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.

Comments

Re:What's the exchange rate to dead squirrels?

[TheRealMindChild]

WoW gold. Linden Dollars. Diablo 3 gold. Whatever. This is the same, minus the game. The American dollar and the Euro are built on the same voodoo magic in terms of value. BitCoin, if it has anything going for it over these other examples is sound principal for the system going forward as a currency in the real world.

Question for economics wonks

[Okian Warrior]

I've never understood the vitriol heaped on BitCoins in this forum. None of the stated reasons for "It'll never work" seem to hold under examination.

1) It's not based on anything

Well, neither are any of the major currencies, especially the dollar. The Euro is teetering on the brink of disaster, the Fed has been spraying money with a firehose, numerous South American currencies have gone bust - I just don't see any difference. ...except, that bitcoins are immune to *some* of the problems typically found in national currencies.

2) No one is using them

There was a time when no one used the internet, either, and look how big that got.

I'm not sure there is a point here - lots of things didn't get big and no one uses them (pets.com, anyone?), and lots of things got big and *everyone uses* them (google.com).

If you're saying that not enough people will *ever* use them, so that the idea won't take off, then that's an opinion. A lot of people are predicting success, so why are they wrong and you right?

3) It's a scam

All of the scams reported so far have been, effectively, companies trying to be a bank without banking regulation.

It's not a problem for BitCoin if someone convinces you to deposit your coins in their bank and then loses them, any more than it's a problem for US currency if someone convinces you to give them your money and loses it. People get scammed all the time, but it's not the fault of the currency.

Again, I don't see the difference. BitCoins are like money, and can be stolen like money. Why is having money any different?

==================

BitCoins doesn't solve all the problems of money, but it does solve a fair number of them. Logic and reason would seem to indicate that this is a better way to do currency.

I must be missing something.

Can one of the economists explain why it won't work?

I mean, explain it without appealing to emotion and irrational fear. Like, by using logic and evidence.

Re:Question for economics wonks

[Anonymous Coward]

1) It's not based on anything
This is mostly bunk, but not entirely. The US dollar, for example, isn't backed by gold or anything similar, but it is backed by 300 million people and a large number of companies that need to pay taxes in US dollars. Even if I decide that dollars are bunk and I'm going to use Euros or bitcoins or whatever, at the end of the year I must turn some of my wealth back into dollars to pay taxes. And the day I go hunting for dollars to pay taxes... the dollar suddenly has value, the guy holding the "worthless" dollars can demand some stuff from me, because I need them to stop the government from arresting me for nonpayment of taxes.

Thus, even if pretty much everyone decides to stop liking the dollar, there's a floor under its value; people need some dollars. (For gold, people "need" gold for things like making wedding rings and some industrial uses, this similarly puts a floor on its value.)

Bitcoins aren't accepted for tax payments, however, and have no "material value" like gold; if pretty much everyone decides to stop liking them, there's no actual floor there, they can drop in value to zero overnight.

So, this is a weak argument for why bitcoins are less good than a "real" currency. Basically this argument says "if it falls apart, it goes all the way to zero value instantly, whereas a real currency has something slowing the fall". It's not a very strong anti-bitcoin argument, because it kind of presupposes that people are going to turn against bitcoins at some point -- if people decide to use them and like them, the lack of government backing is kind of irrelevant. It's also the case that we have several examples where "people have to pay taxes in currency X" was rendered moot by the government printing zillions of units of X (wiemar germany, zimbabwe...), thus rendering a fiat currency completly worthless.

2) No one is using them
This is another kind of circular argument. As long as bitcoins are a niche currency, I don't want to use them, because why would I use the currency that isn't accepted at the merchants I want to buy from. And why would a merchant want to accept a currency that consumers aren't carrying? This is why Visa/Mastercard/Amex own the credit card market, and newcomers have trouble getting in (discover card still has trivial market share despite decades of offering better deals than the big three!)

