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How an obscure OTC-traded derivative from the 80s took over crypto
- woleium 3y agoperpetual futures, first used by Chinese gold miners in Hong Kong, took off at bitmex with 100x leverage.
- FabHK 3y agoPerfect one-sentence summary of the article, minus the advertisement.
- microtherion 3y agoI was reminded of the characterization of cryptocurrencies as "Perpetual Zero Coupon Bonds": https://martincwwalker.medium.com/impossible-finance-the-perpetual-zero-coupon-bond-eaf4460d80ef https://martincwwalker.medium.com/impossible-finance-the-per...
- hippich 3y agoFirst time hearing about Zero coupon bonds and Perpetual bonds... Nonetheless, wouldn't author's description of perpetual zero coupon bond apply to many (most? all?) fiat currencies as well, since these are not really backed by anything anymore?
- maxbond 3y agoYou can think of currency as a negative coupon bond, even - if you hold onto cash you generally expect it to lose value. In order to function properly as a currency, an asset needs to be the least volatile liquid asset available in the economy (or at least to be competitive along this axis). The expectation the asset will slowly depreciate is compatible with this requirement. The expectation that your currency is a highly deflationary lottery ticket to be traded on 100x margin (and the kicker is that your collateral is some other highly volatile cryptoasset) - not so much. That's why the price of goods and services are almost never set in Bitcoin (rather, the price is set in dollars and floating in Bitcoin). It's too volatile to fulfill all of the roles of a currency, but if you're quick about it you can use it as a medium of exchange. This is more or less a summary of Taleb's argument that the net present value of Bitcoin is zero. https://arxiv.org/abs/2106.14204 https://arxiv.org/abs/2106.14204 https://youtube.com/watch?v=XeG0FzPxSh4 https://youtube.com/watch?v=XeG0FzPxSh4
- zhte415 3y agoCash does not have a negative coupon. Cash has no coupon. I feel introducing quasi terminology helps confuse rather than help. Index linked bonds, I think you're getting at the concept by talking about inflation, are linked to price changes. Check the actual price index (CPI, RPI, etc) of linkage for what price changes. Most bonds are not index linked, not hedged against inflation, and have a fixed coupon. Whether or not that fixed coupon is or isn't above inflation depends on what inflation is. That's why bonds are classed as 'fixed income', or in alternate terminology 'financial assets' (not 'real' where 'real' has some link to inflation, or nominal incomes). Further, bonds vary widely in terms of coupon, can be stripped of coupons, etc. So rather than coupon, yield to maturity might be more useful to look at vis inflation.
- FabHK 3y agoCash has no coupon, so it has negative coupon as soon as you switch your analysis to real terms. In fact, in the context of the fundamental theorem of asset pricing (every asset discounted by a suitable numeraire is a martingale under the probability measure induced by that numeraire), cash isn’t even an asset (instead, the interest bearing bank account is one).
- imtringued 3y agoInflation is a necessary evil because paper is static and can't display real values. People who expect money to store value directly must be insane. I mean think about Roman empire currency being valid today. That is impossible. Money is only valuable within an economy that accepts it. Money from the past is no longer in the economy that is used to be accepted in. Every time period could be considered its own economy. Storing value or carrying value into the future can only happen in the real world, not with money itself, which is just a managerial system. In the real world, objects degrade, expire, require maintenance or constant energy inputs. Once humans are gone, nature will simply take over. The disconnect between money and the real world must manifest itself as inflation.
- throw0101b 3y ago
- ourmandave 3y agoFrom OP link: The value of cryptocurrencies, in spite of a collapse in value, is stopped from falling to their natural value, i.e. zero, by a combination of market manipulation, investor ignorance and a tsunami of lies on social media from those paid to promote these worthless frauds. Which isn't how the US government backing the USD works at all.
- sroussey 3y agoThe US backs it’s currency will a military.
- drexlspivey 3y agoWhat does this even mean? How about the euro, is that backed by a military?
- bandrami 3y agoIt's not a Ponzi scheme if you have aircraft carriers (people think I'm joking but that difference is real and important).
- ChainOfFools 3y agoThis is the real reason the Bitcoin maxis - in contradiction to the narrative of government controlled money being evil - were so stoked about getting El salvador, or any sovereign government with aterritorial boundary recgnized by international convention and defended by men with guns, to adopt Bitcoin as a currency. " backed by math" doesn't amount to much when there are mortars aimed at the middle of your mining farm complex.
- maxbond 3y agoIt's not a Ponzi scheme if you have a real economy generating real economic activity. The military isn't really the important part, it's the ability to tax a massive economy and then invest that money in eg infrastructure projects that help the economy grow. Ponzi schemes fail because the money isn't invested anywhere, it's just moved around. This makes it impossible for Ponzi schemes to be positive sum, so they're inherently unstable because when they are stressed everyone is forced to turn on each other because they're not all gunnuh make it.
