The Uncertain Future of Bitcoin Futures

My big issue with this is if the reference price is manipulated by exchanges (there is a lot of speculation about that exchanges aren't being honest with their trades) there is no way for the future to correct this. Shorting the future would do nothing. The future is a prediction on that settlement index and not the actual price of BTC. The usual move would be to take delivery and sell elsewhere or carry the underlying.

I really wish BTC wasnt financially settled. I have no trust in the current BTC exchanges. They really don't deserve it.

1) Will customers be able to sue JPMorgan Chase & Co. due to facilitating institutional trading customers access to these futures, when the CEO said that Bitcoin is a scam/fraud?

2) When the futures clear, you basically end up with dollars, which is odd to an extend as a future in oil will literally give you oil once it clears.

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On 1 I think that as long as those institutional trading investors are given a prospectus stating that Bitcoin could be a scam, invest in these futures at your own risk, it should legally shield JPMorgan Chase & Co.

The only time I can imagine JPMorgan Chase & Co. would be on the line is if they wrote an prospectus that said this is a good investment whilst the CEO is out in public talking about how much of a scam it is.

On 2, I would say this stops the CME Group Inc.'s futures exchange having to find a way to deal with actually running Bitcoin withdrawals that could open up hot wallet hacks, etc.. and in the long run this should bring down the overhead (fees) on the futures.

In addition what is the point of getting actual Bitcoin once the future clears? Obviously these customers do not want actual Bitcoin. I would say a future that ended with actual Bitcoins would scare away a lot of possible customers.

There are lots of more-or-less sketchy cryptocurrency exchanges which allow you to shortsell bitcoin, but these all require buying cryptocurrency in the first place as collateral.

The upshot is that if you bet against bitcoin and win, you win a bunch of... bitcoin. Not so useful if you want to bet on a big collapse of crypto in general.

Selling bitcoin futures seems like a way to bet against bitcoin in the long term, using actual USD, although I don't think that will ever be an option for smalltime investors / individuals.

- the institutional investors who wanted to go long on BTC, had (and still have) the opportunity to buy BTC

- considering that the ways to short BTC now comes at high costs and pretty high counterparty risks I'd say it's a pretty big chance that most of the institutional investors getting into trading BTC derivatives, will go short.

- this creates a big opportunity for crypto currency whales to go long on the derivatives, pump the BTC price and earn some millions.

If you watched the crypto currency markets in the last days, you can notice that lots of alt coins are increasing in price. It means that somebody buys lots of them. I think they're getting ready to buy bitcoin with them when the derivatives will be listed, in order to pump its price even more.

Of course, the above is not a trading advice.

In order for forward market to be viable you need to have a stick big enough where pulling out of a forward contract is impossible for anyone without them going to jail and ( not or ) still having to perform under this contract.

The really funny part is that the feeding on the suckers ( i.e. retail pansies ) is so profitable and regulators are so pathetic that those who based on their other dealings should not touch BTC with a hundred yard pole (i.e. VCs, exchanges, law firms ) are jumping into it not just with both feet but on all fours.

I went to a BTC investors/tech people meet up not long ago. Some of the people were household names in this "community". No one could describe a difference between POS and POW; no one could speculate on internally consistent basis what kind of outcomes would be possible based on the actions of China's central bank. But everyone was very excited about all the conferences they were going to and all the money they were making off the suckers.

It really reminded me of months before the dotcom crash.

If I sell futures contracts against 10 BTC, and I have 10 BTC in my Bitcoin wallet, I’m fully hedged, and I take no risks (provided the wallet in question is sufficiently secure).

If CME requires USD as collateral, how would I hedge my position? If the BTCUSD price rises 10%, I can’t sell my BTC for USD (to use as collateral) because then I’d expose myself to further price increases before expiration.

Unless I’m missing something, this will become an inefficient market, bottlenecked by the ability of contract sellers to come up with USD collateral.

A solution could be to collect a Bitcoin public key for contract buyers, and require sellers to send the BTC amount covered by the sold contracts to a "collateral BTC address" which can be redeemed in two of the following ways a) by the contract seller, e.g., 7 days after expiration of the contract b) by the contract buyer+CME (2-of-2 multi-signature) after expiration of the contract. CME would keep the USD proceeds, from selling the contract, in the seller's account at the CME. If the Bitcoin USD settlement price doesn't rise to more than the contract selling price, CME would simply transfer the settlement price USD amount from the contract seller's to the buyer's account. If the price rises a lot, the buyer of the contract would be able to (by CME providing a signature as well) redeem the bitcoins sitting at the "collateral BTC address", and sell the bitcoins at the current market price (which the contract buyer would have 7 days to do before the contract seller can redeem the bitcoins himself).

This way, CME doesn't store any bitcoins themselves, and contract buyers are responsible for keeping their own private keys safe (optimally, private keys should be generated on an offline device, and the public key safely transferred to an online computer). In order to steal BTC collateral, an attacker would have to steal both the contract buyer's and CME's private key.

