10 ms·

How Futures Trading Changed Bitcoin Prices

99 points by Spellman 8y ago

Moral_ 8y ago
What is this guy talking about (from the article): For example, they could sell a promise to deliver a bitcoin in a month’s time at a lower price than the current spot price and hope to buy a bitcoin during the month at an even lower price to make a profit. All BTC futures contracts are cash settled, there is no underlying asset being exchanged.
- jonknee 8y ago
  It could be more clear, but the strategy is the same. Sell a contract now and hope to buy it back cheaper in the future. It doesn't matter too much how it's settled.
  - tcbawo 8y ago
    The problem is that margin requirements are extremely high. So people are unlikely to tie up that much capital. But more appropriately the market can stay irrational longer than you can stay solvent.
    - jonknee 8y ago
      High margin might tamp demand for the Coinbase crowd, but I don't think it matters a ton to the big players who wanted to be able to short BTC. The futures market isn't a place most retail investors should be anyway.
      - tcbawo 8y ago
        The big players will put their money where they get the best return. They're not going to leave much money sitting in a margin account long term -- the potential relative gain is too a small.
  - JackFr 8y ago
    > It doesn't matter too much how it's settled. It matters very much how it is settled. Right now BTC drives the price of the future, but there isn't a mechanism for the price of the future to pressure the price of BTC.
    - jonknee 8y ago
      You don't have to play in arena one or the other. You can say, hedge a long BTC position by selling futures contracts. Or if the markets get out of balance you can buy in one and sell in the other until they come into sync. If you sell a bunch of over priced futures you will want to buy a bunch of BTC to balance the book and that will move the price of BTC.
      - JackFr 8y ago
        But if I have an unhedged futures position and I don’t buy or sell BTC — and because it’s cash settled, I never have to — I can’t directly affect the price of BTC.
        jonknee 8y ago
        You're buying or selling the future position with another party and cannot control what they are doing. Most futures are cash settled and they affect markets all the same. Nearly $200b worth of S&P 500 E-Mini contracts traded today and not a single share of stock will be directly involved in those contracts. But you better believe they move the market (just watch what happens when a monster ES order hits the tape).
- empath75 8y ago
  If you want exposure to bitcoin prices without having the risk of leaving bitcoins on an exchange (or gasp, holding them yourself), then futures are an alternative. If people are buying exposure through futures instead of buying bitcoins, that's going to reduce demand and the price.
ataturk 8y ago
I still can't get my head around how people would want to buy futures on total garbage. I should take a shit in a pail and sell futures on it, apparently.
usgroup 8y ago
TLDR: Bitcoin futures enabled short-selling which puts downward pressure on Bitcoin prices.
- DidISayTooMuch 8y ago
  That was very a concise TLDR. Thank you.
- marshray 8y ago
  For every short, there's a long.
  - jaxytee 8y ago
    Long, but at what price?
    - marshray 8y ago
      The buyer pays the exact same price as matched to the seller, plus some tiny fees for the exchange and clearing.
- jraines 8y ago
  CME and CBOE volume paled (and still pales) in comparison to Bitmex, where traders can and did short Bitcoin well before the regulated markets launched.
  - deleted 8y ago
    [deleted]
- JackFr 8y ago
  But it didn't actually enable short selling, it created a USD-settled market for betting on the price of Bitcoin, which is a very different thing. The article is simply wrong.
craigc 8y ago
I don’t know why people are still surprised by this. There are a lot of people in powerful places that want Bitcoin to fail and die. Futures markets introduced a regulated way for them to make that happen. Buy up a ton of Bitcoin during the lead up to futures trading, then short Bitcoin on the futures market while market selling thousands of the cheaply acquired Bitcoin on spot exchanges. You succeed in lowering the price of Bitcoin, killing the public’s perception of crypto currencies, scaring away retail investors, and you make a killing in the process. JPMorgan has been using futures markets to manipulate Gold and Silver spot prices for years while also accumulating huge amounts. Look at an early article that was published prior to the launch: https://www.coindesk.com/cme-groups-leo-melamed-well-tame-bitcoin/ https://www.coindesk.com/cme-groups-leo-melamed-well-tame-bi... It was all planned ahead of time for Wall Street to get maximum profit at the expense of regular people. What else is new.
