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

Not sure I follow.

[Kenja]

So you use this, and you either lose or gain bitcoins. That seems like a circular system where bitcons beget bitcoins. That is NOT a "use" for bitcoins, not when the end result is ideally more bitcoins.

Re:Not sure I follow.

[Anonymous Coward]

So you use this, and you either lose or gain bitcoins. That seems like a circular system where bitcons beget bitcoins. That is NOT a "use" for bitcoins, not when the end result is ideally more bitcoins.

You don't get it? Really? Seriously?

Replace the word "bitcoins" with "dollars" in your above statement, and you'll see it suddenly makes perfect sense.

Of course, it makes about as much "sense" as printing billions more dollars in order to fix what's currently broken, but hey what do you expect when greedy fuckers are in charge with zero regulation...

And I expect nothing less out of the bitcoin world.

It ain't the zero regulation that caused the problem - the problem was over-regulation where the regulations were written with government-industry collusion to protect the interests of the big players and screw everyone else.

Of course, that always is going to happen when you get powerful self-serving governments and large corporations. Amazingly, adding lots of government regulations didn't work - look at how now Obama is letting Wall Street get away with literal theft. John Corzine and a few billion disappearing dollars ring any bells?

Be a helluva lot better in the long run to get the government OUT of picayune regulation, let the crooked banks actually FAIL, and toss the crooks in jail.

But we're a few hundred million dollars a year in bribes, errr, campaign contributions from that ever happening.

And don't kid yourself - Obama got more money from Wall Street than McCain did.

Re:Not sure I follow.

[MachineShedFred]

Don't forget that right before this mess started, President Clinton signed a repeal of a Depression-era law that mandated a firewall between investment banks, commercial banks, and insurance companies.

That was a fantastic idea, to let the banking industry go back to being able to use money that belongs to you and I on hair brained investment schemes (derivatives and bundling). Or for insurance companies to offer investment insurance (AIG).

Guess we learned how well that works, again.

They will be easier to steal this way...

[hawks5999]

I love bitcoin, but so far every exchange or market turns out to be a way to lose your coins to poor security or straight fraud. Add in gold and oil futures and it sounds like another great fraud opportunity.

Futures Markets

[the eric conspiracy]

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.

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

[humanrev]

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

Fine.

I have yet to encounter a business which uses BitCoins as a means of payment. They must exist and I could look them up, but I have yet to encounter one as part of my regular Internet usage. None of the big businesses use it, none of the smaller businesses use it, even geeky sites don't use it. This makes BitCoins rather pointless compared to regular coin.

Also, perhaps more importantly, BitCoins has yet to prove itself. Why invest in a shakey implementation of an Internet-based currency when so many other attempts died before it? I'm not going to touch it unless I actually see mainstream usage.

Simply put - I have nothing to lose by not bothering with BitCoins. I also have very little to gain, if anything at the moment, if I did. It's just not worth the time.

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

Re:Question for economics wonks

[martin-boundary]

1) It's not based on anything

Well, neither are any of the major currencies, especially the dollar.

Incorrect. The major currencies, especially the dollar, are based on the threat of extreme violence. If you live in America, 1) you are forced to accept dollars at face value for services and trades. And 2) you are not allowed to counterfeit them. If you try, expect black SUV and helicopters, people breaking down your door at 6am, being slapped around a bit, and then put in jail for a good chunk of your remaining life.

2) No one is using them

As a gauge of current popular interest, the fact that not a lot of people are actually using them for anything is a big negative. Slashdot should be reporting things that interest its readership.

3) It's a scam

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.

Nice strawman. Real currencies are recognized and backed by governments, bitcoin is only a pretend currency, like monopoly money. It may in fact be illegal, if it tries to substitute for legal tender, in various parts of the world.

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

No, bitcoins are like property, and can be stolen like property. That means they can have value, but it doesn't make them like money.

Re:Question for economics wonks

[mdfst13]

1) It's not based on anything

Well, neither are any of the major currencies, especially the dollar.

The US dollar is valid for paying US taxes. BitCoins aren't.