As someone who's done about 20 years worth of investing in stocks and mutual funds and has a very low tolerance for gambling[0], I wouldn't dream of investing in Bitcoin. Last year, however, I did mine Ethereum. The result of that mining turned out quite well for me, costing a little in electricity[1]. I further rationalized it by the fact that I could put the video cards I purchased to work for me in other ways -- I might not have purchased the card that I did were I not targeting price/watt in mining, but the cards I purchased were slightly better than the ones I would have and I'm very happy with them for rendering and some of the fun I'm having playing with ML using CUDA, and hey my ffmpeg transcodes are quite fast, too! I jumped on ETH mainly because of the fact that I had played with Bitcoin in the early days and managed to mine about 20 of them which I lost due to reloading a server[2] and not caring about my USD$0.25 worth of BTC[3].

All of that aside, I don't mine any longer -- the difficulty is too high and with my setup, the best I can hope for is to get a couple of Ether a year. I started mining ETH because they were doing something different from BTC and I had the sense that the price would go up (though, again, didn't expect it to hit $475 as it has today). The thing of it is -- nobody can answer the question "why" in a way that makes me comfortable. It's, effectively, a bet that someone elses' imagination will feel that the price of these bits are worth more than they are now. While I've gotten the sense that a lot of investing works this way, at least from time to time it appears to track with real-world things, like earnings and the state of the overall economic sector that the company is a part of.

I think at least some of the price movement has to do with the fact that Bitcoin is wildly unregulated (and I believe when the inevitable hammer of government steps in, that price won't soar or remain as high). The fact that my in-laws have money in the game (though, for practical purposes, it's pocket change) tells me the days of free-wheeling non-regulation are very numbered, though I have a hard time figuring out how you even regulate something like this (particularly a product like ZCash). And the worst of it is that from a regulatory standpoint, it'd be easy to argue that a lot of the transactions taking place look a whole lot more like money laundering and a whole lot less like "a digital equivalent to cash[4]". The fact is, the treasury components of our governments love that we hate carrying around pieces of easily lost paper and prefer to use regulated intermediaries that helpfully provide reports to them about our incomes and spending habits which can be used to ensure we're operating according to the law. The numbers of traditionally "Cash Only" businesses are approaching zero which is starting to put any transaction that doesn't involve one of these regulated entities into the "questionable" category.

I'm fascinated by all of this, personally. It's mostly played out as I have expected -- when the value of BTC started exploding, the numbers of cryptocurrency and cryptocurrency related products started exploding as did the number of thefts, viruses/criminal elements specifically attacking or using cryptocurrencies. And, of course, the scammy-sounding me-too start-ups trying to find some way to use buzzwords from the cryptocurrency space (though the "ICO"s surprised me quite a bit both in the sheer number of them and the number of people willing to buy into them). Most of the off-shoot cryptocurrencies were nearly identical to one of the leading products with ZEC and ETH being outliers with unique features and spawning their own copy-cats (I'm also watching PIRL with curiosity[5] since it seems centered on improving transaction speeds, more stability around management/updates and focused early on getting an actual marketplace up -- plus, it's based on ETH, which I find very interesting as a technology).

[0] I brought $20 to Las Vegas with the full intent of losing it. It took four days for that to happen and I still felt badly about having wasted it despite it providing me with several hours of entertainment across a variety of video poker machines.

[1] As a guy who has three servers running in his basement and likes to keep the air conditioning set at a frigid 68 degrees, the difference between my already outrageous electric bill and my slightly more outrageous electric bill wasn't something my budget noticed. The servers were mostly idle, anyway, so why not have them doing something while they're not doing anything?

[2] I found the technology interesting and mined more as an academic experience. I don't remember the exact date, but it was within a few months of when the network went live ... I didn't even use a pool and managed to net somewhere around 20-25 of them in a couple of months. I loved the "idea" but wrote it all off as a cypherpunk's wet dream, not something that would actually have value in the future. Oops!

[3] IIRC, there wasn't even a way to see the price of BTC in USD because the only way to turn them into cash was to find someone who wanted to buy them from you.

[4] As in, similar anonymity and similar risk -- you lose or have your wallet stolen, your cash is also lost. Unfortunately, people won't see it that way when it's their money.

[5] I even ended up firing up my mining rig, though that was mostly because I was feeling the itch to delve into CUDA, again, so I took some time to add some optimizations to the mining code I had tweaked last year. I don't expect to make money from it, just I like didn't expect to do so for ETH, but I'm enjoying playing around with code and technologies that I don't normally get exposure to in my day job.

This is a strawman. Only fools keep substantial Bitcoin balances in exchange wallets.

Edit: OK, fools and ordinary people. But this is an article about investors in Bitcoin futures. The author could have at least mentioned offline wallets. Also, it's true that you need exchange wallets for speculation. But there's the Kelly criterion, and you can keep most of your winnings offline.

It's still such early days in this area, if you are curious at all, buy some BTC and ETH and sit on it.