
The Uncertain Future of Bitcoin Futures - JumpCrisscross
https://www.bloomberg.com/view/articles/2017-11-23/the-uncertain-future-of-bitcoin-futures
======
jnordwick
The BTC future will settle against a spot reference price so you cannot take
delivery.

My big issue with this is if the reference price is manipulated by exchanges
(there is a lot of speculation about that exchanges aren't being honest with
their trades) there is no way for the future to correct this. Shorting the
future would do nothing. The future is a prediction on that settlement index
and not the actual price of BTC. The usual move would be to take delivery and
sell elsewhere or carry the underlying.

I really wish BTC wasnt financially settled. I have no trust in the current
BTC exchanges. They really don't deserve it.

~~~
runeks
> My big issue with this is if the reference price is manipulated by exchanges
> (there is a lot of speculation about that exchanges aren't being honest with
> their trades) there is no way for the future to correct this.

How would this manipulation be done by the exchanges in practice?

a) If they lie about the last trade price, their order book wouldn’t match
this.

b) If they use deposited USD to buy up BTCUSD sell orders (to push up the
price), their USD assets would no longer match their USD liabilities.

And if only a single exchange does b), its USD assets would quickly drain from
the exchange, as arbitrageurs would 1) buy cheap bitcoins at the other
exchanges 2) sell on the expensive/cheating exchange 3) withdraw USD from
cheating exchange (draining USD that is already in short supply because of the
cheating) 4) deposit USD at low-price exchanges and repeat 1).

~~~
jnordwick
I've worked in trading for a while now, and after talking to a could people
specifically about bitcoin, inter-exchange arbitrage isn't as big as it should
be. The issues tend to be around clearing and counterparty risk (BTC on two
different exchanges have different prices reflecting the difficulty in moving
BTC off the exchange). There is a lot of friction in BTC movement which really
shouldn't exist.

Also you assume exchanges operating financial information is open and trusted
which is definitely not the case.

It's easy for the exchange to paint the tape with false trades and it doesn't
cost them anything. A large player getting a fee discount can self trade
without much loss either.

I don't think the order books are to be trusted with these BTC venues.

~~~
chris_st
> _There is a lot of friction in BTC movement which really shouldn 't exist._

Maybe this is protecting the BTC market from flash traders?

~~~
jnordwick
I don't know how you call this massive volatility and fraud "protection" from
me and my cohorts. BTC could use the depth provided by high volume electronic
trading, and also the linkage between all the venues and alt coins.

------
josephagoss
Two interesting arguments the article discusses.

1) Will customers be able to sue JPMorgan Chase & Co. due to facilitating
institutional trading customers access to these futures, when the CEO said
that Bitcoin is a scam/fraud?

2) When the futures clear, you basically end up with dollars, which is odd to
an extend as a future in oil will literally give you oil once it clears.

___________

On 1 I think that as long as those institutional trading investors are given a
prospectus stating that Bitcoin could be a scam, invest in these futures at
your own risk, it should legally shield JPMorgan Chase & Co.

The only time I can imagine JPMorgan Chase & Co. would be on the line is if
they wrote an prospectus that said this is a good investment whilst the CEO is
out in public talking about how much of a scam it is.

On 2, I would say this stops the CME Group Inc.'s futures exchange having to
find a way to deal with actually running Bitcoin withdrawals that could open
up hot wallet hacks, etc.. and in the long run this should bring down the
overhead (fees) on the futures.

In addition what is the point of getting actual Bitcoin once the future
clears? Obviously these customers do not want actual Bitcoin. I would say a
future that ended with actual Bitcoins would scare away a lot of possible
customers.

~~~
bradleyjg
Re: 2

Everything you say is true and acknowledged in the article, but as ML also
points out they are also all arguments against bitcoin.

~~~
mdip
This is going to speak to my naivety around futures and how they work but if
you're ending up with cash instead of bitcoin and there's no actual bitcoin
wallets/bitcoins involved, what on earth are you actually _buying_ when you
buy a Bitcoin future in this manner? It sounds like the one, sure, answer is
"not Bitcoin". Can anyone explain this to a neophyte like me?

~~~
JoshTriplett
There are two possibilities when buying a commodity-backed security like this.

You could buy a representation of the actual commodity, such that every $X you
own represents $X of Bitcoin. That's known as a "cash commodity", or an
"actual", or various other terms.

Or, you could buy what amounts to a _bet_ on the future value of the
commodity. Those don't need to correspond to any actual amount of the
commodity. Those are called "futures", which are one type of "derivative"
(because they're _derived_ from the value of the commodity without directly
representing an amount of the commodity).