There is a common assertion that the Fed has been printing loads of money. Ignoring that it isn't the Fed that prints money but the Treasury, it's worth noting that we aren't experiencing particularly high inflation. Inflation is higher than it should be, but not ridiculously so. It's also worth noting that the estimated M3 is smaller now than it was in 2008. M2 is about the same as it was in 2008. Only M1 is higher. The likely reason is that the multipliers that lead to M2 and M3 being bigger than M1 are subdued by the recession. As a result, M1 is artificially high to counteract the drops in other parts of M2 and M3.

Source: http://www.shadowstats.com/alternate_data/money-supply-charts

The problem with the Euro isn't that it is worthless. The problem with the Euro is the possibility that some of the countries that are currently in the Euro will be kicked out. People will still be able to pay taxes in Euros in Germany, France, and several other countries even if that happens.

I don't have a strong opinion on the possibility of BitCoins taking off. I do have a strong opinion on the value of national fiat currencies. So long as they are accepted for tax payments, national fiat currencies will have an advantage over currencies that are not. Competing currencies will therefore have to find or develop their own advantages to compensate.

Re:Question for economics wonks

[Fred Ferrigno]

The US dollar is the only currency you can pay US taxes with and the only currency the US government issues debt in, so as long as the US government exists, there is a guaranteed demand for US dollars.

I know, I know, "But the US is about to implode any day now!" And if it does, the entire world economy will go with it. BitCoin depends on the Internet and the Internet depends on a functioning economy. BitCoins won't do you any good if your ISP and your power company are bankrupt.

So in any realistic scenario where BitCoins have value, so does the US dollar. However, it's entirely plausible that BitCoin will fail but not the dollar. Congress could prevent law-abiding businesses from dealing in BitCoins, shutting down the major exchanges and effectively isolating BitCoin from the traditional financial system. The illicit market would still exist, so you'd still be able to convert cash to BitCoins to buy drugs with... but most people will just buy drugs with the cash directly.

Re:Question for economics wonks

[bondsbw]

If you have more expenses because you bought more things, which needed to be produced, then you print more dollars. Hence dollars increase more or less as GDP increases.

The entity responsible for printing those dollars gets something for nothing. They print millions of dollars (for essentially no cost), and exchange those for goods and services. They didn't work hard to earn those dollars.

This is inflation... it isn't "useful", and it makes your dollars go down in value over time. The only real good thing about inflation is that in limited amounts, it encourages spending instead of hoarding.

Bitcoins are not actually generated by doing useful work and even worse the system is made to reward disproportionately the early adopters of the system.

Dollars are also not generated by doing useful work. They are generated by a printing press, which is not doing anything inherently useful. I don't really see why rewarding early adopters is a bad thing.

Look at their predicted number of bitcoins in the system to figure it out yourself.

Bitcoins can be subdivided to 8 decimal places, or currently about 1/100,000th of a cent in US dollars. Any deflation that occurs can be handled well into the future.

Re:Question for economics wonks

[Guru80]

I'm so glad you didn't resort to logic and evidence and gave the OP exactly what he was looking for, emotion and fear mongering.

Re:Question for economics wonks

[bmo]

>This is inflation... it isn't "useful", and it makes your dollars go down in value over time. The only real good thing about inflation is that in limited amounts, it encourages spending instead of hoarding.

You just wave this away as if it doesn't matter, while it's the biggest flaw of Bitcoin.

Hoarding? Bitcoins have massive built in deflation. Should they ever start becoming popular, the only sensible thing would be to hoard them because there are so few to cover so much. There is only a possible 21 million bitcoins, after that, no more. The world GDP is $70Trillion, meaning if you instantly substituted bitcoins for the entire world's economies, each bitcoin would have to be worth $3.3Million. Why would you even spend a single bitcoin?

Also, deflation kills economies. It's the /worst/ thing to happen in a recession. It accelerates decline by making loans too expensive. Businesses need loans to buy capital equipment, start new projects, and such, and in deflationary times, you wind up paying back with money that becomes worth more as time goes on, on top of the interest you're paying. Same goes for buying houses and durable goods. People don't spend when they can get "more" by simply not spending, and that's with even "mild" single-digit deflation. Economies grind to a standstill.