- earthtolazlo 8y ago
  It’s a good thing that Bitcoin’s inherent scalability and utility as a currency makes it resistant to such manipulation.
  - arisAlexis 8y ago
    the manipulation resistance comes from decentralization. the USD price pair is irrelevant in such a scenario as commonly said 1 btc is 1 btc. If we want to look at the price pair though usd has totally crashed vs bitcoin during the years.
  - EthanHeilman 8y ago
    Can't tell if sarcastic or not
    - nmca 8y ago
      Clue: it is sarcastic.
- vkou 8y ago
  And on the converse, there's a number of insiders in the crypto ecosystem, who cheat to prop their investments up. See: The USDT printing presses, wash trading. There's a lot of greedy people that want to make BTC cost a lot more then it really should. But pay no attention to them, blame some boogieman from Wall Street for curbing their enthusiasm. If it weren't for those meddling main stream traders, we'd be going to the moon.
lordnacho 8y ago
Well it might be correct in this case, but I'm not sold on there being a general connection between stuff getting shortable and the price going down. There's only one example given, and the mortgage market is not a great comparison since it didn't suddenly get its own futures. And there were plenty of ways for institutions to bet against mortgages OTC.
- chollida1 8y ago
  > Well it might be correct in this case, but I'm not sold on there being a general connection between stuff getting shortable and the price going down. Reallly? Consider this.... If no one can short something then all you can do is ignore or like it. In that case it only takes one investor to make the price go up. With shorting you get a much more accurate view of what people value something at as you can bet on the downside. More importantly it allows for arbitrage, which is the very market force that keeps our prices accurate. Shorting doesn't mean prices will always go down, you could have shorted China to disastrous results in the past 4 years but it does cause a dampening effect in prices. Or maybe a more direct example, if shorting doesn't have any effect on prices decreasing then why do many markets have a short sale rule? If shorting doesn't have a connection to prices going down, why did the US prevent shorting of financial stocks during 2008?
  - lordnacho 8y ago
    Sure, I understand those ideas. Just saying the example given was weak. Weak for what it tries to support, in any case. You still have to explain how things went up so much when it was known futures were about to start trading, and why it would go down so much right after. Why would people be buying it like crazy if it was a generally known thing that when something becomes shortable, it goes down? Maybe look at the introduction of other exchange traded futures rather than an OTC market. Long term it matters whether things can be shorted, of course. But they're trying to say a very specific turn in the market was caused by this. And like the other poster says, it's not even true that it wasn't shortable.
- nipponese 8y ago
  Besides credit default swaps on notional bond values, what were the other shorting instruments besides taking a short position in bank stocks?
deleted 8y ago
[deleted]
pyrrhotech 8y ago
Fake news, both CME and CBOE Bitcoin futures have very anemic volume. It is mere coincidence than the bubble popped shortly after the debut.
- csomar 8y ago
  I’m not sure why you are getting downvoted. The OP is not providing any proof whatsoever of the CME futures influence. Yes their volume is tiny compared to the unregualted market I can hardly think it’ll have any effects.
tristanho 8y ago
This seems like it may be a victim of the narrative fallacy, trying to make this one simple narrative explain the results of a complex system (the bitcoin market). Everyone has a pet theory as to why bitcoin crashed: regulation, "whales" selling large volumes at once, institutional investors, Futures trading, etc. What's the real reason? It's probably a combination, and almost certainly more complicated that solely "bitcoin futures."
- formula1 8y ago
  - The ability to short (bet on loss) - Unregulated system for whales - already being considered a dirty currency by multiple Govs A whale can short, influence laws and create fud. The futures market made it so people can have interest in it falling not just hope for more rising. Theres a very legitimate reason why futures market changed the dynamic
