ago
  Example: 1 USD is currently worth 0.79 GBP. If I wanted to bet that the USD would decrease in value against the GBP, I could enter into a futures contract (assuming the existence of a wiling counterparty) to purchase 0.75 GBP for 1 USD at a date 3 months in the future. If I was right, and the exchange rate drops to 1 USD = 0.7 GBP, then I profit 0.75 - 0.7 = 0.05 GBP. Instead, I could have just bought the 0.79 GBP immediately and then waited 3 months, and then I would have profited even more: 0.79 - 0.7 = 0.09 GBP. What does the existence of the futures market allow me to do that I can't already do in this scenario? My point was that in cases where production is cyclical or storage fees are nonzero, it might be difficult/impossible to trade on the spot market, or it might be prohibitively expensive to hold the item yourself. But currencies don't have either of these problems.
  - asdfaoeu 9y ago
    What if you don't have any USD? You can also instead by 10 futures contracts and make 0.50 GBP. Additionally futures aren't just for "betting" they are also for offloading risk. For example a company might expect an sale in another currency and might want to "convert" that earlier to offload the risk of making another purchase in a different currency.
    - kcanini 9y ago
      I guess I'm assuming you can always borrow USD if you want to make this type of trade on the spot market without actually owning USD in the first place, or if you want leverage.
  - nivertech 9y ago
    1. What you describing is a forward contract, not futures. 2. Holding spot currency position is not "zero storage cost", you need to pay daily interest - futures has this built-in in their price. 3. Futures are leveraged 4. Futures contracts are standardized - which makes finding counterparty much easier and allow market makers. 5. Futures traded on regulated exchanges (CFTC in US), unlike spot FX - which is more similar to how crypto exchanges operate.
bradleyjg 9y ago
Suppose I have 1MM USD payment expected in six months and owe my vendor 1.3MM CAD the same day. If I have them, I could take other dollars and convert them to CAD at today's spot. I could wait six months and convert then. Either way I'm taking on currency risk. I can choose instead to offload that currency risk to a counterparty for a small fee. It's classic hedging.
- kcanini 9y ago
  > I could take other dollars and convert them to CAD at today's spot. I could wait six months and convert then. Either way I'm taking on currency risk. I see how the second case (waiting six months to convert USD to CAD) involves currency risk. But I don't understand how the first case involves currency risk. If I converted some USD into 1.3MM CAD today, and then held it for six months before paying my vendor, what currency risk did I incur that is eliminated by the futures contract?
  - bboreham 9y ago
    If you exchange now, you risk the price could get better over six months and you missed out. An FX future has the same currency risk profile as exchanging now. What is different is you trade on margin, and you have interest rate risk in a different currency. People who actually want to fix an FX rate in the future would use a 'forward', simply a contract to exchange at a later date. Again no change in FX risk. The true hedge is an FX option, where you can lock in a price (for a fee) yet still back out if you want to.
lordnacho 9y ago
The futures market for anything (including FX) is a convenient way to get risk without doing daily settlements. You know what the cost of carry is up to the futures expiry date, so you use that (non arbitrage) to set the adjustment for the futures price. So then when you trade the future, you're not in need of settling some item (currency, bonds, cows) against some payment each day. Currencies are indeed available each day, and are easily settled each day, but there's a number of reasons why you might want the future: - If you settle each day, your account PnL depends on interest payments. With futures, it's just the difference between the prices traded. So easier to account for. - Futures tend to be cheap to trade. Depends on your agreements. You have to pay interest on one side and receive it on the other side if you settle currency. And guess what, your prime broker gives you a crap rate on both!

technotony 9y ago

You can short on Polinex and Bitfinex...

jnordwick 9y ago
How? What are the carry costs? This would essentially be a bitcoin loan - I've never heard of such a thing, but i don't follow them very much (I do work in finance and trading though). Literally, what is the bitcoin interest rate? Is there even enough volume ooh these lower tier exchanges to support shorting the spot on them? EDIT: i didn't find the interest rates but i did see that Bitfinex offers the ETH-BTC cross which is good so somebody can bet the relative value. I still think a futures market weighs be really useful for hedging purposes and reduced shorting fees and slippage.
- technotony 9y ago
  Yeah, you can lend out your bitcoin. for a daily interest rate and set the loan length to between 2 and 60 days. Lenders principle is in theory protected by a margin account. Interest rate is between 0.1% and up per day, which probably reflects the risk. I believe market depth is about 4,000 btc, so enough for an amateaur to play but not a hedge fund.
  - jnordwick 9y ago
    So that means you are essentially having to go to the market at least every 2 months and pay the spread and tx costs to roll your position? And the way they describe how they automatically choose the loan with the lowest rate they could pick one where you need to return BTC in 2 days even. That sounds horrible.
    - joosters 9y ago
      Yes, even 'random' spikes and dips in obscure exchanges can force-close positions on some other exchanges. 'We use the average price of 5 difference exchanges to calculate the current BTC price' - then one of those random exchanges goes haywire and BTC trades near 0 on them for a few seconds. Ooops, the average BTC price just dropped 20% so we had to close your position due to lack of margin. Sorry! (This has happened several times in the past few months, for instance...)

verroq 9y ago

You can on bitmex.

Animats 9y ago

Where in the cryptocurrency world would you find a counterparty with enough financial strength to pay up when they lose?

runeks 9y ago
This can be solved through requiring collateral, and margin calls, which leads us to the real problem: cryptocurrencies are so volatile that too much collateral would be needed, and even then there'd be a rather large risk of default in case the market moves by too much.
deleted 9y ago
[deleted]
jnordwick 9y ago
In future markets every day your position is marked and your balance updated with your profit or loss. You have margin requirement and when you no longer have enough in your margin account your position is liquidated so you don't wind up losing more money than you had put in.

crypt1d 9y ago

Lykke comes to my mind with their LKK1Y coin: https://www.lykke.com/city/blog/what_is_lykke_forward https://www.lykke.com/city/blog/what_is_lykke_forward https://www.lykke.com/ https://www.lykke.com/ The original, LKK coin, is essentially a representation of the company's shares. LKK1Y is a derivative which you can stake and receive the same amount of LKK in 1 year time. Do note that as of now, Lykke wallet is unavailable in the US as they are still working out the regulations.