Bitcoin's wild built-in deflation would make it completely unusable for capital equipment purchases, real-estate, and durable goods.

This is basic entry-level economics. And this is why Bitcoin is nonsense.

--
BMO

Re:Question for economics wonks

[Vaphell]

There is only a possible 21 million bitcoins, after that, no more. The world GDP is $70Trillion, meaning if you instantly substituted bitcoins for the entire world's economies, each bitcoin would have to be worth $3.3Million. Why would you even spend a single bitcoin?

why does it matter how much is a single bitcoin worth? Divisibility is more important and bitcoins are divisible up to 8 places, for a total of 2.1E15 units.

People don't spend when they can get "more" by simply not spending, and that's with even "mild" single-digit deflation. Economies grind to a standstill.

people also have limited lifespans so they can't hoard for eternity. Endless inflation is a fix to the problem that doesn't really exist.
It's also the main reason why the banks have the whole world by the balls. That's how things end when everybody is forced to park the money in banks or else watch the wealth evaporate fast thanks to inflation tax.

Re:Question for economics wonks

[slim]

Your (in)action perpetuate the status quo.

Perhaps he's perfectly happy with the status quo. If he doesn't perceive the things BC "solves" as being problems, then BC has nothing to offer him.

BC might cause the status quo to change, without itself becoming the ultimate solution.

By analogy: Windows 3.1 had a load of problems. Most people just assumed that's how PCs had to be, and tolerated it. Some people made Linux. Some people only realised that computers didn't have to be like Windows 3.1 when they witnessed Linux. Linux didn't oust Windows from the desktops of the world. But the fact that Linux did things like real multitasking, changing network settings without a reboot, solid window dragging, etc. pretty much forced MS (and others) to get those things into their OS.

Some people might believe that mainstream banks don't offer a satisfactory way to transfer money overseas. Those people might adopt Bitcoin as an alternative. If enough of them do this, it'll rouse the banks into improving their offerings. Competition is healthy.

Re:Question for economics wonks

[Asic Eng]

Well, in general I can only advise to walk away from any deal which sounds fishy - there is no amount of money which can compensate for that. That's because a con-man will *know* what the con is about, so anything he'll offer as guarantee will always be worth less than what he expects to gain. Trying to outwit a con man is a fool's game.

Otherwise it wouldn't be irrational to accept bitcoins per se, but it's difficult to see how that would ever make sense - it's not impossible, merely not compelling. You could also offer to pay in silkworm futures - if you just happen to have a large amount of those - you will similarly have problems finding someone to accept the deal, and for similarly reasons: your potential business partners will not have any idea how much silkworm futures are worth, how to convert them into money, how to transfer and handle them. Just looking into that is effort, and most people will be unwilling to invest that effort.

That's why money is such a great trading tool, and has almost completely replaced bartering with goods.

Re:Question for economics wonks

[Yunzil]

This is inflation... it isn't "useful"

Uh, yes it is, because...

The only real good thing about inflation is that in limited amounts, it encourages spending instead of hoarding.

Which is useful.

Still not a productive use

[Yvanhoe]

What the bitcoin economy needs is not another financial market but more people accepting it as a payement for real goods and services.

I still offer a 5% discount for bitcoin users, but until now, no clients have been interested. However I do not despair as I am getting clients from all around the world and a lot complain about the difficulty to make international payement.

So, if you have bitcoins and need computer vision development, contact me : IV-devs

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.

Re:This is great news!

[cheesybagel]

You probably haven't been following the hikes in the price of commodities or the stories of people selling stock in oil and resources they don't have.

Re:Not sure I follow...

[funwithBSD]

And?

The difference is most people WILL take USD, and most WILL NOT take Bitcoins.

Gold, whiskey, shiny rocks or shells... the value is set by those who will honor it. The more that do, the more useful it is.

Bad idea

[stephanruby]

Actually, I only emitted the idea as a joke. Not only that, but what they're really talking about is not a futures market for bitcoins as the summary tries to imply, but a futures market for oil and gold in which the transactions are done in bitcoins.