- kmitz 8y ago
  I totally agree. Current pattern is very similar to the four-five previous bubbles, which the author doesn't seem to take into consideration or even be aware of. Besides, futures trading has existed a long time on chinese platforms before CME and CBOE joined the party. It really is a waste of time to speculate why bitcoin price is going up or down on such timescale.
  - gst 8y ago
    Also Bitcoin has been declared dead 299 times already: https://99bitcoins.com/obituary-stats/ https://99bitcoins.com/obituary-stats/ Maybe the futures will have some impact, but I wouldn't be surprised if in hindsight it will turn out that futures didn't have any impact at all.
unabridged 8y ago
Not one mention of an ETF (ie the availability of bitcoin to retail investors). The large run up in December was in anticipation of multiple bitcoin ETFs by major companies, the futures market was just the appetizer. And the fall was caused by the SEC putting them on hold.
- jraines 8y ago
  not true. That happened in early-mid 2017. Yes, there were more applications late in the year, but the run up in Nov/Dec was just mania (Coinbase #1 on app store). Yes, volume manipulation, tethers, etc, etc, but that retail speculator mania was the main thing.
dkrich 8y ago
I'd offer a much simpler explanation. The buzz around Bitcoin reached a critical mass where people at home with no knowledge of cryptocurrencies or blockchain technology suddenly got caught up in a bubble. As the interest increased so did the price so it became a feedback loop. People saw their friends and coworkers talking about huge gains and wanted to get in on it. Coinbase allowed anyone with a smartphone and a checking account to buy Bitcoin which further drove up the price. Meanwhile the supply was only going up incrementally. So you had a huge swell in demand and no corresponding increase in supply. This resulted in the price increase. Then when the supply of buyers slowed down there were more sellers than buyers and the price dropped. This is the most classic form of a bubble and I'm surprised that people are looking for alternate explanations, like the introduction of futures, which I find absurd. If it were so easy to predict a crash simply because you now had a vehicle to short it, everyone would have done so. There are ways to short most securities that are traded and yet not all securities collapse in value. The author cites two examples of extreme bubbles- the subprime mortgage market and Bitcoin in late 2017- and blames the crashes on the creation of vehicles to short them. In reality the mortgage market didn't crash until people started defaulting on debt en masse and the vehicles to short the mortgages existed a long time before the market crashed.
- gst 8y ago
  > I'd offer a much simpler explanation. The buzz around Bitcoin reached a critical mass where people at home with no knowledge of cryptocurrencies or blockchain technology suddenly got caught up in a bubble. As the interest increased so did the price so it became a feedback loop. Yes. Those bubbles happen regularly in the Bitcoin world. Maybe the futures had some impact, but even without futures a bubble will eventually end in a crash. December was crazy. I had several non-tech friends ask me how to buy Bitcoins. I strongly recommended against buying, but at least one of them still used a leveraged trade on some sketchy platform to buy. Needless to say that it didn't take long until the volatility wiped out 100% of his investment. I'm against regulation but seeing first hand how financially illiterate people behave I'm not opposed to a minimum level of regulation - e.g., why do retail investors need access to leveraged trading?
  - 8y ago
JackFr 8y ago
This is an astonishingly bad piece of analysis. The CME contract on bitcoin futures DOES NOT EXERT DOWNWARD PRESSURE on the spot price. Bitcoin futures are cash settled in dollars. "Bitcoin futures are financially-settled and therefore do not involve the exchange of bitcoin." [http://www.cmegroup.com/education/bitcoin/cme-bitcoin-futures-frequently-asked-questions.html http://www.cmegroup.com/education/bitcoin/cme-bitcoin-future...] . Therefore when you buy a bitcoin future you exert as much pressure as betting on the NBA finals affect the outcome. There is a perhaps a media effect, but that is of second or third order. If one were able short bitcoin, or one had to deliver or receive bitcoin on tract expiry, that would create downward pressure. Similarly the authors contention that it was the growth of asset backed CDS which brought an end to the housing market bubble is simply not true either. ABCDS had been traded in volume for a long time before the crisis. The proximate cause was (as it almost always is) credit and leverage. When the liquidity dried up, the prices came crashing down.
