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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 ca

by 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
Traders aren't limited to one market or the other and there are plenty of arbitrageurs who will buy/sell futures and do the opposite in the spot market to squeeze out any discrepancies. If the futures are "expensive" you sell them and buy BTC. Reverse if they are "cheap".
- JackFr 8y ago
  Where can you short BTC in the spot market?
  - jonknee 8y ago
    Some overseas exchanges allow it (Bitfinex probably the largest), but that would also introduce some counter party risk. Large owners of BTC could be playing in the futures market or loaning their stake to hedge funds / prop shops.

by JackFr 8y ago

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

Traders aren't limited to one market or the other and there are plenty of arbitrageurs who will buy/sell futures and do the opposite in the spot market to squeeze out any discrepancies. If the futures are "expensive" you sell them and buy BTC. Reverse if they are "cheap".

JackFr 8y ago
Where can you short BTC in the spot market?
- jonknee 8y ago
  Some overseas exchanges allow it (Bitfinex probably the largest), but that would also introduce some counter party risk. Large owners of BTC could be playing in the futures market or loaning their stake to hedge funds / prop shops.