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BitCoin Gets a Futures Market
fireballrus writes "There is one more way to use your BitCoins rather than buying weed or socks. Recently, a Bitcoin Exchange called ICBIT quietly introduced a futures market, obviously using Bitcoins as its main currency. Gold futures trade roughly at 137 BTC/tr.oz and Sweet Crude Oil at 7.3 BTC/bbl. This may play a positive role in the Bitcoin economy which needs more ways to actually use coins instead of mining them." While this sounds intriguing, I'd like to hear a good case for why BitCoin makes sense in this context.
Well, futures markets in general are quite useful because they help provide economic stability if you have an economic interest in the underlying commodity.
For example if you are an airline you can buy futures in oil. If the price of oil goes up you make a profit in the oil futures that helps offset the cost of your fuel.
If you are a farmer you buy futures in the crop you produce. So if your crop fails due to weather you will likely make a profit in your futures because the price of your crop futures has gone up.
So if I were a producer or buyer of bitcoins, a solid futures market would be of great interest.
Only a few fantasists and dreamers use gold to purchase items. Both gold and bitcoins can be exchanged for different forms of currency. I fail to see why it's a joke even if it's unpopular...
There are about 9 million bitcoins in existence right now, with a value of $12.11 each, meaning there's (theoretically) over a hundred million dollars tied up in this. I think that makes it newsworthy.
Um... no, you're wrong. They are insurance. Producers of commodities often can not afford the ups and downs of the market. Specifically farmers. Futures allow them to sell their crop at a set price, and then if the market crashes they are protected... also, if there's a spike in price they do not profit like they normally would.
Capitalism requires transparency. The problem with overly complicated financial products isn't the products themselves, its the lack of transparency caused by their complexity. When a bank sells you a derivative that's based on mortgages, that's fine. When the bank gets permission from the federal government to give out loans to people that can clearly not afford to pay them back, and fails to disclose that to you... that's when there's a problem. The banks realized what the government was asking them to do was insane, but they didn't want to tick off their benefactors. So they gave out the loans anyway, and then sold the risk off in packages designed to hide them.
Not really, no. The government told them to be more liberal in their risk assessment for first time buyers. The banks COULD have offered modest loans for starter homes that the borrowers probably could have paid back, but instead FREELY CHOSE to talk their least financially savvy customers into huge loans on McMansions and to bury those hot potatoes in complex financial instruments so they could foist them off on others.
It was all quite profitable to a select few and devastating to the world economy.
Don't drink the cool aid.
>When the bank gets permission from the federal government to give out loans to people that can clearly not afford to pay them back, and fails to disclose that to you.
That's not what happened here.
What happened was that we had people making loans that they could be sold to "greater fools," i.e., Wall Street.
-Joe Broker makes a loan to Alice - Banks don't make loans anymore, brokers do.
-Alice can't pay it back, but Joe Broker says it's OK.
-Broker doesn't give a shit because he gets a commission for each loan sold. Falsified paperwork EVERYWHERE.
-Broker sends the paperwork to the bank. The bank doesn't give a shit because they can sell the loan to Wall Street.
-Wall Street separates and chops up the mortgages and securitises them by creating securities with different levels (tranches) in the security. These are the "Mortgage Backed Securities." AAA on the top, junk on the bottom.
-These are then sold as if they are all AAA to (see where this is going?) to retail and institutional investors.
-They are considered *cash equivalent* by nearly everyone, except people at places like Magnetar.
-The whole house of cards fell in 2007 and the people holding the bag were people like you and me and our retirement funds.
Meanwhile everyone in the entire system from the broker through Wall Street gets away with not even a slap on the wrist.
But that's not all!
In the chain of passing the buck, at each level, the transfers of these mortgages weren't (and still aren't) handled correctly. Hundreds of thousands, maybe millions, of mortgages have been passed along without the required good paperwork making the servicers of the mortgages in these loans *not* valid mortgagees. And when the loan goes belly up, and a servicer forecloses, there is often either fraudulent paperwork or no paperwork at all and *no right to foreclose*. And in the confusion, there have been people making monthly payments to servicers that don't even have the right to take money for the mortgage at all! That's what the whole robosigner scandal is about, and robosigning is still going on.
And to make it even worse, people have been kicked out of their homes while not even *having* a mortgage to begin with!
http://www.tampabay.com/news/business/realestate/bank-of-america-forecloses-on-house-that-couple-had-paid-cash-for/1072632
It is fraud on a national scale, and it was *not* at the government's prodding. Regulation after regulation was ignored. Rampant fraud was committed by brokers, securitizers, banks, everyone who should have done due diligence.
And the dearth of people going to prison for this shit is why we have Occupy Wall Street.
You have oversimplifed it and you have blamed the wrong people.
--
BMO
You're just proving how WRONG you are.
If I sign a futures contract today for corn to be delivered 6 months from now.. in 6 months, that farmer will sell the corn to whoever holds that contract. That contract cannot be broken -- no matter the current price on the market.
