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Comment by josephagoss | Hacker News Reader

I don't agree that people having some investment in Bitcoin without ever holding Bitcoin is a disadvantage.

Once of the things we used to talk about years ago with Bitcoin was that by the time Grandma owns Bitcoin in some way, it would be via several layers on top.

And we were not talking about technology layers like LN, we were discussing that eventually financial products would be built on top of Bitcoin.

I see this as the market maturing and even die hard Bitcoin fans should see this as a good thing.

It's unrealistic to expect everyone that interfaces/holds value in Bitcoin to actually use the raw layer itself.

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But futures aren't like that; futures are supposed to be one of the lower layers of the financial "abstraction stack", not the top layer.

Grandma doesn't buy futures; grandma invests in a mutual fund that buys futures. But Harold the wheat farmer does buy wheat futures directly, because his whole business is delivering wheat down a manufacturing pipeline, and the wheat future delivers wheat just like his own fields will, so either can be used as an input to said manufacturing pipeline. That's the original point of [commodities] futures, after all—to let Harold hedge his wheat-growing risk. The fact that they can be traded like any other instrument to make money without ever coming into possession of any commodities at all, is just a weird side-effect.

Shorting bitcoin, whether as a hedge or in speculation, seems like the killer app here. And because of the ability to short, a successful futures market should reduce BTC's volatility. I'm personally uneasy with long-only futures funds, because it does seem that they might be able to distort the market. Oil is a great example.

I wouldn't short crypto, ever.

The bitcoin futures contract is worth 5 BTC. So if you own 5 BTC, you can short one BTC futures contract and lock in your current value. In fact, until you've done that, BTC are a highly uncertain store of value with a history of extreme volatility. To me, bitcoin's greatest weakness is its wild price swings.

It's interesting to say that you'd never short crypto. That means, in effect, that you'd never borrow money in BTC -- so no crypto credit. Why? Borrowers are effectively short the currency, lenders long. If BTC goes down, borrowers owe less (in dollars, for example). If BTC goes up, they owe more dollars (must buy the bitcoin back at a higher price, just the same as if they'd gone short futures). Because BTC can go up without limit, borrowers of bitcoin are exposed to limitless risk. This is true if you borrow in any currency, and makes exchange rate risk important in credit. With bitcoin you're almost guaranteed a wild ride -- so for now, credit markets based on bitcoin are practically impossible. So, borrowing five BTC from a bank is the same as going short one futures contract.

We have yet to see if the Chicago Mercantile Exchange contracts will become popular. If they do, the CME will likely create options on the futures contracts. Then, as a speculator, you could much more safely buy put options to short bitcoin, and be guaranteed of never losing more than you'd started with.

> So if you own 5 BTC, you can short one BTC futures contract and lock in your current value.

Wouldn’t it be much easier to sell?

You could just sell the BTC, yes, but a futures contact might be faster, easier, and cheaper, though I don't trade BTC so I don't know, and we don't yet know if these contracts will be liquid. Many futures contracts never take off, so we'll see.

If you sell the 5BTC you’re done. If you short one contract and BTC doubles next week you will be $40k down on that position. It looks a bit risky... Of course your BTC will now be worth $80k instead of $40k so the math works out. But you will have to come with collateral to keep the position open (or get it closed and take the loss).

If you don't actually have the BTC you can't sell.

For example you are a miner and trying to lock in the correct BTC price or if you are expecting payment in BTC and don't want exposure to BTC price moves.

The put hedge is a fraction of the cost of the total BTC you currently hold. It's basically insurance on your current BTC holding and you're willing to pay the "premium" to dampen the volatility of BTC.

Shorting using futures has nothing to do with buying puts. You can think of buying puts as buying insurance (you pay now for the option to sell your BTC at a guaranteed price later), but buying/selling futures is esentially giving you the same exposure as buying/selling the underlying asset.

The meme of crypto is HODL. So yes, I wouldn't short it or borrow btc for USD and today in btc. Definitely not now

> I'm personally uneasy with long-only futures funds, because it does seem that they might be able to distort the market.

What do you mean? It´s not just that there is an ability to short, each contract has necessarily someone standing at each side.

Yes, each contract has someone on each side. With long-only futures ETFs and so on, large numbers of investors can get exposure to the futures markets, for example in physical commodities markets like petroleum and agricultural products, in the attempt to create diversity in their portfolios, and they usually want to go long, as if they were buying stocks, typically when the trend is up in the first place. Many economists believe that they then can help to exacerbate trends beyond a rational price (think, "bubble"). Hard evidence for this is inconclusive, but I personally tend believe it is quite possible.

So, for example, the price of oil may rise because of fundamentals (supply and demand for actual use), but this new source of passive, paper demand (trend-chasing long-only investors) can push the price farther than it could have gone otherwise. For example, $147/barrel West Texas crude oil was clearly impossible to sustain (and may have been the needle which finally made the financial markets go pop), but very possibly froth in the markets had helped pushed it up that far, because everyone wanted to get in on this amazing commodities super-cycle, and of course they wanted to be long. The supply and demand fundamentals were indeed bullish, but not up to $147, or, at the same time in 2007, $18/bushel of soybeans, a price that would imply widespread hunger.

Excuse me for going on like this, but it could be interesting to note that the justification for having speculators in futures markets at all is to provide liquidity to the markets and help in price discovery. That means, to me, that participants should go long or short with equal proclivity. Instead, many ETFs encourage stock and bond investors to take long-term, buy-and-hold style positions in the futures markets. There are short commodity ETFs, but they aren't popular like the longs. Therefore this class of speculator introduces too many longs, not enough shorts, often with the effect of distorting market movements, especially during trends.

Still, these aren't likely to be issues with bitcoin futures.

I cannot say that I disagree with what anything you wrote. I really don’t know how things are going to play out, it will be interesting to watch. Futures can create a disconnect between fundamentals and prices because they provide a way to get exposure to an asset that was not available before. But in the case of bitcoins it is already possible to buy them and there is no fundamental value to diverge from anyway... The demand for bitcoins is clearly high before futures are available and maybe having a new way to get the exposure will in fact relieve the pressure on prices (the notional long exposure can go up without pushing prices up as long as there are enough shorts). I don’t know and I don’t really care: I have no dog in the race, I’m just watching it for fun.

> Harold the wheat farmer does buy wheat futures

Presumably you mean he sells wheat futures.

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