- imtringued 3y agoCash is a bearer bond. It represents a liability against the central bank but what does the central bank owe you? It owes you another bill of the same type but in good condition. So yes, paper bill currency is just as speculative as cryptocurrency. The difference is that nowadays most money is created with a contractual obligation to get rid of it eventually, which means its value is stable(=opposite of volatile) over time.
- redandblack 3y agoAll non-dividend paying stocks are zero-coupon perpetual bonds anyway. Nothing new about it
- vikramkr 3y agoStocks are distinct from bonds, they're an ownership stake in a business so dividends are only a small component of their value. Share buybacks, liquidity events like exits, voting rights, etc all feed into value. Stock buybacks in particular can have tax advantages over dividends leading to companies like apple favoring them as a way of distributing value to shareholders. And the the terms of a stock aren't set at stock issuance, since they represent shares in a business they can go from dividend paying to not dividend paying and back.
- imtringued 3y agoIf you have a company that is ideologically against paying dividends or doing stock buybacks and instead buys gold with its profits, its value would still go up as if it did stock buybacks because share owners also own a fraction of the gold. Now imagine a real business like Amazon reinvesting, the investments raise the value of the company's assets.
- ProjectArcturis 3y agoIf the contract never expires, what mechanism keeps the price of the contract in line with the price of the physical good?
- red2awn 3y agoThrough "funding". If the perpetual future's price is above (below) spot's price, long holders pay (receive) short sellers an interest at a regular interval (every 8 hours at most crypto exchanges).
- julianhul 3y agoPeriodic exchange of money between longs and shorts, AKA "funding". If the contract price is above the price of the physical good, holders of the contract ("longs") pay the sellers of the contract ("shorts") a small fee every few hours. This makes it less valuable to hold the contract, and pushes the price of the contract down, until its on par with the price of the physical good.
- monero-xmr 3y agoPay a fee to maintain the contract. Must post collateral if price moves against you or get liquidated.
- smabie 3y agoThis doesn't answer his question.
- greggsy 3y ago> “The only question is: Which exotic derivative will be the next? At Everstrike, we think it will be the everlasting option.” Wasn’t expecting that promo at the end, but who am I kidding, no one writes seriously about crypto without promoting something.
- smabie 3y agoPerpetual options already exist, ie squeeth
- julianhul 3y agoI would hesitate calling squeeth an option. No expiration, no strike price. Is it really an option anymore? Or just a perp with gamma?
- monero-xmr 3y agoIf you are an American and want to experiment with perps and aren’t confident with defi, you can become a Palauan resident and trade on Bybit (Dubai) and some other offshore exchanges legally. https://rns.id/ https://rns.id/
- strgrd 3y agothanks monero-xmr, but if i wanted to gamble, i'd go to a casino. if i wanted to invest money, i'd buy SPY
- monero-xmr 3y agoBest investment I ever made was in my children. Second was crypto!
- pcthrowaway 3y agoShit, I never invested in children, everyone said it was a negative RoI.
- smabie 3y agoPerpetual futures are so nice compared to regular tradfi ones. Having to roll over your ES or NQ futures serves no purpose (and it's not like any other future besides the front month is liquid anyways) and is probably just a scam by CME to induce more trading volume. That being said regular futures do make sense for stuff like commodities.
- hsjqllzlfkf 3y agoI find it super helpful that cryptobros invented their own lingo. That's because that way, when I get emails from recruiters being mysterious and using words like "tradfi", I know I can safely ignore.
- RileyJames 3y agoDoesn’t that beg the question? Why hasn’t a platform capitalised on the perpetual future in tradfi markets. I can understand why CME might not. But why wouldn’t a new entrant like robinhood launch perpetual futures?
- polygamous_bat 3y agoBecause perpetual future doesn't make sense for a lot of things people trade futures for: corn, soybean, crude oil. They have physical presence and in some cases an expiry date. There are futures for other financial instruments or indexes where it might make more sense, but there the use of futures is more about hedging than owning the underlying, since it's not as complicated as owning your own crypto and keeping it safe.
- charlieyu1 3y agoWell it actually makes sense, production is often continuous, most producers just want to hedge some risk due to price fluctuations over the time, they have no interest in physical delivery because it is often expensive.
- vgatherps 3y agoOne answer here is that with dated rates products (I.e. all futures and options, not to mention spot ficc) is * pricing is well understood * shares similar risks across all products If you add an ES perp, that might be a fine instrument in isolation, but it behaves totally differently than most other rates instruments so might be hard to fit into a portfolio than dated futures that you roll. I ran a trading desk in the past that did both dated and perpetual products and this was a major point of focus.
