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Bitcoin Futures Could Open the Floodgates for Institutional Investors
- moonbug22 9y agoSnort.
- onewhonknocks 9y agoThis is a very interesting turn of events.
- ballenf 9y agoIn the context of futures being a way for a farmer to finance the expenses of growing a crop or raising a herd, isn't this a stretch of the use of the word "future". I get that the word means a lot more today than its origins would convey, but shouldn't the term used just be the generic "derivative" or "index"? Forgive my ignorance of the finance world, but it feels like they are stretching definitions in order to frame this as approaching crude oil or pork bellies when it's more of an options contract.
- lrm242 9y agoNo, they aren't. There are all sorts of futures contracts, and they are all derivatives and none are indexes themselves. There are equity index futures, single stock futures, foreign exchange futures, treasury futures, etc. Cash settlement vs the ability to take settlement in the physical underlying is where you might be getting confused, but they're all futures nonetheless.
- CyberDildonics 9y agoWhy do futures exist for something that can be settled in 30 minutes?
- random023987 9y ago> Why do futures exist for something that can be settled in 30 minutes? Because money. Or more specifically, someone is willing to sell these futures to someone who is willing to buy them.
- kolbe 9y agoBecause then money and commodity never actually have to exchange hands. If you trust the CME to guarantee all parts of the transaction, and if you have no use for the commodity beyond speculation, then why part with all that money and move around all those bitcoins?
- lordnacho 9y agoWith a future you can create negative exposure, aka being short. It's a lot more straightforward than finding borrow for it and arranging to pay interest and returning it after you're done.
- waynenilsen 9y agoLeverage
- ThrustVectoring 9y agoFor one thing, bitcoin miners would love to short the future price of bitcoin. They're spending dollars now to buy mining rigs, which make bitcoin later. They're exposed to the future price of BTC for whether or not this is profitable. With a short futures position on BTC, it turns uncertain profit into more certain profit.
- jeffwass 9y agoSuppose someone will pay you one bitcoin next week, as per some private agreement. For this discussion, let's entirely ignore credit risk (the risk this person doesn't pay) but consider market risk. Like it or not, you carry the risk of bitcoin fluctuations. You might be comfortable receiving $6400 for your bitcoin next week. But bitcoin is volatile. Maybe bitcoin jumps to $8000. But maybe it drops to $4000. If you're comfortable giving up the upside, for a chance to prevent that downside, this bitcoin future is for you. You enter a future contract where you agree to sell one bitcoin in one week at a price of $6400 (if that's the going one week forward rate). In one week, your person pays you the agreed bitcoin, which you then sell to the exchange and receive your $6400. Meanwhile, for that week you can sleep at night knowing that if the bitcoin market crashes, you still get your $6400. And if the market rallies to a higher price, well missing out on that rally was the cost of being able to sleep at night. This is what commodity futures were originally used for, eg farmers agreeing to sell their stocks at agreed rates without worrying about market fluctuations. Companies do this too, eg hedging their cost of fuel to a known quantity in line with expected consumption.
- lordnacho 9y ago"Future" basically just means a specific settlement date (and margined with variation, in contrast to a forward). Anything at all can be traded in such a way. What's useful about it is you are trading with the exchange, they take care of everyone's credit risk, hence they margin everyone. And they concentrate the interest in a monthly or quarterly date. > more of an options contract No, definitely not. An option contrast has asymmetric payoff, because options can be left unexercised. When you trade a future you are obliged to make the exchange at the appointed price and time.
- cwkoss 9y agoBitcoin Futures have been tried before, with little effect on institutional investors. Key point is that CME Group (Chicago Mercantile Exchange) will be offering them. Being able to transact Bitcoin derivates on a trusted derivatives exchange will be attractive to more conservative institutional investors.
- lrm242 9y agoThis is how any reasonable institution not 100% focused on cryptocurrencies will gain cryptocurrency exposure. The big reason is they are backed by CME clearing and settlement. It helps to significantly reduce the counter-party risk associated with other venues.
- jstanley 9y agoNote that storing bitcoin properly comes with no counterparty risk whatsoever. That's like 50% of the entire point of bitcoin!
- wmf 9y agoInstead you have lost password risk.
- tim333 9y agoAnd hacking risk. And insiders stealing them and claiming they've been hacked risk. And similar.
- grondilu 9y agoThe counterparty risk is not in the storage, but in the exchange. You always expose yourself to counterparty risk when you exchange currencies (even crypto ones).
