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Can’t really wrap my head around the rise of BTC in futures trading, as they are all cash settled. In other words, pure betting and gambling with the futures, a

Can’t really wrap my head around the rise of BTC in futures trading, as they are all cash settled. In other words, pure betting and gambling with the futures, as they really do not touch the underlying BTC. I guess, just a regular day in the massively manipulated crypto currency world...

module0000 9y ago
It’s about risk management. The highest volume futures contracts are cash settled as well(ES, NQ, ZB, 6E’s). Example usage 1: you may want to own BTC and de-risk before economic events by hedging <x>% short BTC contracts.
- kgwgk 9y ago
  As if there was any link between BTC and economic events...
  - tehlike 9y ago
    was this a /s? IF it's not: With the current HODL mentality, you can imagine the bitcoin price go even higher. I wish the same HODL'ers were around in 2008, things would have been much different. "Buy the dips" is the best investment strategy that became mainstream thanks to bitcoin.
    - ryanwaggoner 9y ago
      Wait, I’m sorry, are you claiming that Bitcoin HODL’ers gave us the ‘buy the dips’ strategy? :)
      - tehlike 9y ago
        No, i said they made it mainstream, to the guy who had 500$ as investment.
  - module0000 9y ago
    There is a link between all currencies with value and major economic events. FOMC minutes, FOMC rate decisions, GDP, NFP... just to name a few. Look at your BTC quotes at the timeframes those events are released to see for yourself.
camillomiller 9y ago
Crypto might even be manipulated, but in this case what’s the issue? I don’t get your logic. Some independent financial entity decides to start trading futures on horse manure. That makes horse manure a heavily manipulated underlying financial product?
- gchokov 9y ago
  Well. You will see what manipulation means when the first contracts are about the expire!
  - camillomiller 9y ago
    Mid-january then?
    - gchokov 9y ago
      yes
- IncRnd 9y ago
  > That makes horse manure a heavily manipulated underlying financial product? Yes. You will find people who use their fields of cows to pass off excrement as horse manure, injecting various gasses into the manure to pass excrement-inspections. You will also find actual owners of horses who discard half their horse manure.
sliverstorm 9y ago
Just the next step from the Bitcoin economy, to the Bitcoin Standard economy, to the eventual Bitcoin Fiat economy. Seriously, the Lightning network looks a lot like the old Gold Standard, and the arc of Bitcoin seems to be reinventing modern currency, so I'm trying to figure out what's next.
- isoprophlex 9y ago
  Fort Knox storing paper BTC wallets instead of gold?
- JanSt 9y ago
  To me, the Lightning network looks like a terrible idea. It achieves nothing that an increased blocksize would not have done on-chain yet wraps a faster-layer around the slower, deliberately crippled (1MB) blockchain and does require multi-hop liquidity that must be provided by interested parties. My understanding would be that the slower layer (like TCP) would be stacked on the faster layer (like IP). The lightning network seems all wrong to me. If the Lightning network is so great, why do we need a blockchain at all? If not, why not just increase the blocksize? It achieves nothing that couldn't be done on-chain. There have been successful tests of blocksizes of up to 1 GB or 1000x the current size. Even getting it up to a small multiple of the current size would dramatically cut transaction costs and waiting times.
  - raverbashing 9y ago
    My opinion exactly It's not a "terrible idea" it is what should have existed in the first place in the oficial blockchain They're just adding a 2nd layer on top, calling it official and then saying "bitcoin is working"
    - homakov 9y ago
      It should _have_ existed, but the idea came around only about 2015? It's evolving slowly. But if it were "built-in" would be a lot better of course.
  - 9y ago
gibybo 9y ago
The markets are not as independent as they might seem. If the futures market gets ahead or behind of the other BTC markets, it creates opportunities for arbitragers to profit from the difference which has the effect of reducing the gap. It doesn't matter that they are cash-settled. For example, if lots of money start pouring into Bitcoin futures, the futures price will rise above the price on BTC exchanges. It will then be profitable to sell the futures while buying Bitcoin on the exchanges, which drives the price of Bitcoin up on the exchanges. When the future matures, you just sell the Bitcoin on the exchange and pay your cash-settlement on the future for a guaranteed profit.
- gchokov 9y ago
  Excellent explanation - thank you.
- pash 9y ago
  More precisely, it is possible to replicate the final value of a futures contract (on Bitcoin or any other asset) up front, by trading in the spot market, even though a futures contract’s payoff is uncertain until it expires. Whatever the future’s value ends up being at its expiry, you can put together in advance a portfolio of holdings that will have the same value simply by borrowing a certain amount of cash and using it to buy in the spot market a corresponding amount of the asset on which the futures contract is written; if you do this, the value of your holdings in cash (after paying interest on your borrowings) and in the asset are guaranteed exactly to equal the value of the futures contract at expiry, no matter what price the underlying asset ends up trading at then. So if there is any deviation in the value of the futures contract (at any point in its lifetime) from the aggregate value of the cash and assets in the portfolio that replicates its final value, then there is an opportunity for a pure arbitrage. Consequently trading by arbitrageurs bounds futures prices in a tight range determined by the variables that set the cost of putting together this replicating portfolio: the price of the underlying asset, the interest rate on cash and the yield on the asset (if any), the time until the maturity of the futures contract, and cost of transacting in these markets. This arbitrage relationship is about as hard they get, so trading futures is tantamount to trading the underlying asset itself, since changes in price in the futures market will be translated directly via arbitrage into changes in price in the spot market for the underlying asset, and vice versa.
emerged 9y ago
My read is that futures trading legitimizes Bitcoin, perceptually at least signaling mainstream financial adoption of Bitcoin. I'm sure that read is only one of the myriad of subjective factors involved (let's all agree that Bitcoin rises and falls in clouds of collective subjective perception), but I think it may be the dominant one.
- FireBeyond 9y ago
  I'd say the dominant factor is "the sheer number of exchanges that have varying degrees of resistance, from mild to total, of converting BTC to USD" ... Be they delays on withdrawal, explicit, or just ghosting. Be they unrealistic minimums (Bitfinex will not process such a transaction for >250BTC, $4.5M or so at today's rates). Be they whatever flavor excuse-of-the-day. Some exchanges need to learn to walk before they run.
devit 9y ago
As far as I can tell it's just a way to outsource holding the BTC. A BTC future can be perfectly hedged by taking a loan until the settlement date and using it to buy 1 BTC, holding it until settlement and then selling, so that's probably what the counterpart selling the future is doing.
- vasilipupkin 9y ago
  Not quite, since futures are marked to market every night, there is additinal cash flow relative to your scenario
- ithinkinstereo 9y ago
  As others have mentioned, contracts are marked-to-market on a daily basis, which impacts the margin needed to hold the contract. With wide price swings, this can force you to close your position before it settles in order to meet margin, especially if you're trading with leverage. CBOE also has a really high margin requirement (I think 40%+), so the capital costs to play are quite high here.
olalonde 9y ago
https://news.ycombinator.com/item?id=4693920 https://news.ycombinator.com/item?id=4693920
capex 9y ago
Or, just a regular day in the massively manipulated futures trading market...
delhanty 9y ago
Randy Mitterling, Nassim Taleb, Chris Cook appear to agree with you. [1] So maybe that's the way it is - Bitcoin futures the biggest crypto ponzi scheme yet? [1] https://twitter.com/nntaleb/status/939852491130396673 https://twitter.com/nntaleb/status/939852491130396673
hanzulrich 9y ago
It’s so weird, people are treating it like a share instead of a currency

