For example, if lots of money start pouring into Bitcoin futures, the futures price will rise above the price on BTC exchanges. It will then be profitable to sell the futures while buying Bitcoin on the exchanges, which drives the price of Bitcoin up on the exchanges. When the future matures, you just sell the Bitcoin on the exchange and pay your cash-settlement on the future for a guaranteed profit.
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.
So if 1 BTC@januar17 is priced 10 000 USD, you borrow 16 000 USD and buy 1 BTC. How does that help you?
> 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,
Why? If the spot price at expiry is different from 10 000, let's say it sunk to 5 000, then you have to give back cash and you have 1 BTC that is now worth 5 000.
Could you illustrate how the equivalence comes out?
You don't offer 1 BTC@january 17th for 10,000 USD if 1 BTC spot costs 16,000 USD.
> Why? If the spot price at expiry is different from 10 000, let's say it sunk to 5 000, then you have to give back cash and you have 1 BTC that is now worth 5 000.
You don't have to give back any cash. You sell the BTC, that gets you 5,000 USD, you give the 5,000 USD to the owner of the futures contract (cash settlement of the value of 1 BTC), they pay you the agreed-upon 10,000 USD (in reality, those two payments are netted, so they pay you 5,000 USD, that's it), and you pay back your 10,000 USD loan.
That seems pretty high to me though, you can arbitrage on Coinbase and Gemini which are both US based regulated exchanges (they have licenses, insurance, and audits) with what I would expect to be less than 7%/month risk. Perhaps there just aren't many arbitragers with access to the futures market and knowledge of Gemini/Coinbase yet. I'd arbitrage it myself but I have no retail brokerage access to shorting the future contracts.
Further evidence the market just isn't acting efficiently yet: volume of 3.43k contracts today, which is only $61M. The 24 hour trade volume of the top 5 Bitcoin exchanges is $5 billion.
> Right now 1 BTC on Gemini (the reference exchange for CBOE Bitcoin futures) is $16,600 and the futures price is $17,800 for a 1 or 2 month contract.
> Since the risk free rate is about 0.125% monthly and this spread is 7.2%,
> it looks like the market is pricing the counter-party risk at about 7% for one or two month durations.
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'm sure that read is only one of the myriad of subjective factors involved (let's all agree that Bitcoin rises and falls in clouds of collective subjective perception), but I think it may be the dominant one.
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.
A BTC future can be perfectly hedged by taking a loan until the settlement date and using it to buy 1 BTC, holding it until settlement and then selling, so that's probably what the counterpart selling the future is doing.
So maybe that's the way it is - Bitcoin futures the biggest crypto ponzi scheme yet?
Seriously, the Lightning network looks a lot like the old Gold Standard, and the arc of Bitcoin seems to be reinventing modern currency, so I'm trying to figure out what's next.
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.
It's not a "terrible idea" it is what should have existed in the first place in the oficial blockchain
They're just adding a 2nd layer on top, calling it official and then saying "bitcoin is working"
Regardless of blocksize the block times are still 10 minutes which means you need one hour for the transaction to settle, per the 6 block standard. You can't compare that with LN.
Bitcoin is extremely early stage technology. It'll take years for a bunch of scaling developments and blocksize is just a temporary measure.
no need to be genius to just increase blocksize 1000x and "assume" gigabit connection which no one has.
Lightning network is a great idea, in theory, in practice however it will just not work for the problem you mentioned - no one is interested in providing this kind of liquidity.
As of why need blockchain at all - is because 1st layer is the court and guarantees you to own money from the channel. You just don't have to ask court for every coffee payment (i.e. broadcast to every single laptop in the world).
It lets one party in a channel send arbitrarily large numbers of payments ("arbitrary" subject to the total payment value being capped to the channel capacity, as well as to the Bitcoin divisibility) to another without increasing the UTXO set as you would on-chain.
No that is not true. Each Lightning Channel needs UTXOs to be created before it can be used at all.
Its goal is rather to do trustless multi-hop off-chain payments on pre-opened channels.
Notice that Satoshi himself implemented simple payment channels in Bitcoin. (Without the multi-hop part)
It is all but clear that the much more complex LN contraption will help in the real world.
Furthermore, a case can be made that this going closer to decoupling Bitcoin from the economy on top. The "gold standard" argument hinted at above might be a too close historical parallel, really.
Because, eventually, the gold standard got abolished.
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.
On the sad side, people who put money in bitcoin are thinking it's a great investment. This is not to devalue your comment, but for the past 10 years, almost every years, the low lows have been increasing.
Be your own bank is not a meaningful goal, though, at least with the way things are. Coinbase, for example, holds about 10% of circulating bitcoin is what i hear.
As for the original goals of bitcoin, maybe monero is closer to it. I don't know.
There's no fractional reserve with LN.
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.
Example usage 1: you may want to own BTC and de-risk before economic events by hedging <x>% short BTC contracts.