- dharma1 9y agoNo counterparty risk on decentralised exchanges
- osullivj 9y agoA futures contract on a real exchange like the Merc is a big step forward for exchange members like tier one banks, and smaller trading shops that have access to futures via brokerage relationships. The article also mentions ETFs, which will give retail investors BTC exposure.
- tomatocracy 9y agoETFs are the reason this is a big thing. The CME contract enables ETFs with viable size and for both long and short BTC (otherwise they would only really be possible as long ETFs, although the ETF could be shorted itself, and long ETFs would have to own the underlying BTC). In turn, that gives retail speculators (it feels difficult to call them investors for BTC...) access to BTC, which is a significant pool of money.
- uberrr 9y agoCould these be shorted? It’s only a matter of time until one or more of the unregulated exchanges cuts and runs or gets shut down and seized.
- Sangermaine 9y agoOr "gets hacked" and all of the coins are "stolen".
- tmaic 9y agoThese will be derivatives, not actual bitcoins. When you enter a contract you will only care about the price level of the Bitcoin Reference Rate, the contracts aren't holding any actual bitcoins, so there is nothing to hack and steal.
- mediocrejoker 9y agoI'm not sure if that's accurate though. If a large quantity of coins disappeared, surely that would have ripple effects through to even the most convoluted derivatives?
- rb808 9y agoYes, by definition every future has the same number of longs as shorts.
- ThrustVectoring 9y agoYes. That's the entire point of having a futures market - generally, the producers of a commodity will be net short the futures contract in order to de-risk their productive investment. Buying a mining rig trades todays dollars for future BTC. Shorting a BTC futures trades future BTC for todays dollars.
- 6nf 9y agoYes you can short them. There's a twitter bot following the losses of those foolish enough to do so. https://twitter.com/BitmexRekt https://twitter.com/BitmexRekt
- geetfun 9y agoWow this is going to open up the casino to a lot of major players. I fear the hobbyist investor is going to get roasted. Anything that can be traded on such a scale will undoubtedly be manipulated.
- random023987 9y ago> Anything that can be traded on such a scale will undoubtedly be manipulated. Conversely, the efficient markets hypothesis implies that in time, the prices of eTulips will converge on the values of the underlying security. But you're right in that it will likely be preceded by an influx of new greater fools.
- wmf 9y agoOne could just as easily make the opposite argument; e.g. Bitfinex apparently allows wash trading while "legacy" exchanges like CME probably don't.
- chollida1 9y agoAgain the biggest issue is how to verify the integrity of the underlying instrument, in this case bitcoin. What the SEC was after when they denied the winklevoss ETF was a way to confirming that they could audit all bitcoin transactions on the applicable exchanges, and following from that, the identities of all the exchange participants. Here is the reference index that the CME is using http://www.cmegroup.com/trading/cf-bitcoin-reference-rate.html http://www.cmegroup.com/trading/cf-bitcoin-reference-rate.ht... and here is the methodology that they are using to calculate the bitcoin price. As far as I can see, they are accepting trade confirms from the following venues.... Bitfinex, Bitstamp, GDAX, itBit, Kraken and OKCoin.com http://www.cmegroup.com/trading/files/bitcoin-reference-rate-methodology.pdf http://www.cmegroup.com/trading/files/bitcoin-reference-rate... Interesting that these are cash settled vs being settled in bitcoin. I guess that speaks as to who they expect to use these instruments.
- andrewla 9y ago> What the SEC was after when they denied the winklevoss ETF was a way to confirming that they could audit all bitcoin transactions on the applicable exchanges, and following from that, the identities of all the exchange participants. I don't think that's accurate, unless you're using a strange sense of the word "audit". The SEC's criticism seemed mainly to focus on the fact that the exchanges lacked controls to prevent price manipulation, and lacked oversight by regulators (not just the SEC) to ensure those controls were in place and effective. The constituent exchanges are listed here [1], basically the list you posted without Bitfinex or OKCoin.com. > Interesting that these are cash settled vs being settled in bitcoin. I guess that speaks as to who they expect to use these instruments. This seems an odd decision to me as well, especially since Bitcoin is almost a textbook commodity. I guess they are afraid that there could be a short squeeze if the existing exchange can't handle a greatly increased volume, but trusting that the exchanges can provide sufficient liquidity is a requirement to use their pricing data as well, otherwise you can get manipulation on the other end. [1] http://www.cmegroup.com/education/brr-brti-constituent-exchanges-criteria.html http://www.cmegroup.com/education/brr-brti-constituent-excha...
- ttul 9y ago
- fspeech 9y agoInstitutionals use futures to hedge their other positions. What will they use bitcoin futures to hedge for? An unhedged future position is not an investment. It is a gamble.