~~~
mdip
As one of the other commentators mentioned (and has been called out a few
times), in the case of other futures, you are actually settling them with the
commodity in question, but in the case of this product, you are settling with
cash. I think I understand what you're saying, and I don't think I have any
fundamental problem with it -- mainly because I don't invest in the futures
market so it's simply "unimportant to me" how it works in this case -- but I'm
curious: is this a normal practice?

Is it more common for a futures-based product to be settled with the product
it's based on or is it more normal for it to be settled in this manner?

My curiosity, if the way they're executing on this is unusual, is "why"? I
mean, take oil futures as a good example. It'd seem a _whole lot easier_ to
settle a BTC future with actual BTC than to settle an oil future with actual
oil, so why isn't it the other way around? Heck, why wouldn't _all_ of these
futures-based financial products be handled in a cash-based manner -- what's
the downside? (I'm not arguing for or against either method -- I _really don
't know_).

My apologies if these are truly stupid questions -- I imagine I sound to
someone who works/studies this sector like people sound to me who think
"Facebook" and "The Internet" are interchangeable terms, but if you're willing
to play along, here, I certainly appreciate it. :)

~~~
kgwgk
Keep in mind that most commodities futures contracts are never settled. They
are closed before expiration (rolling into a new contract if you want to keep
the position open). Many brokers will close your position before expiration,
because they are not prepared to handle delivery, even if younwant to.

There are also some commodities futures that are cash-settled. Futures on
financial indices, interest rates and such are usually cash-settled. But some
futures based on financial instruments are “physically” settled, like US
Treasury futures.

------
eemax
Related to this, does anyone know of a way to bet against bitcoin (or
cryptocurrencies in general), without buying cryptocurrencies themselves?

There are lots of more-or-less sketchy cryptocurrency exchanges which allow
you to shortsell bitcoin, but these all require buying cryptocurrency in the
first place as collateral.

The upshot is that if you bet against bitcoin and win, you win a bunch of...
bitcoin. Not so useful if you want to bet on a big collapse of crypto in
general.

Selling bitcoin futures seems like a way to bet against bitcoin in the long
term, using actual USD, although I don't think that will ever be an option for
smalltime investors / individuals.

~~~
ricardobeat
eToro let’s you short BTC, Dash, Ethereum, LTC and XRP, though no leverage is
available for those, and the spread can be a bit daunting.

Disclaimer: I don’t usually trade crypto there, this is not investment advice.

EDIT: apparently it’s not available in the US.

If you sign up with my referral link we both get $20:
[http://etoro.tw/2BmqxQb](http://etoro.tw/2BmqxQb)

~~~
eemax
I should clarify that I am in the U.S... seems like most of these sites are
unavailable here.

~~~
ricardobeat
Oh, sorry. I believe one of the main exchanges (bitsane/bitfinex Maybe?) was
going to make options and margin accounts available, don’t remember which one.
There’s also cex.io, but it’s in the UK.

I guess you’ll have to wait for JP Morgan’s fund to go live...

------
byron_fast
As opposed to other futures, which are totally certain.

~~~
mdip
Heh, I get the sarcasm implied here, but I think the bigger issue is that a
lot of "futures" are based on things that have reasons[0] for the price moving
the way that it does. Oil futures, while unpredictable at times, have an
element of research that can be done to make an informed "bet". Crop futures
are affected by weather predictions and almost all futures are affected by
overall economic outlooks for the sector they occupy.

But cryptocurrency? I have yet to find someone who can give me a "good"[1]
reason for prices of BTC to even bet at USD$100, let alone USD$8,000. The
probability that in two months the price is $0.01 or the price is $19,000 are
equal without a reasonable, data-backed explanation about why the price,
today, is $8,000.

[0] As in reasons that exist outside of the bubble of "other people are buying
it and they're paying that much". Hell, 80-90% of people who work in
technology/programming/software development couldn't properly explain how the
blockchain _actually_ works -- and I don't mean "they mostly get it but make
some technical errors/couldn't write a working example", I mean they are
"deer-in-the-headlights lost" with regard to explaining how any of it works.
And it's been my (anecdotal) experience that those who can wouldn't dream of
putting money into it.

[1] Good, as in something other than the early "Well, there's that drug market
that takes it and it's popular" or "Algorithms are trading it without human
intervention and the price just keeps going up" or "Look at that! (pointing
upward at the right-hand side of the price graph)". There's simply no
explanation that I've heard that dares market a benefit to owning Bitcoin
beyond the fact that it can be turned back into cash and the amount of cash
that it can be turned into is inexplicably more than the amount of cash it
could be turned into last week.