That's hardly the same idea, so I'm not sure if I should be offended that they took my half-baked idiotic idea and tried to implement it, or that I should be offended that they took my half-baked idiotic idea and tried to copy it badly.

Either way, I'd recommend against investing in this market, and as the inventor -- I should really be the one to know.

Paid to obtain the socks?

[IgnitusBoyone]

I find myself wondering how the producer of the socks makes any financial gain. According to the check out page the socks cost -2.00 USD. I'm heavily thinking of investing in some sock storage because at 2.00 for every sock I adopt I could make a fortune. I'm sure the initial investment will more then pay for the shipping and afterwords I can resale them for additional capitol.

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

[Anonymous Coward]

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.

Re:Not sure I follow...

[bmo]

>Gold, whiskey, shiny rocks or shells... the value is set by those who will honor it. The more that do, the more useful it is.

I'm pretty sure if I send Drew a bottle of Maker's Mark, he'll give me a couple of months of TrueFark in return.

Bitcoins? Not so much.

--
BMO

Why all the hostility?

[mathimus1863]

Yes, there's a lot of people who are in Bitcoin because of become-a-billionaire-overnight fantasies. But you remove all that and you're left with a really fascinating system that should appeal to everyone on Slashdot. It's a mix of cryptography, freedom of speech, computing, networking, finance, economics, and even politics -- most of us here dig that stuff.

Get over the hype and take Bitcoin for what it really is: a fascinating experiment that has, so far, withstood the amazing barrage of publicity, hacking attempts, legal uncertainties, and remains valuable for reasons completely contrary to everyone that says it's worthless. It may become worthless one day, but consider the possibility that Bitcoin is disproving all your wildly oversimplified assumptions about what makes something valuable. It is completely different, and there's plenty of reasons to believe that it could succeed as much as it could fail.

Why does gold have value? Nothing is backing gold. Yet it has value, mainly because of its properties: scarcity, fungibility, density, beauty, etc. Bitcoin is really quite similar but some different properties. Ease of transfer over the internet, fungibility, scarcity, storage efficiency, near-anonymity and built-in escrow.

I don't think it's any more ludicrous for Bitcoin to have value than it is for gold to have value. And in the end, when I want to sell WoW weapons, buy webserver space, or play a few games of poker online, why would I use gold, credit card or paypal, which all require me to remember log-in creditials, give away information and/or pay a bunch of third party fees. There's plenty of value in being able to pay people across the world, instantaneously, without sacrificing your privacy, and without paying any fees. Why is that not valuable? Seriously... quit focusing on the get-rich-quick kids, and start appreciating Bitcoin for it's unique properties and philosophy.

Re:This is great news!

[Anonymous Coward]

On the contrary, I know how to trade, but most other people don't.

Like I said... *CHA-CHING!*

Yes, because we have tons of billionaires trolling Slashdot yelling out "CHA-CHING!"

CHA-CHINGA! There, see I can do it too, and even better than you.

And yes, of course you must be a billionaire, because if you actually did know 'how" to trade, then no other amount of money amassed would be acceptable.

Re:This is great news!

[Jane Q. Public]

No doubt.

Futures and derivatives are NOT "capitalism". They are gambling. Pure and simple. This has been one of the main downfalls of banks and Wall Street, directly contributing to the 2008 debacle.

We should not base our economy on fake money. Investment is fine. And all investment is "gambling" to a certain extent... at least if it's done honestly.

BUT... speculation and derivatives are PURE gambling. It's nothing more than a government-sponsored casino.

Re:Links

[PPH]

Why obscure the links behind a link abbreviation service,

Obscure what links? The https://icbit.se/ link is the actual domain name of the Bitcoin exchange, ICBIT. The URLs point to various futures pages on ICBIT.

Isn't this ....

[PPH]

... what got Saddam Hussein killed? Trying to trade oil in Euros?

Re:Isn't this ....

[Doc Ruby]

No, what got Saddam killed was having a country that would make Bush/Cheney cronies $TRILLIONS if the US invaded it.

Re:This is great news!

