Bitcoin Futures Start with a Bang as Rally Trips Circuit Breaker

Futures contract has TIME value, so they are usually higher than the SPOT price, please check this link for detailed explanation .

https://www.investopedia.com/terms/f/futurescontract.asp

Thought it is not exactly same, but similar case is Where you pay Premium with Stock Options to have the right RIGHT to buy the stock one month from now.

Regarding cex & bitstamp they are exchange out side of USA, each of them have different Risk factors associated to each of those exchanges, that is why that price difference .

Coinbase and CBOE are both US based exchanges and are under govt. regulation and are reputable than any other bitcoin exchanges in the world.

additional $10,000 margin call is well with in the profit margin (on the money interest rate basis), unless bitcoin goes to $100,000 by next month.

> When you buy base and simultaneously sell future contract, you effectively lend your money to other counterparty. In ideal market this should be equal to interest on loan (as you mentioned).

Good point. But the interest on what amount, exactly? You need both 1) capital to buy bitcoins and 2) capital used for margin on the futures exchange. The latter amount is unpredictable, and if the bitcoin price shoots to 10x the spot purchase price you will need to borrow ~35% of this amount for margin, thus making the effective interest around 4x the market rate.

So, in short, the amount that the futures contract price will deviate from spot should be proportional to the volatility of the bitcoin price (because you need to borrow an amount proportional to this for use as margin).

But this only applies to cash-settled bitcoin futures contracts. If settled in bitcoins, it should be sufficient to deposit bitcoins at the futures exchange as margin — thus making the price of these, physically settled, futures contracts only depend on the prevailing short-term rate of interest, as far as I can see.

Just want to add for those new to btc, these are not far fetched scenarios — they have all happened in the past.

> In all these cases. You are likely to loose 100% of the sum you invested.

Nah, for example in case 3 you don't lose your full capital. You just have either position open without hedging the risk whatever reason.

Case 4, case 5, for you to lose your full capital it has to happen for both exchanges.

There are risks and I'm not saying that it might make sense to take those risks, just saying that you are now giving equally wrong picture of the risks.

The bitcoin exchanges have plenty of liquidity, and executions happen in less than one second.

The real risk for arbitrage is with the crypto exchange itself: these can go bust, or disappear overnight. You wanna keep $1M sitting on one of these exchanges?

CBOE BTC futures are cash-settled

I'm more curious about market makers. I'll be a lot more willing to accept this as a sign that BTC is maturing once that happens.

> As others pointed out, when you buy/sell futures, you risk counterparty risk.

Yes, but: There is a chain of companies that have to fail before you incur the loss. The clearinghouse will cover the default first, and bill it back to the clearing broker. So you need someone of the order of Goldman Sachs to fail before counterparty risk affects payments to you.

Margin is a two edged sword.

Beside, margin in futures mean different think than margin on stock.

Yes, futures tax treatment is great. Index options also get the same tax treatment

You are correct it trades to Gemini's spot price, but you are wrong in terms of the difference between the two. As I write this there is a 5 cent different between GDAX and Gemini.

Crypto-collateralized loans are being launched by a startup called Salt Lending. I’m expecting rates to start around 10%, although I’m unsure where I heard that. https://www.saltlending.com/

Same thing, the trader profit in this CASE mentioned is still same $2000

As if there was any link between BTC and economic events...

Well. You will see what manipulation means when the first contracts are about the expire!

> That makes horse manure a heavily manipulated underlying financial product?

Yes. You will find people who use their fields of cows to pass off excrement as horse manure, injecting various gasses into the manure to pass excrement-inspections. You will also find actual owners of horses who discard half their horse manure.

Fort Knox storing paper BTC wallets instead of gold?

To me, the Lightning network looks like a terrible idea. It achieves nothing that an increased blocksize would not have done on-chain yet wraps a faster-layer around the slower, deliberately crippled (1MB) blockchain and does require multi-hop liquidity that must be provided by interested parties. My understanding would be that the slower layer (like TCP) would be stacked on the faster layer (like IP). The lightning network seems all wrong to me.

If the Lightning network is so great, why do we need a blockchain at all? If not, why not just increase the blocksize? It achieves nothing that couldn't be done on-chain. There have been successful tests of blocksizes of up to 1 GB or 1000x the current size. Even getting it up to a small multiple of the current size would dramatically cut transaction costs and waiting times.

I agree, and I'm skeptical of Bitcoin on many levels. The vision it offers is very attractive, but each so-called feature comes with so many caveats that it's never clear there is a real advantage. Still, I think people hold onto the vision.