- dgacmu 8y ago
  That's simply not true. Consider an investor with $10000 to throw into the market. And now examine two scenarios: Scenario 1: The spot market price of Bitcoin is $10000. The futures market for 5-day-out Bitcoin is $7000. Should this investor: (a) Buy one actual bitcoin; or (b) buy 1.4 cash-settled 5-day out bitcoins, and then as soon as the market settles, take the settlement cash and buy bitcoin at the same settlement price (which will net approximately 1.4 bitcoin)? The answer is obvious. In this case, the reduced futures market price has caused an investor to not buy from the spot market -- which has a negative effect on the spot market price relative to had the futures market not existed (in which case the investor would have had to buy BTC itself). Senario 2: Spot bitcoin price is $10000, 5 day out futures price is $14000. Again, where should the bitcoin-wanting investor put their money? The spot market, obviously. (Scenario 1 also creates an incentive for current BTC holders to sell their bitcoin for cash, and buy 5-day-out bitcoin on the futures market instead, and pocket the difference. If you hold 1 BTC, you can turn it into 1.4 BTC in 5 days -- most rational investors would take that bet. Which directly decreases the spot market price by creating more demand to sell BTC.)
- jonknee 8y ago
cateye 8y ago
>> the mining cost of bitcoin should not affect its value any more than the cost of printing regular currency... This is a frequently made logic mistake. Proof of work determines the value of the currency strongly because it is inherently interconnected with the sustainability of the underlying network operation. That is why it is often explained as "the ledger is the currency". Mining is not only for creating new coins but also for validating transactions and propagating of the ledger. Therefore cryptocurrency is a different paradigm where direct comparisons are not always possible and result in wrong conclusions.
- amarkov 8y ago
  But why does this interconnection necessarily establish a price floor? The cost of producing a penny is more than 1 cent, for example.
  - cateye 8y ago
    The main difference is that only the central authority can produce a penny. In the case of cryptocurrency everyone is entitled and able to produce it. So there is direct competition and open market for creating "coins". Would you pay $7300 for a bitcoin if you can produce it yourself for $1? Or why would not someone sell it for $5? At the moment, the price for producing a bitcoin is very close to the market or exchange value.
    - mancerayder 8y ago
      Would you pay $7300 for a bitcoin if you can produce it yourself for $1? Or why would not someone sell it for $5? At the moment, the price for producing a bitcoin is very close to the market or exchange value. How does that figure given timeframe? Are you somehow calculating equipment initial cost and electricity in an estimate? Over how long?
- Ihfhcub 8y ago
  Sorry but the complete opposite of everything you say is true. Hashrate follows price only. Very rarely will the hashrate effect price Miners have no say in what is a valid transaction. Mining system had only one purpose. To make sure miners have no say on what is a valid transaction Miners have no control over how new coins are made. They disempower themselves by competing for the protocol dictacted reward
JumpCrisscross 8y ago
Anecdote: the bozo content of the securities market went down after crypto. Particular in private equity and venture capital. The segregation of low-information traders in the crypto space may have made other markets more reliable.
JackFr 8y ago
This is like saying when CME started trading weather contracts in 1999 it caused global climate change. http://www.cmegroup.com/trading/weather/temperature/us-monthly-weather-heating_contract_specifications.html http://www.cmegroup.com/trading/weather/temperature/us-month...
- JackFr 8y ago
  I don’t understand the downvote. If a future is cash settled it doesn’t exert pressure on the underlying. No matter how many weather contracts you trade you can’t change the weather.
arisAlexis 8y ago
author very erroneously throws in a number of $250 in 2015 cost of mining while discussing fundamental value seemingly unaware of minig difficulty and halving.