- kolbe 9y agoThis is not the correct definition of an institutional investor. http://www.investopedia.com/terms/i/institutionalinvestor.asp http://www.investopedia.com/terms/i/institutionalinvestor.as...
- sgspace 9y agoBitcoin is a hedge against fiat and the fractional reserve banking system.
- matt4077 9y agoIt doesn't make sense for institutional investors to hedge against "fiat". Because the failure of the current financial system would be catastrophic event for any such investor, at which point his hedging wouldn't help. I. e. the exchange where these futures are traded would no longer be operational. There's a name for this effect which I've forgotten. But it can be seen, for example, in the markets ignoring the risk of nuclear war during the Cuban Missile Crisis. The reason is the same: there's no use in considering nuclear war in your decision-making, because you'd be dead anyway.
- Fomite 9y agoThis. If "fiat" collapses that's a catastrophe far beyond the level of "No worries, I have some bitcoin futures in an exchange." It's like saying bitcoin is a hedge against the end of the world.
- 627467 9y agocouldn't this be a hedge against ANY (but not all) failure of some financial system somewhere?
- 9y ago
- pasbesoin 9y agoFrom bubble to froth.
- preparat 9y agoWonder how they would deal with forks, if it's an issue at all.
- jeffwass 9y agoProbably not too differently from how equity exchange products deal with corporate events like mergers and spinoffs.
- ThrustVectoring 9y agoIt's cash settled based off the price of an index, which makes it easier. They just defer to the folks making the index. If it was physically settled you could squeeze the shorts by having a last-minute unilateral grant of a side-token to everyone who possesses the underlying. The shorts have to come up with the token or cover the contract - either way, you have people who are forced to buy it to cover contractual obligations, and you probably own the only exchange capable of making transactions with NewToken (and maybe also you pre-mined some of bonus tokens to sell?) When its cash settled, this is much less of an issue. No market? No market price, so it doesn't get included in constructing the index.
- eric_h 9y agoI just cashed out the last of my bitcoin. All in all turned a small (4 digit) profit with which I will buy myself a couple of toys. I'm sure I left cash on the table, but I was too late to the game to have really made a fortune on this stuff (curse my younger self for giving up on setting up a miner after a little difficulty ("it'll never be worth anything anyway", I said to myself), back when a cpu could still mine). Good luck to everyone still playing - I'll believe bitcoin is going somewhere when the majority of it's transaction volume isn't speculation, drug dealing or money laundering.
- ttul 9y agoThis. Like it or not, we are in for a crash followed by a long crawl back for cryptocoin investors. The tech is cool and useful, but not $6400/BTC useful just yet.
- dpandya 9y agoIf you're as confident on this as the comment suggests, you could purchase the appropriate futures with most of your net worth and make lots of money. If you don't want to do that, maybe it isn't quite as certain as you suggest.
- iamthirsty 9y agoI'm a huge proponent of putting your money where your mouth is, but staking most of your net worth against what still is a pretty manipulated market is just stupid and is a gamble no one needs to make.
- beepboopbeep 9y agouh, or you could be a reasonable human being and weigh the risks that you're willing to endure for a given return on an investment...
- fgonzag 9y ago"The market can stay irrational far longer than you can stay solvent"
- libertymcateer 9y agoBitcoin futures are regulated by the CTFC. http://www.morrisoncohen.com/siteFiles/files/For%20Blockchain%20a%20Coming%20Wave%20of%20Change%20-%20NLJ%20-%2010-01-17.pdf http://www.morrisoncohen.com/siteFiles/files/For%20Blockchai... It will be quite interesting to see how institutional investors and the CTFC come down on this whole phenomenon. I do not share the unbridled optimism of many of my peers.
- ThrustVectoring 9y agoIt's a good idea, IMO. There's a natural market here on both sides, between miners who have an economic interest in being short BTC futures, and institutional investors who want long exposure through a standardized exchanges and products that they are already allowed to use. And as a side bonus, this should significantly reduce volatility in the market.
- dogruck 9y agoNote that the Futures will settle in cash.
- rebuilder 9y agoThe article states the BTCUSD rate spiked over 5% after the announcement they mention. That kind of spike is fairly common for Bitcoin, and attributing it to news seems pretty arbitrary.
- paulpauper 9y agothe nice thing about bitcoin futures is no conatango, no risk of key loss/theft.
- pg_is_a_butt 9y agojust the risk of the real market conspiring against your futures market. you're all idiots.
- defgeneric 9y agoShouldn't the risk of key loss/theft mean the BTC futures will normally be in contango?
- partiallypro 9y agoThis will end in tears
- statoshi 9y ago... of the skeptics when they realize the opportunity they missed.
