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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 d
by 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 agoYou 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.
- kgwgk 9y agoIf 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).
- jnordwick 9y agoIf 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.
- 0x445442 9y agoThe 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.
- kgwgk 9y agoShorting 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.
- NicoJuicy 9y agoThe meme of crypto is HODL. So yes, I wouldn't short it or borrow btc for USD and today in btc. Definitely not now