module0000 9y ago

It’s about risk management. The highest volume futures contracts are cash settled as well(ES, NQ, ZB, 6E’s). Example usage 1: you may want to own BTC and de-risk before economic events by hedging <x>% short BTC contracts.

kgwgk 9y ago
As if there was any link between BTC and economic events...
- tehlike 9y ago
  was this a /s? IF it's not: With the current HODL mentality, you can imagine the bitcoin price go even higher. I wish the same HODL'ers were around in 2008, things would have been much different. "Buy the dips" is the best investment strategy that became mainstream thanks to bitcoin.
  - ryanwaggoner 9y ago
    Wait, I’m sorry, are you claiming that Bitcoin HODL’ers gave us the ‘buy the dips’ strategy? :)
    - tehlike 9y ago
      No, i said they made it mainstream, to the guy who had 500$ as investment.
- module0000 9y ago
  There is a link between all currencies with value and major economic events. FOMC minutes, FOMC rate decisions, GDP, NFP... just to name a few. Look at your BTC quotes at the timeframes those events are released to see for yourself.

camillomiller 9y ago

Crypto might even be manipulated, but in this case what’s the issue? I don’t get your logic. Some independent financial entity decides to start trading futures on horse manure. That makes horse manure a heavily manipulated underlying financial product?

gchokov 9y ago
Well. You will see what manipulation means when the first contracts are about the expire!
- camillomiller 9y ago
  Mid-january then?
  - gchokov 9y ago
    yes
IncRnd 9y ago
> That makes horse manure a heavily manipulated underlying financial product? Yes. You will find people who use their fields of cows to pass off excrement as horse manure, injecting various gasses into the manure to pass excrement-inspections. You will also find actual owners of horses who discard half their horse manure.

sliverstorm 9y ago

Just the next step from the Bitcoin economy, to the Bitcoin Standard economy, to the eventual Bitcoin Fiat economy. Seriously, the Lightning network looks a lot like the old Gold Standard, and the arc of Bitcoin seems to be reinventing modern currency, so I'm trying to figure out what's next.

