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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

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.

derefr 9y ago
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.
- malloryerik 9y ago
  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.
  - kgwgk 9y ago
    > I'm personally uneasy with long-only futures funds, because it does seem that they might be able to distort the market. What do you mean? It´s not just that there is an ability to short, each contract has necessarily someone standing at each side.
    - malloryerik 9y ago
      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.
      - kgwgk 9y ago
        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.
  - NicoJuicy 9y ago
    I wouldn't short crypto, ever.
    - malloryerik 9y ago
      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.
      - kgwgk 9y ago
        > So if you own 5 BTC, you can short one BTC futures contract and lock in your current value. Wouldn’t it be much easier to sell?
        malloryerik 9y ago
        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.
- tome 9y ago
  > Harold the wheat farmer does buy wheat futures Presumably you mean he sells wheat futures.

derefr 9y ago

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.

malloryerik 9y ago
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.
- kgwgk 9y ago
  > I'm personally uneasy with long-only futures funds, because it does seem that they might be able to distort the market. What do you mean? It´s not just that there is an ability to short, each contract has necessarily someone standing at each side.
  - malloryerik 9y ago
    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.
    - kgwgk 9y ago
      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.
- NicoJuicy 9y ago
  I wouldn't short crypto, ever.
  - malloryerik 9y ago
    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.
    - kgwgk 9y ago
      > So if you own 5 BTC, you can short one BTC futures contract and lock in your current value. Wouldn’t it be much easier to sell?
      - malloryerik 9y ago
        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.
tome 9y ago
> Harold the wheat farmer does buy wheat futures Presumably you mean he sells wheat futures.