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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.
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.
"Have you ever thought about just turning off the TV, sitting down with your kids, and hitting them?"
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.
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.
"When life gives you lemons, don't make lemonade. Make life take the lemons back!" -- Cave Johnson
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?
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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.
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.
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.
Never answer an anonymous letter. - Yogi Berra
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.
>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.
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BMO
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.
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.
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.
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.
John
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.
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BMO
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.
I swear they give me mod points to shut me up.
"Um... no, you're wrong. They are insurance."
Um... no, I'm not wrong. Insurance IS gambling.
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.
j'ai découvert une démonstration vraiment admirable (de ce théorème général) que cette si
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....
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.
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.
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.
Out of curiosity, can you pay taxes with gold, oil or stamps, or is it USD only?
Please consider this account deleted, I just can't be bothered with the spam anymore.
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.
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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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