99 points by Spellman 8y ago

What is this guy talking about (from the article): For example, they could sell a promise to deliver a bitcoin in a month’s time at a lower price than the current spot price and hope to buy a bitcoin during the month at an even lower price to make a profit. All BTC futures contracts are cash settled, there is no underlying asset being exchanged.

jonknee 8y ago
It could be more clear, but the strategy is the same. Sell a contract now and hope to buy it back cheaper in the future. It doesn't matter too much how it's settled.
- tcbawo 8y ago
  The problem is that margin requirements are extremely high. So people are unlikely to tie up that much capital. But more appropriately the market can stay irrational longer than you can stay solvent.
  - jonknee 8y ago
    High margin might tamp demand for the Coinbase crowd, but I don't think it matters a ton to the big players who wanted to be able to short BTC. The futures market isn't a place most retail investors should be anyway.
    - tcbawo 8y ago
      The big players will put their money where they get the best return. They're not going to leave much money sitting in a margin account long term -- the potential relative gain is too a small.
- JackFr 8y ago
  > It doesn't matter too much how it's settled. It matters very much how it is settled. Right now BTC drives the price of the future, but there isn't a mechanism for the price of the future to pressure the price of BTC.
  - jonknee 8y ago
    You don't have to play in arena one or the other. You can say, hedge a long BTC position by selling futures contracts. Or if the markets get out of balance you can buy in one and sell in the other until they come into sync. If you sell a bunch of over priced futures you will want to buy a bunch of BTC to balance the book and that will move the price of BTC.
    - JackFr 8y ago
      But if I have an unhedged futures position and I don’t buy or sell BTC — and because it’s cash settled, I never have to — I can’t directly affect the price of BTC.
      - jonknee 8y ago
        You're buying or selling the future position with another party and cannot control what they are doing. Most futures are cash settled and they affect markets all the same. Nearly $200b worth of S&P 500 E-Mini contracts traded today and not a single share of stock will be directly involved in those contracts. But you better believe they move the market (just watch what happens when a monster ES order hits the tape).
empath75 8y ago
If you want exposure to bitcoin prices without having the risk of leaving bitcoins on an exchange (or gasp, holding them yourself), then futures are an alternative. If people are buying exposure through futures instead of buying bitcoins, that's going to reduce demand and the price.

ataturk 8y ago

I still can't get my head around how people would want to buy futures on total garbage. I should take a shit in a pail and sell futures on it, apparently.

usgroup 8y ago

TLDR: Bitcoin futures enabled short-selling which puts downward pressure on Bitcoin prices.

DidISayTooMuch 8y ago
That was very a concise TLDR. Thank you.
marshray 8y ago
For every short, there's a long.
- jaxytee 8y ago
  Long, but at what price?
  - marshray 8y ago
    The buyer pays the exact same price as matched to the seller, plus some tiny fees for the exchange and clearing.
jraines 8y ago
CME and CBOE volume paled (and still pales) in comparison to Bitmex, where traders can and did short Bitcoin well before the regulated markets launched.
- deleted 8y ago
  [deleted]
JackFr 8y ago
But it didn't actually enable short selling, it created a USD-settled market for betting on the price of Bitcoin, which is a very different thing. The article is simply wrong.

craigc 8y ago

I don’t know why people are still surprised by this. There are a lot of people in powerful places that want Bitcoin to fail and die. Futures markets introduced a regulated way for them to make that happen. Buy up a ton of Bitcoin during the lead up to futures trading, then short Bitcoin on the futures market while market selling thousands of the cheaply acquired Bitcoin on spot exchanges. You succeed in lowering the price of Bitcoin, killing the public’s perception of crypto currencies, scaring away retail investors, and you make a killing in the process. JPMorgan has been using futures markets to manipulate Gold and Silver spot prices for years while also accumulating huge amounts. Look at an early article that was published prior to the launch: https://www.coindesk.com/cme-groups-leo-melamed-well-tame-bitcoin/ https://www.coindesk.com/cme-groups-leo-melamed-well-tame-bi... It was all planned ahead of time for Wall Street to get maximum profit at the expense of regular people. What else is new.