[Charliemopps]

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.

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!

[sjames]

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.

Re:This is great news!

[bmo]

>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

Re:This is great news!

[BMOC]

You're both wrong. The banks wanted to make money. Since both the property market and the packaged loan markets were going up, any bank that didn't loan out like crazy stood to be less profitable, and hence not do as well on the market themselves. The government opened the door to bad loans through lax regulation and no checks on leveraging. The banks responded to what market pressure and the drive to be the most profitable loan institution would normally do. The lack of transparency just made it all the worse.

Re:This is great news!

[sjames]

So the banks saw that other banks were making money hand over fist through crooked tactics (enabled by the eeevil government not regulating them enough?) and figured they better get in on that action? They were helpless against the incredible power of their own greed and so aren't responsible for their criminal behavior?

How do you s'pose it'll fly if I decide to get in on that credic card fraud market and use that as a defense if/when I get caught? I just wanna make some money!

Re:This is great news!

[rgbrenner]

Futures are gambling.. Are you serious? Do you know what futures are?

A farmer grows x bushels of corn that will be harvest 6 months from now. He asks people who need corn 6 months from now to sign a contract for it, so he has someone to sell the corn to, and he knows the price he will receive for it.

That is a futures contract.

How is that gambling?

Maybe you shouldn't throw around terms you don't know. It gets in the way of the adults having an informative discussion.

Re:This is great news!

[Jane Q. Public]

"Um... no, you're wrong. They are insurance."

Um... no, I'm not wrong. Insurance IS gambling.

Re:This is great news!

[Jane Q. Public]

"It is fraud on a national scale, and it was *not* at the government's prodding."

Yes, it is fraud on a national scale, because business went along with Freddie and Fannie, knowing that they could now make high-risk loans and have their asses pulled out of the fire if something went wrong.

But yes, it was at the government's prodding. Fannie and Freddie ARE government prodding. That's what they're for. And it's a matter of record. All you have to do is look it up.

Missing the point: financial stability.

[lindseyp]

I haven't found a single post that doesn't miss the point.

Being able to buy/sell futures of commodities such as oil ties the bit coin to the real world in a way we haven't seen before. A potential user of bitcoins may be put off by the volatile nature of the value of the bitcoin itself, but if he can pin it down to the value of oil or gold by trading those futures, it makes holding bitcoins a much more sensible, or at least much less financially treacherous prospect.

Imagine... I could sell 1000 USD and buy 100 bitcoins (no idea how this compares to the real exchange rate, bear with me...)
I could then, with my 100 bitcoins, buy gold futures. Even if the value of a bitcoin plummetted meanwhile, I'd be making all that money back as the price of gold (expressed in bitcoins) skyrocketed. I'd be essentially immune to the fickle price of a bitcoin and merely invested in gold. I could further stabilise my finances by SELLING gold futures in USD. If I did this right away, for a small cost, I would essentially have pegged the value of my bitcoins at 1 per every 10 USD.

The creators of bitcoin have been very smart to introduce this market. It enables the use of bitcoins without the fear of volatile price moves. Surely the biggest barrier to entry for most potential users.

I can be convinced by Math

[Okian Warrior]

What you want is single-digit inflation that keeps pace with economic growth. This is actually healthy for an economy. The problem is that when bitcoin true believers like you talk about inflation, you're comparing all inflation to the 1930s German hyper-inflation, which isn't the same thing.

The math spells it out and if even math is not going to convince you, then I guess there is no talking.

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.

Re:I can be convinced by Math

[mellyra]

What you want is single-digit inflation that keeps pace with economic growth. This is actually healthy for an economy. The problem is that when bitcoin true believers like you talk about inflation, you're comparing all inflation to the 1930s German hyper-inflation, which isn't the same thing.

The math spells it out and if even math is not going to convince you, then I guess there is no talking.

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.
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, ... and so on.

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

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

[Pseudonym Authority]

So if someone refuses to accept my dollars I can call in an airstrike on them?

Well, Saddam Hussein was planning to switch to the Euro....