- dharma1 9y agoI dunno if this is good. Maybe for miners who want to hedge. But seeing how much bitcoin price reacts to news and how relatively easy it is to spread fake news, I think this just creates more incentives for market manipulation. It's pretty hard to manipulate commodity futures prices with fake news but crypto currency market trends are pure psychology
- ThrustVectoring 9y agoThat's kind of the advantage of making it easier for the professionals to participate - they have a tendency to react better to news and more accurately price things (since they make giant piles of money if they accurately price things that others mis-price). I suspect that bitcoin futures would damp the volatility in the bitcoin market.
- dharma1 9y agoIn theory yes, but how do you price bitcoin accurately even as a professional investor? You can't. There's no edge, aside from market manipulation with fake news, and maybe front running with insider news that might affect the price.
- ThrustVectoring 9y ago>how do you price bitcoin accurately even as a professional investor? You can arbitrage the price of mining equipment + electricity vs the cash value of shorting a bitcoin future. Mining rewards are approximately known along with the halving date, mining rigs have a known cost, electricity costs are predictable, etc. Every time BTC futures rise enough above your cost of mining on a risk-adjusted basis, sell more short and expand your mining operation. That's the fundamental pricing dynamic. At least on the short side. The long side makes zero goddamn sense to me, but at least people can place a maximum value based on the forecasted cost of mining and put serious downward pressure on prices that way.
- mathgenius 9y agoNah. CME futures are notorious for increasing volatility. See: the flash crash [1]. And: a bazillion other examples. These "professional" traders aren't playing any kind of fair game. [1] https://en.wikipedia.org/wiki/2010_Flash_Crash https://en.wikipedia.org/wiki/2010_Flash_Crash
- joejerryronnie 9y agoI'm curious if anyone here thinks the bay area housing market is a bubble but bitcoin is a solid investment.
- sheeshkebab 9y agoIt sounds like you do? Sell your expensive sf house and take your fdic insured money losing saving account and plow it into bitcoin - invest for the future! It’s all solid.
- nikolay 9y agoThanks, but no thanks! I'd keep as far away from this stinking pile as possible! It's 2017! We have instant bank transfers and everybody can get a free Square reader and accept payments. PayPal is not what used to be and you can accept global payments with no friction. It's time to end this nonsense, stop talking about Bitcoin, focus on the blockchain, and let it show its true colors when there are no disoriented people confusing blockchain with Bitcoin who keep buying fueled by their pathological greed. If I want to speculate, there's a more sophisticated method, but, wait, it requires a brain - the stock market! With Robinhood and the likes - it's scam-free and I don't rely on the Chinese miners or government for my fortune's security!
- revmoo 9y agoJanet Yellen alt spotted
- wolco 9y agoThe stock market over bitcoin? Bitcoin is up double the last 30 days. Timing is everything your opionion is dated or belongs in the future in the present bitcoin is a good investment
- JamesBarney 9y agoYou mean 30 day ago Bitcoin was a good investment. Who knows whether it's a good investment now.
- nikolay 9y agoIf you sell now, it was a good investment. If you hold, nobody knows (well, I do.)
- mirimir 9y agoHey, I earned most of my current Bitcoin at $200-$300. Some I'm selling, of course. But the rest, I'm OK with betting.
- 9y ago
- Top19 9y agoThis paper from the Journal of Economic Letters two years ago determined that “the fundamental value of Bitcoin is 0”: http://scholar.google.com/citations?user=DhMqG0YAAAAJ&hl=en http://scholar.google.com/citations?user=DhMqG0YAAAAJ&hl=en If you want to see the choice quote you’ll need to go to www.sci-hub.io.
- Double_a_92 9y agoThe fundamental value is the distrubuted and anonymous ledger.
- Animats 9y agoBitcoin's market cap is probably wildly exaggerated. The best evidence of this is the Winkelvii's attempt to start an ETF. That's a way for them to unload their Bitcoins, of which they have over 100,000. There's no market that could absorb over 100,000 Bitcoins and pay out dollars without crashing the price. Who's going to pay out $0.6 billion in cash?
- jacobush 9y agoSplitting hairs here but I'd argue market cap is very misunderstood. Take DASH - same market cap metric, but you have all these coins locked up in super nodes.
- brndnmtthws 9y agoThe 24h trading volume of Bitcoin is currently at around $2.8b, so I don't think you're necessarily right. There's been $2.8b of Bitcoin sold in the last 24h, and the price has gone up. You could probably sell that many coins over the course of a couple weeks without having much effect on the market.
- deleted 9y ago[deleted]