If I sign a futures contract 2 months from today, the price for that new contract may be different.. but it does not affect the price of my previous contract, even though the farmer has not delivered the goods yet -- that price is fixed.
Look.. if I buy a gallon of milk that I will drink for the next week, that is not gambling. If 2 days from now the store has a sale, then I can buy more milk for the sale price.. but the price of the gallon I already bought does not change.
There is no gambling here.. futures contracts are just people buying goods in advance.
I'm glad you brought that up. As it happens, I'm a math major and I can be easily convinced by arguments that are based on math.
Let's start with the basics: What is the "best" value for single-digit inflation? I assume that 1% is too low and 9% is too high - what's the optimum value to use? Is 7% too much?
While we're on the subject, what's the math formula for calculating the optimal value? If the answer is "it depends", then what does it depend on? Is the function relatively flat (any value within a range is good) or peaked (one specific value is best, and near values are bad)?
Actually, how does one even calculate the current inflation rate? Are gas prices included? Luxuries? How do I tell which purchases contribute to inflation and which don't? Is there a rule I can look up?
Don't appeal to math unless you know what math is. Economics is not math.
Economics major here (switched majors from maths to econ after 2 years so I guess I can see your POV).
First of all - economics mostly uses maths as a tool but is not math. However, there are branches of economics that take maths very seriously - especially traditional microeconomics (as opposed to the likes of behavioral micro) has been stringently derived from a small set of axioms. Get yourself a graduate-level micro textbook (Mas-Colell is great) and you will find the familiar "definition - proposition - lemma - proof - corollary" structure pervading every topic discussed by this book. The proofs are usually not super complex and mostly use convexity arguments (due to indifference curves being everywhere), the (hyperplane) seperation theorem, ... ...).
Whereas microeconomics uses very math-y mathematics (centered on analytical proofs), macroeconomics uses mathematics in a more physics-like way (to calculate equilibrium conditions - lots of integral calculus, series, differential equations,
The post you replied to is rubbish - price inflation corresponding to GDP growth is generally not considered desirable (and "inflation" is usually meant to mean price inflation). What the poster was probably referring to is probably just an increase of the quantity of money.
Now, price inflation in the 1-2% range is usually seen as desirable - less because (this fully anticipated) inflation is particularly beneficial but because deflation tends to cause real problems and measurement errors mean that only in the 1-2% range you can actually be certain that you prices are stable rather than falling. ... and so on.
Why is deflation bad? there are two main reasons - (a) it encourages the hoarding of currency over investments into the actual economy and (b) while wages adapt to inflation very well (with 0-2 years lag depending on whether next year's inflation was anticipated and already considered in this year's wage negotiations or not) it is nearly impossible to lower wages based on the argument that the general price-level in the economy has fallen.
Products sell for lower prices but the wage-level stays constant - the natural consequence is rising unemployment, falling demand due to the unemployed having less to spend,
Inflation is hard to measure as you have to (a) define a sensible basket of goods and (b) have to find a way to deal with increases in the quality of goods (the computer you can buy today may be more expensive than the computer you could buy 10 years ago but it is also much more powerful and as such hardly comparable. what do?)
There is no definite measure of inflation a
So long as you can buy something of value with BitCoin, it's money.
And you can.
But that is anti-competitive. It's not a matter anymore of who produced more, or how efficiently. In fact those who bet on what would be a normal, competitive free-market price might not actually have done very well.
It is a matter of who BET on what the futures would do, and who came out on top. But it's that ANTICIPATED FUTURE VALUE that was bet on (which is why they're called "futures" in the first place).
Again: that's gambling. And I don't mean "taking risks", I mean actual gambling.
Not for the farmers.
The whole point of futures and derivatives is to transfer risk from those who can't bear it to those who want it. Farmers need stability; they need to be able to cover their costs and make a profit in good years and bad, and they need to know before they plant that they're going to be able to get a reasonable price for their crops. Futures allow them to offload their risk. It's not cost-free... on average they'll make less money than if they sold at market prices, but it's a good deal for them.
On the other side, the speculators who buy the futures are in a position to accept risk in exchange for potential gain. They can bear the losses they take when prices decline, and they want to profit from what they make when prices rise. Over the long run, if they price the futures accurately, they'll also earn the premium that the farmers effectively pay to buy stability.
When all of this is done by people who know what they're doing, it's not gambling at all. The farmers know what they're getting: reduced risk for reduced profits. The speculators, meanwhile, are "gambling" the way a casino "gambles"... they may win or lose on a given hand, but the percentages are tilted in their favor over the long run.
Not only does this arrangement make sense for both sides, it actually provides the market with stability and tends to smooth out price fluctuations over time.
Futures are a Good Thing. Period.
Most derivatives serve the same purposes in their respective markets. Granted that some instruments are so insanely complex and so far removed from the underlying business that they truly are gambles -- or even swindles -- but that's not the case with the ones that stick around decade after decade.
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