4 ms·

Can you do an "Explain it like I'm 5" of this? I don't doubt you but I'm struggling to make the connection. Will futures affect the pricing of the underlying as

by lbotos 9y ago

Can you do an "Explain it like I'm 5" of this? I don't doubt you but I'm struggling to make the connection. Will futures affect the pricing of the underlying asset? (I don't think so?) I think you are saying "futures reduce volatility for the trader" but I'm not sure.

cm2187 9y ago
It allows participants to short and therefore should allow more balanced flows. However one needs some pretty steel-made cojones to short a bubble....
- jjxw 9y ago
  More specifically, it allows one to short with limited downside. There are some exchanges that provide naked short positions in Bitcoin, but those have theoretic infinite downside and your broker will force you to liquidate at a loss at a certain point. With futures, however, you can put together positions that will provide a known limit on your downside for short positions. This provides a more appealing avenue for shorts to get in with much less risk.
  - cm2187 9y ago
    I am not sure I get how the risk is limited with a future. If the price goes to $1m when you traded at $16,000, you will have to make a $984,000 margin call payment (+margin).
  - kgwgk 9y ago
    With a short position using futures you will also be forced to liquidate at a loss at a certain point. It’s not really different from shorting BTC.
sdljfslkjfdsj 9y ago
Also the CME & CBOE bitcoin contracts like many other futures commodities allow "spread" trading across duration. This has a dampening affect as well. In a lot of commodities spread trading volume exceeds that of the outright.
CryptoPunk 9y ago
It helps price in future price shocks, and adds liquidity, which has a known dampening effect on volatility. With respect to the latter, my own personal theory for why this is is that more liquidity means more individuals actively trading the asset, and that translates to more non-correlating factors affecting the price. This makes it less likely that a shock somewhere in the economy will have a significant impact on the price. Modern economic scholarship properly offers a better explanation.

by lbotos 9y ago

cm2187 9y ago

It allows participants to short and therefore should allow more balanced flows. However one needs some pretty steel-made cojones to short a bubble....

jjxw 9y ago
More specifically, it allows one to short with limited downside. There are some exchanges that provide naked short positions in Bitcoin, but those have theoretic infinite downside and your broker will force you to liquidate at a loss at a certain point. With futures, however, you can put together positions that will provide a known limit on your downside for short positions. This provides a more appealing avenue for shorts to get in with much less risk.
- cm2187 9y ago
  I am not sure I get how the risk is limited with a future. If the price goes to $1m when you traded at $16,000, you will have to make a $984,000 margin call payment (+margin).
- kgwgk 9y ago
  With a short position using futures you will also be forced to liquidate at a loss at a certain point. It’s not really different from shorting BTC.

sdljfslkjfdsj 9y ago

Also the CME & CBOE bitcoin contracts like many other futures commodities allow "spread" trading across duration. This has a dampening affect as well. In a lot of commodities spread trading volume exceeds that of the outright.

CryptoPunk 9y ago

It helps price in future price shocks, and adds liquidity, which has a known dampening effect on volatility. With respect to the latter, my own personal theory for why this is is that more liquidity means more individuals actively trading the asset, and that translates to more non-correlating factors affecting the price. This makes it less likely that a shock somewhere in the economy will have a significant impact on the price. Modern economic scholarship properly offers a better explanation.