- dist-epoch 3y agoMissing from this list is OANDA, which had perpetual forex contracts for a long time. Interest was paid/received every second, instead of having a tommorow-next model as the other forex brokers do.
- alpark3 3y agoI heard something about the popularity of perpetual futures being owed to "insane leverage possible." Can anyone confirm/explain this?
- wmf 3y agoYes, BitMEX blew up when they started offering 100x leverage so people could get rich or lose everything on small price movements.
- acjohnson55 3y agoThe way a perpetual future works is that it's basically a bet between two parties on whether the price of Bitcoin will go up or down. Every day, the loser pays the winner by the amount of movement. But what if the loser doesn't want to pay? The winner is screwed. To prevent this scenario, but both sides are required to post collateral with the exchange, which gets used to settle the bets. The collateral is required to be a certain percentage of the size of price of Bitcoin. If, due to losing your bet, your collateral dips below the minimum amount required, it is repossessed by the exchange and your bets are terminated. This is considered leverage because it magnifies the risk of speculating on Bitcoin. One way to bet on Bitcoin is to simply buy it. If the price of Bitcoin goes from $10,000 to $11,000, that's a 10% reform return. But if there's an exchange that allows 100x leverage perpetual futures, what they're saying is that I can buy a perpetual future by only posting 1% of the price of the underlying as collateral. So if I buy a perpetual future on Bitcoin while the price is at $10,000 and it goes to $11,000, my return is way higher. I only need to put up $100 for collateral but I just made $1000. That's a 1000% return. The problem, as you might guess, is that if the price falls, the exchange takes my $100, whereas if I had bought Bitcoin, I'd still own the Bitcoin. There's also a problem that the exchange can easily blow up if the market moves too fast for them to liquidate the losers and make the winners whole. The greater the amount of leverage the exchange allows, the greater the chance of this happening.
- FabHK 3y agoYes. However, that’s a feature of future generally, not only perpetuals. However, BitMEX really upped the ante with its 100x product.
- NotYourLawyer 3y agoDidn’t realize this whole thing was gonna turn out to be an ad.
- saurik 3y agoI mean, pretty much every article about random database performance issues also turns out to be either, at best, an ad to work at the company which ran into the problem, or, at worst, an ad for the company that claims to have solved the problem in a turn-key product :(.
- tedkalaw 3y agoNice explainer: https://www.paradigm.xyz/2021/03/the-cartoon-guide-to-perps https://www.paradigm.xyz/2021/03/the-cartoon-guide-to-perps Perps are extremely fun, and not great for your financial health in general. Very addictive PvP game though.
- brunooo 3y agoIzzy Kaminska, one of the smartest crypto critics out there, begrudgingly acknowledged the value of Perps at https://www.bloomberg.com/opinion/articles/2022-08-31/perpetual-futures-are-the-crypto-innovation-finance-needs-to-manage-inflation https://www.bloomberg.com/opinion/articles/2022-08-31/perpet...
- FabHK 3y agoOne thing I haven’t seen getting enough attention is the interest rate you pay for the loan implicit in taking out a leveraged position. For a future with a fixed expiration date, you can easily compute the implied rate by looking at the basis and time to expiry. Back around 5 years ago, you could lock in 80% or so interest p.a. risk free [1] by buying Bitcoin and shorting the future (eg on BitMEX). Everyone else that was yoloing long the future paid that (somewhat hidden) rate. With a perpetual, you can’t lock in the rate (until the expiry, as you can on an ordinary future), but it depends on the funding paid (every 8 hours) over that period. It might well be the same, but would basically depend on the long or short sentiment of the crowd, integrated over that period. At any rate, seems like most people ignore that substantial cost (which was and presumably is arb’ed and exploited by more sophisticated players fleecing the plebs). [1] “risk free” modulo exchange/ops risk, which is substantial as FTX and others demonstrated.
- csomar 3y ago> These two properties together - the elimination of expiration, and the elimination of contango/backwardation, led to massive cost savings for the miners. This is either an Ad or the writer has no experience trading these instruments. As someone who traded these instruments, I'd take the defined future which has a fixed contango/backwardation over the "risky" perpetual which charges daily "funding/interest" that is more volatile than crypto itself. If Basis risk is annoying, interest rate risk is a real and dangerous risk.
- smabie 3y agoWhile perpetuals are riskier, you're under playing the risk of traditional futures: even though your rate component is locked in if you hold to expiry, you could still get liquidated in the meantime if the curve moves violently against you.
- julianhul 3y agoWhat gold future are you trading where the contango/backwardation is fixed?