~~~
charlesdm
Why is gold $1,288 per ounce today? Purely because it acts as a store of
value. But gold is only valued at its current valuation, because people say
gold is gold and that has a certain value. You could have picked any other
rare metal, or say, diamonds. Gold has limited real world uses.

The same could (not saying it will, but could) apply to Bitcoin. It seems to
be growing into digital gold / a digital store of value.

The price of gold globally is $7.8tn. Bitcoin is worth $150bn(ish). If there
is a 50/50 chance that Bitcoin does become digital gold, then at current
valuations it will be cheap. Is it not worth investing $1 today, to
potentially make $10-20-30 IF it does succeed? Those are decent odds with
great upside.

This is not investment advice, just my personal opinion.

~~~
kgwgk
Where does the 50/50 come from? Do other cryptocurrencies also have 50/50
chance of becoming digital gold?

------
tudorconstantin
What I think will happen when these futures will be listed:

\- the institutional investors who wanted to go long on BTC, had (and still
have) the opportunity to buy BTC

\- considering that the ways to short BTC now comes at high costs and pretty
high counterparty risks I'd say it's a pretty big chance that most of the
institutional investors getting into trading BTC derivatives, will go short.

\- this creates a big opportunity for crypto currency whales to go long on the
derivatives, pump the BTC price and earn some millions.

If you watched the crypto currency markets in the last days, you can notice
that lots of alt coins are increasing in price. It means that somebody buys
lots of them. I think they're getting ready to buy bitcoin with them when the
derivatives will be listed, in order to pump its price even more.

Of course, the above is not a trading advice.

~~~
NicoJuicy
I think the alt coins are just bullish and I'm guessing they won't buy btc
with the alts

------
notyourday
Before futures work, you need forwards. There are no bitcoin forwards because
the entirety of the current bitcoin ecosystem is built on and around fraud. If
we are to remove fraud and clearly currently defined as illegal activities
from this ecosystem bitcoin and its value will collapse through the floor.

In order for forward market to be viable you need to have a stick big enough
where pulling out of a forward contract is _impossible_ for anyone without
them going to jail _and_ ( not or ) still having to perform under this
contract.

The really funny part is that the feeding on the suckers ( i.e. retail pansies
) is so profitable and regulators are so pathetic that those who based on
their other dealings should not touch BTC with a hundred yard pole (i.e. VCs,
exchanges, law firms ) are jumping into it not just with both feet but on all
fours.

I went to a BTC investors/tech people meet up not long ago. Some of the people
were household names in this "community". No one could describe a difference
between POS and POW; no one could speculate on internally consistent basis
what kind of outcomes would be possible based on the actions of China's
central bank. But everyone was very excited about all the conferences they
were going to and all the money they were making off the suckers.