earthtolazlo 8y ago
It’s a good thing that Bitcoin’s inherent scalability and utility as a currency makes it resistant to such manipulation.
- arisAlexis 8y ago
  the manipulation resistance comes from decentralization. the USD price pair is irrelevant in such a scenario as commonly said 1 btc is 1 btc. If we want to look at the price pair though usd has totally crashed vs bitcoin during the years.
- EthanHeilman 8y ago
  Can't tell if sarcastic or not
  - nmca 8y ago
    Clue: it is sarcastic.
vkou 8y ago
And on the converse, there's a number of insiders in the crypto ecosystem, who cheat to prop their investments up. See: The USDT printing presses, wash trading. There's a lot of greedy people that want to make BTC cost a lot more then it really should. But pay no attention to them, blame some boogieman from Wall Street for curbing their enthusiasm. If it weren't for those meddling main stream traders, we'd be going to the moon.

lordnacho 8y ago

Well it might be correct in this case, but I'm not sold on there being a general connection between stuff getting shortable and the price going down. There's only one example given, and the mortgage market is not a great comparison since it didn't suddenly get its own futures. And there were plenty of ways for institutions to bet against mortgages OTC.

chollida1 8y ago
> Well it might be correct in this case, but I'm not sold on there being a general connection between stuff getting shortable and the price going down. Reallly? Consider this.... If no one can short something then all you can do is ignore or like it. In that case it only takes one investor to make the price go up. With shorting you get a much more accurate view of what people value something at as you can bet on the downside. More importantly it allows for arbitrage, which is the very market force that keeps our prices accurate. Shorting doesn't mean prices will always go down, you could have shorted China to disastrous results in the past 4 years but it does cause a dampening effect in prices. Or maybe a more direct example, if shorting doesn't have any effect on prices decreasing then why do many markets have a short sale rule? If shorting doesn't have a connection to prices going down, why did the US prevent shorting of financial stocks during 2008?
- lordnacho 8y ago
  Sure, I understand those ideas. Just saying the example given was weak. Weak for what it tries to support, in any case. You still have to explain how things went up so much when it was known futures were about to start trading, and why it would go down so much right after. Why would people be buying it like crazy if it was a generally known thing that when something becomes shortable, it goes down? Maybe look at the introduction of other exchange traded futures rather than an OTC market. Long term it matters whether things can be shorted, of course. But they're trying to say a very specific turn in the market was caused by this. And like the other poster says, it's not even true that it wasn't shortable.
nipponese 8y ago
Besides credit default swaps on notional bond values, what were the other shorting instruments besides taking a short position in bank stocks?

deleted 8y ago

[deleted]

pyrrhotech 8y ago

Fake news, both CME and CBOE Bitcoin futures have very anemic volume. It is mere coincidence than the bubble popped shortly after the debut.

csomar 8y ago
I’m not sure why you are getting downvoted. The OP is not providing any proof whatsoever of the CME futures influence. Yes their volume is tiny compared to the unregualted market I can hardly think it’ll have any effects.

tristanho 8y ago

This seems like it may be a victim of the narrative fallacy, trying to make this one simple narrative explain the results of a complex system (the bitcoin market). Everyone has a pet theory as to why bitcoin crashed: regulation, "whales" selling large volumes at once, institutional investors, Futures trading, etc. What's the real reason? It's probably a combination, and almost certainly more complicated that solely "bitcoin futures."

