3 ms·

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.

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)

mdip 9y ago
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?
- superbrama 9y ago
  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

mdip 9y ago

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?

superbrama 9y ago
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