It really reminded me of months before the dotcom crash.

~~~
mdip
I'm a little surprised you're getting downvoted so much, but I suspect it has
to do with:

> the entirety of the current bitcoin ecosystem is built on and around fraud.
> If we are to remove fraud and clearly currently defined as illegal
> activities from this ecosystem bitcoin and its value will collapse through
> the floor.

While I agree with pretty much everything else you've said about BTC being
somewhere on the not-so-good end of the "insanity" spectrum, and I've had
similar experiences talking to technologists regarding PoS vs. PoW (heck,
finding one who could coherently explain either was an exercise in futility).
You sound like someone who probably knows the difference and it's also been my
experience that those who do, generally believe the state of BTC (with regard
to its current price) is overvalued[0].

I disagree that the ecosystem, as a whole, is built around fraud, or that the
technology/purpose of BTC is generally for fraud. I look at BTC the same way I
look at paper money. The same kinds of fraud can be performed with paper
money. The same kinds of problems, such as permanent loss due to failure to
secure it, can happen with paper money. The one, major thing, you can't do
with paper money (easily, anyway) is buy something online with it. You can do
that, in a lot of places, with BTC (and to a lesser extent, other
cryptocurrencies). You can buy illegal drugs with cash and BTC but your local
drug dealer doesn't take Visa (or maybe they do, now ... I don't buy illegal
drugs).

I _fully subscribe_ to the belief that we're going to see a large crash
happen, probably in the near future. Any time you have something that looks
like an investment that's skyrocketing as much as this has and the "investors"
can't tell you the first thing about "what" it is they're investing in, that's
the pretty much the secret formula for a crash. And I don't think (outside of
the large amount of lost money) that a crash would be a bad thing. The fact
that the price continues to soar is hampering the ability for the BTC and
other cryptocurrencies to be used as _anything_ other than as something to
hold onto hoping for it to grow in value as it has for the last year.

There's another side to this, though ... I've been saying BTC would/should
_crash_ since it was about USD$100 and I've been wrong. I'm willing to accept
that I'm wrong here, but unwilling to bet my own money on that chance.

[0] Where by "overvalued", I mean, more overvalued than anything in the
history of the known world.

~~~
Vadoff
Don't think many drug marketplaces use bitcoin anymore, since bitcoin has a
fully public ledger. Private coins such as Monero or Zcash are used now.

------
runeks
How can this ever become an efficient market unless CME accepts BTC as
collateral?

If I sell futures contracts against 10 BTC, and I have 10 BTC in my Bitcoin
wallet, I’m fully hedged, and I take no risks (provided the wallet in question
is sufficiently secure).

If CME requires USD as collateral, how would I hedge my position? If the
BTCUSD price rises 10%, I can’t sell my BTC for USD (to use as collateral)
because then I’d expose myself to further price increases before expiration.

Unless I’m missing something, this will become an inefficient market,
bottlenecked by the ability of contract sellers to come up with USD
collateral.

A solution could be to collect a Bitcoin public key for contract buyers, and
require sellers to send the BTC amount covered by the sold contracts to a
"collateral BTC address" which can be redeemed in two of the following ways a)
by the contract seller, e.g., 7 days after expiration of the contract b) by
the contract buyer+CME (2-of-2 multi-signature) after expiration of the
contract. CME would keep the USD proceeds, from selling the contract, in the
seller's account at the CME. If the Bitcoin USD settlement price doesn't rise
to more than the contract selling price, CME would simply transfer the
settlement price USD amount from the contract seller's to the buyer's account.
If the price rises a lot, the buyer of the contract would be able to (by CME
providing a signature as well) redeem the bitcoins sitting at the "collateral
BTC address", and sell the bitcoins at the current market price (which the
contract buyer would have 7 days to do before the contract seller can redeem
the bitcoins himself).

This way, CME doesn't store any bitcoins themselves, and contract buyers are
responsible for keeping their own private keys safe (optimally, private keys
should be generated on an offline device, and the public key safely
transferred to an online computer). In order to steal BTC collateral, an
attacker would have to steal _both_ the contract buyer's _and_ CME's private
key.

~~~
malloryerik
You simply cover your futures position before expiration (buy as many
contracts as you'd previously sold). At the same time, you can sell your BTC
for USD.

In futures markets, almost no one takes delivery, but instead they close
("cover") their positions before expiration. For example, airlines use heating
oil contracts as proxies for jet fuel, because they are similar products whose
prices move together. But airlines will never but heating oil on the futures
markets to put in their Boeings and Airbusses.

~~~
F_r_k
In the electricity market, futures (base futures or peak futures) are almost
always used

------
mdip
It's been fun watching Bitcoin as a whole and especially watching financial
folks try to wrap their brains around Bitcoin, its price and seeing them try
to define exactly "what it is". Even my in-laws are investing a small amount
in Bitcoin and Litecoin ... the two of them have a Verizon Wireless internet
connection and a computer from 2004 -- read: not technically savvy in the
least.