But despite the circularity, it is true. This problem is what economists call "the network effect". The value of "being involved in bitcoins" is related to how many other people are involved. Lots of computer things have this effect too -- if you're the first guy to write software to use IPv6, your software has nobody to connect to, so it's kind of worthless; at some point there's a critical mass of other people also using IPv6 and suddenly it's a useful feature. Or facebook -- it was completely pointless when only a few people were using it, but one day you wake up and realize that all of your friends are on it, and suddenly it's useful to you for keeping in contact with them and it takes off.

So... bitcoins are useless to me, and will stay useless until lots of people are using them, at which point lots of people like me will suddenly discover them and they'll take off. Unless they never hit that critical mass, in which case no matter how good an idea they may be in theory, they're useless to me.

3) It's a scam
Well... What is the actual point of converting my dollars to bitcoins?

I know why I might want to convert dollars to euros, there are some stores that sell stuff in euros and ship me stuff. And I know why I might want to convert dollars to pesos, I can take a vacation in mexico and enjoy the beaches and stuff.

So... Why should I convert my money into bitcoins?

I have yet to hear of any merchants that accept bitcoins but not dollars, so I'm not converting to spend money. So... convert for investments?

It allows me to store my money in a variety of unregulated "banks" that a

Why? Good question!

[pla]

While this sounds intriguing, I'd like to hear a good case for why BitCoin makes sense in this context.

I'll give you a positive and a negative.

Positive - This make sense because "futures" relate back to the (expected) scarcity and surplus of real-world material goods, the availability of which has no connection to the value of the Euro vs the Yuan. It would make more sense to hedge crude in terms of soybeans than in dollars, yet we only really have the option of doing it in dollars.

Negative - Bitcoin lacks even the connection to reality that Dollars have by virtue of the latter's use in trade for otherwise-real-world products and services.

Now, you could take that in two ways - Connecting Bitcoin to commodities may make it more "meaningful" than most government-issued currencies, because it can float against the rest of the world's currencies to maintain an accurate reflection of the reality underlying production, rather than some random economic policy put in place by a central bank. On the flip side of that, you currently can't actually take delivery of 50 tons of pork denominated in Bitcoins, so this looks like a "futures" market in the worst speculative sense, without the faintest connection to the underlying commodities.

Links

[93 Escort Wagon]

Why obscure the links behind a link abbreviation service, so we can't see where they're leading? This isn't Twitter, and it's not like the submission itself is particularly long.

That right there stopped me from clicking on them. Which is sad, because I haven't had a chance to mock a BitCoin story in several days now.

Re:!= game currency

[plover]

Game currencies have their own issues. If the money supply is managed poorly, then the game will fail. Too tight, and players can't afford to go on adventures, they spend 20 hours per day grinding away for a Sword of Boredom +.3141, with its special "tedium attack." Too loose and every noob who can kill three orcs is swinging a Sword of Godly Smiting +5000.

The creation of bitcoins is similarly in need of central control. Set the difficulty too low too fast, and inflation kicks in. Set it too high, and stagnation rules.

My bigger concern is what the folks with plastic money will do when bitcoins threaten their livelihood. Not the Fed or the IMF, but Visa and MasterCard. Bitcoins could damage their profitable transaction fees. They won't sit idly by if bitcoins look like they may do anything more substantial than buy and sell organic shampoo.

Re:This is great news!

[Jane Q. Public]

Wait... apologies for multiple posts but I see that we may be talking about different things.

Yes, I know what futures are. And you do, too. But what you aren't taking into account is that futures are bought and sold on the basis of projected future value. So, using some hypothetical example, I'll call Jeebits for example:

A futures contract is not made on the basis of this year's price. If we expect a particularly good year for Jeebits next year, then a futures contract will be offered for less. If we expect a drought, then we would ask (or be offered) a higher price.

So, lo and behold! The next year is a bumper crop of Jeebits. Those who sold contracts at low values (perhaps in a desperate market, to undercut the competition) lose out. Those who sold futures at higher value, perhaps in their confidence in their production, reap the main benefits.

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.