The counterparty risk problem

[Animats]

OK, let's take a look at one of their derivative contracts. Read, especially, Margin Call. The example given is buying a derivative contract, but the real issue is selling one. (There must be an equal volume bought and sold; this is a zero sum game.) Buying a contract costs you a known amount up front,which you may lose. Selling a derivative contract implies that, at some specified future time, you must deliver what you sold, even if you take an arbitrarily high loss doing so.

This is implemented by draining the account of the seller as necessary to pay off the loss. That would be OK if it was a cash account, with no margin. But this exchange permits selling derivative contracts on margin, where the seller is effectively borrowing from the exchange. They currently require 75% margin. Does the exchange take the risk of a counterparty defaulting? No. They write "your profit is always limited by ability to pay of counterparties to your contract." Actually, that's incorrect - it's limited by the cash counterparties have on deposit with the exchange, not their total assets. (That's probably just as well.) However, as a contract buyer, you don't know, and aren't allowed to find out, who the counterparty is or how much money they have on deposit.

The way this is set up, a seller of a derivative contract can escape part of a loss by draining their account. If the value of a derivative is increasing, the seller can cut their losses by draining their account up to the margin limit. This will force the exchange to drain out the rest of their account and close out the derivative contract. The derivative contracts can't change price by more than 10% per day, so there's a maximum loss when selling a derivative contract. This makes derivative contracts less valuable than they would otherwise be.

Then there's the issue of allocating losses when a counterparty defaults. Everything is anonymous, so you have no idea if the exchange is screwing you. On top of that, of course, you're relying on a pseudo-business with no identifying information to pay you money at a future date.

If you don't understand everything above, you should not be in this market.

Re:This is great news!

[rgbrenner]

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.

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.

Re:Sophilistic bullshit

[shutdown -p now]

So long as you can buy something of value with BitCoin, it's money.

And you can.

Re:This is great news!

[Jane Q. Public]

"You know, I would agree with you except that you are wrong."

And I would argue with you more except that you don't have any real arguments to make that you can back up.

Repeat: look up the regulations governing Freddie and Fannie. Read them. (It might take you a while... that is not intended as an insult; it would take anybody a while.) After you have done your studies, get back to me. Then we can discuss it.

Re:This is great news!

[klingers48]

Not true. Why do you think filling your car up hasn't gotten any cheaper?

Actual demand's been down over the last few years and the prices have stayed high because your good old friends Goldman Sachs et al. managed to get previously non-classified commodoties such as crude oil made tradeable as futures.

A barrel of oil changes hands something like 20 times before it even exists these days... And that's not an exageration.

Re:This is great news!

[Jane Q. Public]

"In a way it's ANTI-gambling. Instead of trusting to chance to make money, you reduce the effect of chance. You agree to reduce your potential winnings by X, but taking them 100% certain (you either win or insurance pays out)."

Robert A. Heinlein probably said it best (paraphrase): "Insurance is nothing but gambling. The problem is: if you win, you lose, and if you lose, you win."

Re:This is great news!

[Anonymous Coward]

Requests by the federal government to increase lending on riskier mortgages came ten years before the banks started doing so in earnest. It took a considerable amount of advance work on neutering regulating agencies (and repeal of glass-steagall), such that banks could bury those toxic assets in misrated financial instruments, and insure all of it blindly with companies like AIG.

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

[slim]

Just to expand on the AC reply to you, $12.38 is the current weighted average price on https://mtgox.com/.

Mt.Gox is an exchange - it simply connects compatible offers to one another. i,e, "I want to buy 100 BC at any price below $12.40/BC" is compatible with "I will sell up to 200 BC at any price above $12.35". Mt.Gox charges commission for each trade of course.

So if you had 1 BC, it's realistic that you could trade if for ~$12 right now.

The actual purpose of futures

[sjbe]

Buying gold futures, by contrast, does not have any use, except to then sell those futures, hopefully at a profit.

You mean except for the actual purpose of a gold future which is to take delivery of a defined amount of gold at a specified price on a specified date?