As someone who's done about 20 years worth of investing in stocks and mutual
funds and has a very low tolerance for gambling[0], I wouldn't _dream_ of
investing in Bitcoin. Last year, however, I _did_ mine Ethereum. The result of
that mining turned out quite well for me, costing a little in electricity[1].
I further rationalized it by the fact that I could put the video cards I
purchased to work for me in other ways -- I might not have purchased the card
that I did were I not targeting price/watt in mining, but the cards I
purchased were slightly better than the ones I would have and I'm very happy
with them for rendering and some of the fun I'm having playing with ML using
CUDA, and hey my ffmpeg transcodes are quite fast, too! I jumped on ETH mainly
because of the fact that I had played with Bitcoin in the early days and
managed to mine about 20 of them which I lost due to reloading a server[2] and
not caring about my USD$0.25 worth of BTC[3].

All of that aside, I don't mine any longer -- the difficulty is too high and
with my setup, the best I can hope for is to get a couple of Ether a year. I
started mining ETH because they were doing something different from BTC and I
had the sense that the price would go up (though, again, didn't expect it to
hit $475 as it has today). The thing of it is -- nobody can answer the
question "why" in a way that makes me comfortable. It's, effectively, a bet
that someone elses' imagination will feel that the price of these bits are
worth more than they are now. While I've gotten the sense that a lot of
investing works this way, at least from time to time it _appears_ to track
with real-world things, like earnings and the state of the overall economic
sector that the company is a part of.

I think at least some of the price movement has to do with the fact that
Bitcoin is wildly unregulated (and I believe when the inevitable hammer of
government steps in, that price won't soar or remain as high). The fact that
my in-laws have money in the game (though, for practical purposes, it's pocket
change) tells me the days of free-wheeling non-regulation are very numbered,
though I have a hard time figuring out _how_ you even regulate something like
this (particularly a product like ZCash). And the worst of it is that from a
regulatory standpoint, it'd be easy to argue that a lot of the transactions
taking place look a whole lot more like money laundering and a whole lot less
like "a digital equivalent to cash[4]". The fact is, the treasury components
of our governments _love_ that we hate carrying around pieces of easily lost
paper and prefer to use regulated intermediaries that helpfully provide
reports to them about our incomes and spending habits which can be used to
ensure we're operating according to the law. The numbers of traditionally
"Cash Only" businesses are approaching zero which is starting to put _any_
transaction that doesn't involve one of these regulated entities into the
"questionable" category.

I'm fascinated by all of this, personally. It's mostly played out as I have
expected -- when the value of BTC started exploding, the numbers of
cryptocurrency and cryptocurrency related products started exploding as did
the number of thefts, viruses/criminal elements specifically attacking or
using cryptocurrencies. And, of course, the scammy-sounding me-too start-ups
trying to find some way to use buzzwords from the cryptocurrency space (though
the "ICO"s surprised me quite a bit both in the sheer number of them and the
number of people willing to buy into them). Most of the off-shoot
cryptocurrencies were nearly identical to one of the leading products with ZEC
and ETH being outliers with unique features and spawning their own copy-cats
(I'm also watching PIRL with curiosity[5] since it seems centered on improving
transaction speeds, more stability around management/updates and focused early
on getting an actual marketplace up -- plus, it's based on ETH, which I find
very interesting as a technology).

[0] I brought $20 to Las Vegas with the full intent of losing it. It took four
days for that to happen and I still felt badly about having wasted it despite
it providing me with several hours of entertainment across a variety of video
poker machines.

[1] As a guy who has three servers running in his basement and likes to keep
the air conditioning set at a frigid 68 degrees, the difference between my
already outrageous electric bill and my slightly more outrageous electric bill
wasn't something my budget noticed. The servers were mostly idle, anyway, so
why not have them doing something while they're not doing anything?

[2] I found the technology interesting and mined more as an academic
experience. I don't remember the exact date, but it was within a few months of
when the network went live ... I didn't even use a pool and managed to net
somewhere around 20-25 of them in a couple of months. I loved the "idea" but
wrote it all off as a cypherpunk's wet dream, not something that would
actually have value in the future. Oops!

[3] IIRC, there wasn't even a way to see the price of BTC in USD because the
only way to turn them into cash was to find someone who wanted to buy them
from you.

[4] As in, similar anonymity and similar risk -- you lose or have your wallet
stolen, your cash is also lost. Unfortunately, people won't see it that way
when it's _their_ money.

