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How can this ever become an efficient market unless CME accepts BTC as collateral? If I sell futures contracts against 10 BTC, and I have 10 BTC in my Bitcoin
by runeks 9y ago
How can this ever become an efficient market unless CME accepts BTC as collateral?
If I sell futures contracts against 10 BTC, and I have 10 BTC in my Bitcoin wallet, I’m fully hedged, and I take no risks (provided the wallet in question is sufficiently secure).
If CME requires USD as collateral, how would I hedge my position? If the BTCUSD price rises 10%, I can’t sell my BTC for USD (to use as collateral) because then I’d expose myself to further price increases before expiration.
Unless I’m missing something, this will become an inefficient market, bottlenecked by the ability of contract sellers to come up with USD collateral.
A solution could be to collect a Bitcoin public key for contract buyers, and require sellers to send the BTC amount covered by the sold contracts to a "collateral BTC address" which can be redeemed in two of the following ways a) by the contract seller, e.g., 7 days after expiration of the contract b) by the contract buyer+CME (2-of-2 multi-signature) after expiration of the contract. CME would keep the USD proceeds, from selling the contract, in the seller's account at the CME. If the Bitcoin USD settlement price doesn't rise to more than the contract selling price, CME would simply transfer the settlement price USD amount from the contract seller's to the buyer's account. If the price rises a lot, the buyer of the contract would be able to (by CME providing a signature as well) redeem the bitcoins sitting at the "collateral BTC address", and sell the bitcoins at the current market price (which the contract buyer would have 7 days to do before the contract seller can redeem the bitcoins himself).
This way, CME doesn't store any bitcoins themselves, and contract buyers are responsible for keeping their own private keys safe (optimally, private keys should be generated on an offline device, and the public key safely transferred to an online computer). In order to steal BTC collateral, an attacker would have to steal both the contract buyer's and CME's private key.
- malloryerik 9y agoYou simply cover your futures position before expiration (buy as many contracts as you'd previously sold). At the same time, you can sell your BTC for USD. In futures markets, almost no one takes delivery, but instead they close ("cover") their positions before expiration. For example, airlines use heating oil contracts as proxies for jet fuel, because they are similar products whose prices move together. But airlines will never but heating oil on the futures markets to put in their Boeings and Airbusses.
- beagle3 9y agoVIX futures exist even though there is no underlying vix instrument to be bought. Studying how that works would teach you everything you need to know.
- scott00 9y agoWhat you're asking, in typical futures terminology(1), is how the futures market can function if futures positions and spot/physical positions are not cross-margined. This is actually typical in commodities futures. The same issues apply to crude oil and corn futures (physical settlement) and live hog futures (financial settlement). So how does the market function? If you're in the business of cash and carry arbitrage, either you have a lot of money, or you borrow it. At scale these types of strategies require a lot of capital to purchase the spot side, so a relationship with a lender is important even without the margin. The lender knows about both sides of the trade, so you can generally get good terms. And your margin balance pays interest, so the extra borrowing to cover the margin doesn't cost you that much. It is a real cost of doing business though, which is why margins are generally so low/allowed leverage is so high in futures world compared to securities. Should be interesting to see how they margin the bitcoin futures, because bitcoins are an order of magnitude more volatile than most other products. (1) The money you post to a futures clearing firm to guarantee against default is called either margin or a performance bond. Same concept as collateral, but the word collateral is usually only used in the context of guaranteeing payment of a debt.