formula1 8y ago
- The ability to short (bet on loss) - Unregulated system for whales - already being considered a dirty currency by multiple Govs A whale can short, influence laws and create fud. The futures market made it so people can have interest in it falling not just hope for more rising. Theres a very legitimate reason why futures market changed the dynamic
kmitz 8y ago
I totally agree. Current pattern is very similar to the four-five previous bubbles, which the author doesn't seem to take into consideration or even be aware of. Besides, futures trading has existed a long time on chinese platforms before CME and CBOE joined the party. It really is a waste of time to speculate why bitcoin price is going up or down on such timescale.
- gst 8y ago
  Also Bitcoin has been declared dead 299 times already: https://99bitcoins.com/obituary-stats/ https://99bitcoins.com/obituary-stats/ Maybe the futures will have some impact, but I wouldn't be surprised if in hindsight it will turn out that futures didn't have any impact at all.

unabridged 8y ago

Not one mention of an ETF (ie the availability of bitcoin to retail investors). The large run up in December was in anticipation of multiple bitcoin ETFs by major companies, the futures market was just the appetizer. And the fall was caused by the SEC putting them on hold.

jraines 8y ago
not true. That happened in early-mid 2017. Yes, there were more applications late in the year, but the run up in Nov/Dec was just mania (Coinbase #1 on app store). Yes, volume manipulation, tethers, etc, etc, but that retail speculator mania was the main thing.

dkrich 8y ago

I'd offer a much simpler explanation. The buzz around Bitcoin reached a critical mass where people at home with no knowledge of cryptocurrencies or blockchain technology suddenly got caught up in a bubble. As the interest increased so did the price so it became a feedback loop. People saw their friends and coworkers talking about huge gains and wanted to get in on it. Coinbase allowed anyone with a smartphone and a checking account to buy Bitcoin which further drove up the price. Meanwhile the supply was only going up incrementally. So you had a huge swell in demand and no corresponding increase in supply. This resulted in the price increase. Then when the supply of buyers slowed down there were more sellers than buyers and the price dropped. This is the most classic form of a bubble and I'm surprised that people are looking for alternate explanations, like the introduction of futures, which I find absurd. If it were so easy to predict a crash simply because you now had a vehicle to short it, everyone would have done so. There are ways to short most securities that are traded and yet not all securities collapse in value. The author cites two examples of extreme bubbles- the subprime mortgage market and Bitcoin in late 2017- and blames the crashes on the creation of vehicles to short them. In reality the mortgage market didn't crash until people started defaulting on debt en masse and the vehicles to short the mortgages existed a long time before the market crashed.

gst 8y ago
> I'd offer a much simpler explanation. The buzz around Bitcoin reached a critical mass where people at home with no knowledge of cryptocurrencies or blockchain technology suddenly got caught up in a bubble. As the interest increased so did the price so it became a feedback loop. Yes. Those bubbles happen regularly in the Bitcoin world. Maybe the futures had some impact, but even without futures a bubble will eventually end in a crash. December was crazy. I had several non-tech friends ask me how to buy Bitcoins. I strongly recommended against buying, but at least one of them still used a leveraged trade on some sketchy platform to buy. Needless to say that it didn't take long until the volatility wiped out 100% of his investment. I'm against regulation but seeing first hand how financially illiterate people behave I'm not opposed to a minimum level of regulation - e.g., why do retail investors need access to leveraged trading?
- 8y ago

JackFr 8y ago

This is an astonishingly bad piece of analysis. The CME contract on bitcoin futures DOES NOT EXERT DOWNWARD PRESSURE on the spot price. Bitcoin futures are cash settled in dollars. "Bitcoin futures are financially-settled and therefore do not involve the exchange of bitcoin." [http://www.cmegroup.com/education/bitcoin/cme-bitcoin-futures-frequently-asked-questions.html http://www.cmegroup.com/education/bitcoin/cme-bitcoin-future...] . Therefore when you buy a bitcoin future you exert as much pressure as betting on the NBA finals affect the outcome. There is a perhaps a media effect, but that is of second or third order. If one were able short bitcoin, or one had to deliver or receive bitcoin on tract expiry, that would create downward pressure. Similarly the authors contention that it was the growth of asset backed CDS which brought an end to the housing market bubble is simply not true either. ABCDS had been traded in volume for a long time before the crisis. The proximate cause was (as it almost always is) credit and leverage. When the liquidity dried up, the prices came crashing down.