[5] I even ended up firing up my mining rig, though that was mostly because I
was feeling the itch to delve into CUDA, again, so I took some time to add
some optimizations to the mining code I had tweaked last year. I don't expect
to make money from it, just I like didn't expect to do so for ETH, but I'm
enjoying playing around with code and technologies that I don't normally get
exposure to in my day job.

------
mirimir
> Of course this makes sense, because handling bitcoins is mostly terrible.
> The fate of every bitcoin exchange, I often say around here, is to have its
> bitcoins stolen, so CME is quite sensibly launching a bitcoin exchange
> without any bitcoins to be stolen.

This is a strawman. Only fools keep substantial Bitcoin balances in exchange
wallets.

Edit: OK, fools and ordinary people. But this is an article about investors in
Bitcoin futures. The author could have at least mentioned offline wallets.
Also, it's true that you need exchange wallets for speculation. But there's
the Kelly criterion, and you can keep most of your winnings offline.

~~~
vesinisa
Though, there is no shortage of attacks against electronic wallets on personal
computing devices either. The average, technologically moronic user might
actually be _safer_ storing his Bitcoin on a trustworthy exchange, as opposed
to a personal wallet protected by a weak passphrase, if any, on the same
computer/phone where he surfs, reads email and runs software of dubious
origin.

Best way to protect against unauthorized use of your funds, as the article
notes, is to go really old school and print your private keys out on a piece
of paper, and store it in a physical vault.

Of course, none of this would be a problem if the exchange acted as a trusted
ledger and could simply revert any unauthorized transactions on the user's
funds. Like a traditional bank, but just with all the crypto hype!</s>

~~~
mirimir
One can have _numerous_ Bitcoin wallets. I have dozens of active ones. I'm not
a speculator, so I don't keep anything substantial in exchange accounts.
Unless you're holding more than a few Bitcoin, you don't even need to go full
offline. Linux VMs on Linux hosts are not likely pwned. You clearly wouldn't
keep much on a phone.

------
bgnm2000
I think many people are missing the inherit value of a decentralized currency.
You trust your government today, and you have a stable currency. If that is
not the case tomorrow, you will wish you held crypto.

~~~
astrodust
Crypto can't function without a functioning society, and as best as we can
tell, without a government you don't have one of those.

------
seibelj
Is it possible that the concept of "money" has been upgraded? That
cryptocurrencies are simply better as a store of value than dollars, for
reasons A through Z? For example, people don't like the costs and regulations
associated with fiat currencies - therefore, crypto is better for them. It's
like trying to ban alcohol or drugs - people still like them, so you can never
ban them, no matter what the government wants. So crypto will never be banned
(longterm).

It's still such early days in this area, if you are curious at all, buy some
BTC and ETH and sit on it.

~~~
matt4077
> Is it concept of "money" has been upgraded?

That sentence alone nicely illustrates why people loath bitcoin enthusiasts.

> people don't like the costs and regulations associated with fiat currencies

I have a savings account. It doesn't cost anything. The only regulation that
matters to me is that it is insured against loss and theft.

> trying to ban alcohol or drugs - people still like them, so you can never
> ban them

Illegal drugs are banned. Hence _illegal_.

> no matter what the government wants.

Governments don't "want" things. People do–and elect governments to do it. The
overwhelming majority is against legalising heroin. If you believe you can run
a mainstream currency with the power requirements of a small country without
and not be subject to government regulation, you are delusional.

Look: Nobody is currently using Bitcoin as a "store of value". Nobody but drug
dealers is currently using Bitcoin as a transactional currency. The only
reason anybody is buying bitcoin is speculation, or, if you will, FOMO. With
transaction costs in the double digits, and a security story worse than
leaving a bag of money on a public bus, Bitcoin has zero underlying value as
anything but the air in a bubble.

~~~
seibelj
Illegal drugs are banned, but anyone who wants them can still get them. The
point is, what the government wants and what society wants don't need to be
synced.

Your argument has been said when Bitcoin was $1, $10, $100, $100, $10,000. You
will keep saying it at $100,000. And no one cares - the only way you can be
proven right is if / when BTC goes to $0. And if it never does, you can keep
saying the same old arguments, waiting patiently forever until it happens.