As digital cash, I can buy something online more or less anonymously, without a middle man. Well, except for the miners. And my anonymity is blown if the person from whom I purchase ever reveals my real-world identity. And the fact that the transaction may reveal my entire spending history. Other cryptos offer better privacy guarantees of course. Oh and the tax burden of buying a pair of socks with BTC makes it terribly unattractive for practical uses.

A nearly instant, low-fee settlement layer is great. Except the fee schedule is market driven which sucks for fee calculations, and the instant part is no longer true with full blocks, RBF, and other realities of a popular distributed ledger.

The deflationary model is interesting and is great for investment but not so great for money. And the volatility is too high to consider Bitcoin an investment.

The currency exists independent of national borders. But, rogue states can horde it and work around international sanctions, and it's quite popular for money laundering.

Be your own bank - with all the risks that may not be so obvious at first glance, and none of the benefits that real banks get.

The list goes on. These "features" will keep selling bitcoin, I don't know the dream will ever really die.

>the Lightning network looks a lot like the old Gold Standard

There's no fractional reserve with LN.

Excellent explanation - thank you.

More precisely, it is possible to replicate the final value of a futures contract (on Bitcoin or any other asset) up front, by trading in the spot market, even though a futures contract’s payoff is uncertain until it expires. Whatever the future’s value ends up being at its expiry, you can put together in advance a portfolio of holdings that will have the same value simply by borrowing a certain amount of cash and using it to buy in the spot market a corresponding amount of the asset on which the futures contract is written; if you do this, the value of your holdings in cash (after paying interest on your borrowings) and in the asset are guaranteed exactly to equal the value of the futures contract at expiry, no matter what price the underlying asset ends up trading at then. So if there is any deviation in the value of the futures contract (at any point in its lifetime) from the aggregate value of the cash and assets in the portfolio that replicates its final value, then there is an opportunity for a pure arbitrage. Consequently trading by arbitrageurs bounds futures prices in a tight range determined by the variables that set the cost of putting together this replicating portfolio: the price of the underlying asset, the interest rate on cash and the yield on the asset (if any), the time until the maturity of the futures contract, and cost of transacting in these markets.

This arbitrage relationship is about as hard they get, so trading futures is tantamount to trading the underlying asset itself, since changes in price in the futures market will be translated directly via arbitrage into changes in price in the spot market for the underlying asset, and vice versa.

I do wonder how counterparty risk will be priced into the futures contracts. There've been a number of cases - Mt. Gox, Bitfinex, any Chinese/Korean/Zimbabwean exchange if you're not a resident of that country - where you can sell a Bitcoin for a nominal price on the exchange but not be able to withdraw that money into the fiat financial system. That's led to structural differences in prices between exchanges which don't get arbitraged away because potential arbitrageurs can't get their cash into or out of the exchange. What happens if that happens to institutional investors trying to settle futures contracts?

But doesn't this sort of bypass the true scarcity of the actual bitcoins?

But if a lot of traders think this way, they may have high execution cost when the contract expires and they try to sell the spot. Specifically, a lot of selling pressure by this kind of trade will push down the spot price and the traders may not be able to sell the spot at the price of the futures cash settlement. So, there is a connection but only up to a point.

Of course there a probably traders doing other kinds of trades that have a different effects on the prices, but it's quite tricky to analyze, compared to a physically-settled contract.

I'd say the dominant factor is "the sheer number of exchanges that have varying degrees of resistance, from mild to total, of converting BTC to USD" ...

Be they delays on withdrawal, explicit, or just ghosting.

Be they unrealistic minimums (Bitfinex will not process such a transaction for >250BTC, $4.5M or so at today's rates).

Be they whatever flavor excuse-of-the-day.

Some exchanges need to learn to walk before they run.

Not quite, since futures are marked to market every night, there is additinal cash flow relative to your scenario

As others have mentioned, contracts are marked-to-market on a daily basis, which impacts the margin needed to hold the contract. With wide price swings, this can force you to close your position before it settles in order to meet margin, especially if you're trading with leverage. CBOE also has a really high margin requirement (I think 40%+), so the capital costs to play are quite high here.

Coinbase froze deposits/withdrawals, trading on the exchange often continues normally.

In 18 months ;)

If Segwit adoption (~12% after launching toward the end of August) by 3rd parties is any indicator even if lightning released today we wouldn't be seeing huge benefits for months if not years.

There is a certain elegance to increasing the block size as it allows you to continue using the chain as you've been using it for years (on-chain transactions). As a bitcoin community member for nearly its entire history myself and others have worked hard to get the level of merchant adoption we enjoyed in early 2016. Today bitcoin is accepted in less places than it was 2 years ago and transacting with is is a luxury only reserved for us privileged early adopters. It was never supposed to be this way.