dgacmu 8y ago
That's simply not true. Consider an investor with $10000 to throw into the market. And now examine two scenarios: Scenario 1: The spot market price of Bitcoin is $10000. The futures market for 5-day-out Bitcoin is $7000. Should this investor: (a) Buy one actual bitcoin; or (b) buy 1.4 cash-settled 5-day out bitcoins, and then as soon as the market settles, take the settlement cash and buy bitcoin at the same settlement price (which will net approximately 1.4 bitcoin)? The answer is obvious. In this case, the reduced futures market price has caused an investor to not buy from the spot market -- which has a negative effect on the spot market price relative to had the futures market not existed (in which case the investor would have had to buy BTC itself). Senario 2: Spot bitcoin price is $10000, 5 day out futures price is $14000. Again, where should the bitcoin-wanting investor put their money? The spot market, obviously. (Scenario 1 also creates an incentive for current BTC holders to sell their bitcoin for cash, and buy 5-day-out bitcoin on the futures market instead, and pocket the difference. If you hold 1 BTC, you can turn it into 1.4 BTC in 5 days -- most rational investors would take that bet. Which directly decreases the spot market price by creating more demand to sell BTC.)
jonknee 8y ago

cateye 8y ago

>> the mining cost of bitcoin should not affect its value any more than the cost of printing regular currency... This is a frequently made logic mistake. Proof of work determines the value of the currency strongly because it is inherently interconnected with the sustainability of the underlying network operation. That is why it is often explained as "the ledger is the currency". Mining is not only for creating new coins but also for validating transactions and propagating of the ledger. Therefore cryptocurrency is a different paradigm where direct comparisons are not always possible and result in wrong conclusions.

amarkov 8y ago
But why does this interconnection necessarily establish a price floor? The cost of producing a penny is more than 1 cent, for example.
- cateye 8y ago
  The main difference is that only the central authority can produce a penny. In the case of cryptocurrency everyone is entitled and able to produce it. So there is direct competition and open market for creating "coins". Would you pay $7300 for a bitcoin if you can produce it yourself for $1? Or why would not someone sell it for $5? At the moment, the price for producing a bitcoin is very close to the market or exchange value.
  - mancerayder 8y ago
    Would you pay $7300 for a bitcoin if you can produce it yourself for $1? Or why would not someone sell it for $5? At the moment, the price for producing a bitcoin is very close to the market or exchange value. How does that figure given timeframe? Are you somehow calculating equipment initial cost and electricity in an estimate? Over how long?
Ihfhcub 8y ago
Sorry but the complete opposite of everything you say is true. Hashrate follows price only. Very rarely will the hashrate effect price Miners have no say in what is a valid transaction. Mining system had only one purpose. To make sure miners have no say on what is a valid transaction Miners have no control over how new coins are made. They disempower themselves by competing for the protocol dictacted reward

JumpCrisscross 8y ago

Anecdote: the bozo content of the securities market went down after crypto. Particular in private equity and venture capital. The segregation of low-information traders in the crypto space may have made other markets more reliable.

JackFr 8y ago

This is like saying when CME started trading weather contracts in 1999 it caused global climate change. http://www.cmegroup.com/trading/weather/temperature/us-monthly-weather-heating_contract_specifications.html http://www.cmegroup.com/trading/weather/temperature/us-month...

JackFr 8y ago
I don’t understand the downvote. If a future is cash settled it doesn’t exert pressure on the underlying. No matter how many weather contracts you trade you can’t change the weather.

arisAlexis 8y ago

author very erroneously throws in a number of $250 in 2015 cost of mining while discussing fundamental value seemingly unaware of minig difficulty and halving.