isoprophlex 9y ago
Fort Knox storing paper BTC wallets instead of gold?
JanSt 9y ago
To me, the Lightning network looks like a terrible idea. It achieves nothing that an increased blocksize would not have done on-chain yet wraps a faster-layer around the slower, deliberately crippled (1MB) blockchain and does require multi-hop liquidity that must be provided by interested parties. My understanding would be that the slower layer (like TCP) would be stacked on the faster layer (like IP). The lightning network seems all wrong to me. If the Lightning network is so great, why do we need a blockchain at all? If not, why not just increase the blocksize? It achieves nothing that couldn't be done on-chain. There have been successful tests of blocksizes of up to 1 GB or 1000x the current size. Even getting it up to a small multiple of the current size would dramatically cut transaction costs and waiting times.
- raverbashing 9y ago
  My opinion exactly It's not a "terrible idea" it is what should have existed in the first place in the oficial blockchain They're just adding a 2nd layer on top, calling it official and then saying "bitcoin is working"
  - homakov 9y ago
    It should _have_ existed, but the idea came around only about 2015? It's evolving slowly. But if it were "built-in" would be a lot better of course.
- 9y ago

gibybo 9y ago

The markets are not as independent as they might seem. If the futures market gets ahead or behind of the other BTC markets, it creates opportunities for arbitragers to profit from the difference which has the effect of reducing the gap. It doesn't matter that they are cash-settled. For example, if lots of money start pouring into Bitcoin futures, the futures price will rise above the price on BTC exchanges. It will then be profitable to sell the futures while buying Bitcoin on the exchanges, which drives the price of Bitcoin up on the exchanges. When the future matures, you just sell the Bitcoin on the exchange and pay your cash-settlement on the future for a guaranteed profit.

gchokov 9y ago
Excellent explanation - thank you.
pash 9y ago
More precisely, it is possible to replicate the final value of a futures contract (on Bitcoin or any other asset) up front, by trading in the spot market, even though a futures contract’s payoff is uncertain until it expires. Whatever the future’s value ends up being at its expiry, you can put together in advance a portfolio of holdings that will have the same value simply by borrowing a certain amount of cash and using it to buy in the spot market a corresponding amount of the asset on which the futures contract is written; if you do this, the value of your holdings in cash (after paying interest on your borrowings) and in the asset are guaranteed exactly to equal the value of the futures contract at expiry, no matter what price the underlying asset ends up trading at then. So if there is any deviation in the value of the futures contract (at any point in its lifetime) from the aggregate value of the cash and assets in the portfolio that replicates its final value, then there is an opportunity for a pure arbitrage. Consequently trading by arbitrageurs bounds futures prices in a tight range determined by the variables that set the cost of putting together this replicating portfolio: the price of the underlying asset, the interest rate on cash and the yield on the asset (if any), the time until the maturity of the futures contract, and cost of transacting in these markets. This arbitrage relationship is about as hard they get, so trading futures is tantamount to trading the underlying asset itself, since changes in price in the futures market will be translated directly via arbitrage into changes in price in the spot market for the underlying asset, and vice versa.

emerged 9y ago

My read is that futures trading legitimizes Bitcoin, perceptually at least signaling mainstream financial adoption of Bitcoin. I'm sure that read is only one of the myriad of subjective factors involved (let's all agree that Bitcoin rises and falls in clouds of collective subjective perception), but I think it may be the dominant one.

FireBeyond 9y ago
I'd say the dominant factor is "the sheer number of exchanges that have varying degrees of resistance, from mild to total, of converting BTC to USD" ... Be they delays on withdrawal, explicit, or just ghosting. Be they unrealistic minimums (Bitfinex will not process such a transaction for >250BTC, $4.5M or so at today's rates). Be they whatever flavor excuse-of-the-day. Some exchanges need to learn to walk before they run.

devit 9y ago

As far as I can tell it's just a way to outsource holding the BTC. A BTC future can be perfectly hedged by taking a loan until the settlement date and using it to buy 1 BTC, holding it until settlement and then selling, so that's probably what the counterpart selling the future is doing.

vasilipupkin 9y ago
Not quite, since futures are marked to market every night, there is additinal cash flow relative to your scenario
ithinkinstereo 9y ago
As others have mentioned, contracts are marked-to-market on a daily basis, which impacts the margin needed to hold the contract. With wide price swings, this can force you to close your position before it settles in order to meet margin, especially if you're trading with leverage. CBOE also has a really high margin requirement (I think 40%+), so the capital costs to play are quite high here.

olalonde 9y ago

https://news.ycombinator.com/item?id=4693920 https://news.ycombinator.com/item?id=4693920

capex 9y ago

Or, just a regular day in the massively manipulated futures trading market...

delhanty 9y ago

Randy Mitterling, Nassim Taleb, Chris Cook appear to agree with you. [1] So maybe that's the way it is - Bitcoin futures the biggest crypto ponzi scheme yet? [1] https://twitter.com/nntaleb/status/939852491130396673 https://twitter.com/nntaleb/status/939852491130396673

hanzulrich 9y ago

It’s so weird, people are treating it like a share instead of a currency