Methinks you are confusing speculation on a financial instrument with the actual purpose of the instrument. The purpose of a gold future contract is to lock in a price on a delivery of a defined amount gold. The primary purpose of futures contracts is to hedge against future price fluctuations in commodities like gold or corn or frozen concentrated orange juice. [/movie reference] If you are a farmer and you are growing corn, you are carrying a lot of risk if you wait until the end of the growing season. Not only do you not know how much corn you'll have but you don't know what the price will be. So you sell a contract to deliver X bushels of corn on Y date for Z price. Your price is locked in and if there is a drought you can simply sell the contract on the futures market instead of delivering the corn.

Anyone who buys a futures contract using bitcoin is an idiot or a scam artist. No one who is actually hedging risk is going to use bitcoin to do it so all that is left is speculators. Speculating in futures contracts is highly risky even without adding an additional level of exchange rate risk in using bitcoins. Furthermore, I'm rather doubtful that if you purchased a futures contract through this "market" that you could actually take delivery of the products that underlie the contract.

I have no idea why there is this obsession with bitcoin by a few people here on slashdot. Bitcoin is an incredibly stupid idea used mostly by people doing illegal things. Anyone who uses bitcoin either has no concept of exchange rate risk or is doing something illegal that carries an even higher risk like jail time. At best bitcoin is an ill-conceived and fatally flawed virtual currency. At worst it is a pyramid scheme and/or a money laundering scheme. Either way it is something to stay away from.

Re:Not sure I follow...

[History's Coming To]

Out of curiosity, can you pay taxes with gold, oil or stamps, or is it USD only?

Lol, an actual idiot

[SmallFurryCreature]

Be a helluva lot better in the long run to get the government OUT of picayune regulation, let the crooked banks actually FAIL, and toss the crooks in jail.

So tell me shit for brains, if there is no regulation, on what charges would you throw the crooks in jail? Without regulation, there ain't no crooks.

Re:This is great news!

[DarkOx]

Lets be honest about how Wall Street sees the GSEs. The point of them is to reduce risk to the private sector. Be Fanny, Freddie, or Sally. The idea being that it creates an effective subsidy for less qualified borrows to get access to capital. That is how the policy makers look at it. Personally I am not sure as noble as all that sounds even that is ethical but, that is what my idiot country men voted for so...

This is how Wall Street sees it:

He they government will buy any high risk paper we ask them to buy! That means we can sell bundles high margin loans. If we don't think to hard about the real risks associated we can over state the net present value! Then pawn them off on the government for a slight discount on that over stated value, raking in huge profits. Government gets the paper and it might work out for them, we get hard cash so are covered no matter what, and hey even if we do decide to hold some the paper and it goes tits up we will probably get a bailout anyway.

This is precisely why Government should get OUT OF THE BANKING MARKETS. No DEPOSIT INSURANCE, NO MORTGAGE LENDING ETC. Anytime you socialize risk, its going to be exploited. After all I might as well bet big and possibly strike it rich, if you are going to just cover my losses when it does not work.

Re:This is great news!

[Hillgiant]

It's gambling when the guy selling the contract isn't growing the corn and the guy buying the contract doesn't plan on using it.

Re:This is great news!

[swillden]

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.

Re:This is great news!

[Atzanteol]

Pffft! Mr. "critical thinking skills" wants us all to define our terms guys! Lets laugh at him derisively while we continue to argue past each other and never come to an understanding.

Ha ha!

Re:This is great news!

[BMOC]

They were helpless in the sense that they failed to help themselves peer through the fog of packaging. If the banks dealing with the debt packages had management structures that had done the slightest bit of due diligence, they would have known they were walking on thin ice. In fact this very thing was realized by multiple people in multiple institutions. Red flags were raised but internal audit groups and those people were silenced, promoted out of a position of audit, or outright fired. This is all well documented.

Banking/finance/market regulation doesn't mean that you can't make money lending or selling derivatives. Banks need to be strongly encouraged to do legitimate documentation so that their customers can know how risky the institution is. Ordinarily you could do this by threatening prison to any manager of any company found to be dealing in what amounts to fraud. Unfortunately all those white-collar criminals at that level are so buddy-buddy with politicians, that'll never happen.