I hate to break it to you but none of the existing cryptocurrencies know how to scale transactions yet. There are, however, many proposed solutions. Bitcoin is aggressively pursuing those solutions.

The worst proposal, increasing blocksize, is not currently being considered because of its impact on centralization.

I myself use Litecoin when moving between exchanges but Bitcoin is in my opinion to other cryptos what USD is to stocks. You can compare AAPL and GOOG, but you usually compare AAPL USD and GOOG USD

Correct. All of the big unlicensed and unregulated exchanges that provide no transparency of their ownership, or as to how customer balances are held allow significant margin trading. And they have no impartial 3rd party proof of reserves.

This. And it is what I say when friends & family say it "must be a bubble" or "journal X say stay away". Investing/risking is not a binary, all or nothing bet. Just set aside some money you have not immediate use for, and you won't regret losing or many nights without sleep, if a crash comes. It is still early enough, and one can learn a lot of crypto technology, which won't be going anywhere regardless of future prices.

I can imagine bitcoin will one day become tightly regulated and only available to sophisticated traders; the network only supports 15 transactions per second, limiting who can do trades is one way to deal with it. NYSE can do about 11K a second (based on https://www.quora.com/What-is-the-average-total-number-of-tr...)

Interactive Brokers is providing access to the CBOE futures to retail investors. Appears to be long positions only at the moment with high margin requirements, but it's something.

Many of the other large retail brokerages said they would offer them pending liquidity/volume thresholds.

If there's no more miners / mining, who verifies the transactions? (iirc that's what miners did, but correct me if I'm wrong and miners only generate currency and don't verify transactions)

Which are the most interesting ones?

Only a convention. Participants can fork / change the algorithm easily.

So why does it take so long to make a transaction these days? Is the difficulty scaling outpacing the actual network?

I don't think there will fewer miners. I think it's more likely that the price of Bitcoin would increase.

There a lot of very large mining operations that cannot afford to scale down, and they won't sell their mined Bitcoin at a loss. If there are fewer transaction fees, this smaller amount of BTC would have to pay for all of the electricity that was used to mine a block.

Maybe everything would change if the mining operations started to run their own power plants that use free and renewable energy. They could buy some land next to a river and set up a hydroelectric power generator. That would just be a capital cost, and if you do it right, then it could cost very little to maintain. The operational cost would be maintenance, the internet bill, and fixing/replacing broken miners. Even if the mining doesn't work out, I've just been reading about some people who do this and sell excess power to their power company.

So a takeover by a UN mandated operation then, to put it under the trusted oversight of a bank? :)

You are talking about speculators. Anybody that holds an financial instrument for less than five years (my definition) is a speculator.

Warren Buffet is an investor. He buys a business (he thinks) he understands and then holds on to it while it generates profit.

It really bothers me that - in business terms - investors are nowadays just lumped together with speculators.

Investors try to build something while speculators just try to make money, no matter the cost to anybody else.

It's a shame that there isn't a common word in English to distinguish between positive-expected-value gambling and negative-expected-value gambling. They are fundamentally different pursuits.

> That's pretty much what people use stock market for anyway

That's what I used to think until I began to understand (through Mr Money Mustache posts) that lots of people with large amounts of money invest (i.e. buy-and-hold) in the stock market because, despite the annual ups and downs, it has historical net annual gains of 7-10% over the last hundred years...

At least traditional modern financial instruments still have some connection to an underlying real-world market, even if they are 10 layers of financial abstraction removed from reality. They can also always sort of justify it by saying that it provides liquidity and so on.

Harder to justify what the point of Bitcoin financial instruments is though, since it can't really be used for much at all in its current state. Maybe if it stabilized and became a proper store of value (whether the incentives to keep a cryptocurrency stable are even there remains another question), but now it's just so hype driven.

I guess ultimately 'the point' of it all it doesn't matter, people can trade in imaginary goods no problem. Still exposes the strangeness of modern financial markets.

What? 2GB of RAM and 15GB of decently fast storage (preferably SSD) are the only hard requirements. That's not state of the art by any means.

When syncing, you can choose to either build and save the state for every block ("archive" mode), or save only the latest state ("fast" mode). The former requires quite a bit more data than the latter (currently 500 GB vs 32 GB for the Geth client) [0]. The default for most contemporary clients is "fast" mode.

Note that with the "fast" mode you still have all the blocks, and with that all the information needed to recreate the state at a certain block somewhere in the past. And you can still help the network by syncing those blocks to newly spawned archive or fast nodes. It's just that requesting the state (e.g. balance) at a certain block in the past takes some computational work. Most people are not interested in that however, which is why it's the default synchronization mode.

[0] https://etherscan.io/chart/chaindatasizefull vs https://etherscan.io/chart2/chaindatasizefast