How an obscure OTC-traded derivative from the 80s took over crypto
blog.everstrike.io
blog.everstrike.io
That being said regular futures do make sense for stuff like commodities.
I can understand why CME might not. But why wouldn’t a new entrant like robinhood launch perpetual futures?
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.
* 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.
Perps are extremely fun, and not great for your financial health in general. Very addictive PvP game though.
Wasn’t expecting that promo at the end, but who am I kidding, no one writes seriously about crypto without promoting something.
Ice floes were always a risk to policy fulfilment, so Boomers invented Global Warming to remove them.
That worth 300k? Opinions differ. I don't have an enormous farm filled with livestock for tiny hands to help with, so I'm going with "no".
Some people think I am immoral for thinking this, but they do not have farms either, so I'm not confident in their judgement. On the other hand, urbanites seem to think children can be replaced by kittens. This is more or less the core of the Culture Wars, so probably starting a huge Internet Fight here.
Anyway, I’ll bite: one of humanity’s instincts is to have a family. It’s not amoral, it’s at the core of our being.
Humans have a complicated relationship with their "instincts". Why is that? We have culture, which can (theoretically) adapt very rapidly compared to information exchange via sex / virus / "some other mystery horizontal genetic transfer". How much more rapidly? It's faster, but how much faster is a hugely debated topic in anthropology and genetics. Same net effect: humans, probably since before they were humans, have felt almost constantly at war with their "instincts", since culture is always faster to adapt.
Here's another trick: how do you differentiate between an "instinct" and a general want? You kind of don't, and this opens up a rhetorical relationship with the whole concept of "instinct" that has a heavy history and lives into the present day. But do we know what our instincts are? We could jump deep into the fMRI rabbit hole here, saying this "pathway" this, and "horrible abuse of stats" that, but I think that's a waste of effort. It doesn't matter - not in this context, I DO think it's needed science - because both instinct and culture have the same desired end state: human - and American, if possible - survival. Why not just break it down old fashioned utilitarian style? Which is why I bring up farms. Post-agricultural, an industrial state NEEDS to support birth rates via direct subsidies, as in paychecks.
This never happens, so kids don't happen either, and we start talking about three hundred grand and instincts and trolls and all the rest.
We love blaming those at our same socio-economic level for the ills that we perceive in the world, but often it's our masters who gain the most from pointing us at each other's throats. The loss of traditional values, the shattering of the working class, the collapse of masculinity, the dehumanization of the black and of the woman, the ever-shrinking family, the escalating violence of state security, the complete loss of any sense of privacy or decency - it's the same force making these things happen. HAS BEEN MAKING them happen, for years, decades or even centuries.
How this country responds to that fact decides everything, including how we respond in a peer conflict. Would the Democrats necessarily mind a losing ground war that drains the countryside? Would the Republicans necessarily retaliate after a few dozen megatons land on NYC, LAX, SFO, PDX, and SEA? That's why I worry about this shit. Because as much as we might hate <INSERT AMERICAN YOU DISAGREE WITH>, I guarantee we really need to hate the PLAAF more.
Know thyself and all that.
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.
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.
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).
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.
In some way (low) inflation is a feature and not bug: having money just sit around unproductively Scrooge McDuck-style is a waste of resources. Having cash (slowly) lose its value incentivizes its investment into productive assets and help move the economy around.
Why does anyone expect / 'deserve' to earn returns on money that just sits around doing nothing?
Who is value set by, if not the market?
NPV, price, and value are each distinct [1]. Individuals judge value according to their own idiosyncratic needs and views, the market determines price, and a valuation model determines NPV - market forces will tend to align these, but there's no guarantee they will and no contradiction if they don't. (Note that NPV might be better termed "net present cash flow," it's more like a price than a value.) The S&P can go to zero on Monday and a million the next day - it's not likely (presumably the exchanges would halt trading long before that happened) but there's nothing to stop it. It's not like a physical system which is constrained by the universe to behave a certain way, it's closer to a series of independent dice rolls.
It seems to me like many people engage with this market for ideological reasons. I don't mean to say that's an illegitimate choice. But it can surely push the price past the NPV, if there's a contingent that's insensitive to the NPV. (This is why it's important to separate price from value. People investing for ideological reasons have a view about the value of Bitcoin, not the price.)
And then there's stuff like this.
https://youtube.com/watch?v=wIhTGB3wqV0
(Apologies that this is a meme, it was the first instance of the clip I found & I didn't feel like looking for a non meme version.)
Tl;Dw this is Saylor encouraging people to mortgage their house to buy Bitcoin. I think Saylor is some mixture of con artist and true believer, but I would call that close to unhinged. So yeah, some participants might be delusional (not a doctor). But I assume it's a minority.
[1] If you'd like me to define these terms, please see these previous comments of mine.
https://news.ycombinator.com/item?id=32857769
There's some debate in this thread about whether price and value are actually equivalent.
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.
Also note that I intend these as descriptive and not proscriptive statements. I'm not trying to say the government isn't wasteful (though 90-98% waste is an overstatement) or that it's the best way to do things, I'm just trying to illustrate why seemingly ponzi-like systems like national currencies can be economically productive and stable over long periods of time while truly ponzi-like systems rarely have longevity (Herbalife and Amway being exceptions to this rule, in my opinion) because they don't actually produce anything.
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.
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.
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.
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.
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.