[londons_explore]

Can an expert explain for the less informed:

* Do futures markets typically stabilize the price of a commodity?

* Who loses out if a futures contract can't be fulfilled (for example due to lack of liquidity in the underlying market)?

[koolba]

> Do futures markets typically stabilize the price of a commodity?

Kind of. It doesn't necessarily stabilize the prices of the commodity so much as allow the transferring of the risk associated with price movements.

> Who loses out if a futures contract can't be fulfilled (for example due to lack of liquidity in the underlying market)?

The exchange acting as the clearing house is on the other side of each contract so they'd be left holding the empty bag. Exchanges deal with this by settling futures daily (so net cash movement based on current price) and by setting margin requirements on the members buying or selling contracts. The margin requirements vary based on the volatility of the future and for something like Bitcoin I wouldn't be surprised if was 100%.

What's particularly cool / safe (and interesting if you're a finance nut) about futures vs. actual trading of Bitcoins is that there is zero crypto involved. Everything is cash settled in dollars.

[dsacco]

> What's particularly cool / safe (and interesting if you're a finance nut) about futures vs. actual trading of Bitcoins is that there is zero crypto involved. Everything is cash settled in dollars.

I certainly find this interesting, but I don't think it's a good vote of confidence for Bitcoin just yet, even if it's structurally safer for the exchange. For the most part futures are not cash-settled, or only cash-settled when it is very inconvenient for the buyer or exchange to settle them physically. If you buy futures, you are usually trying to gain speculative exposure to something that is otherwise very difficult to hold (e.g. oil futures vs oil barrels).

If there is no structural obstacle to settling futures physically, that implies there is another reason the market or the exchange doesn't particularly want to. This can mean various things; in the case of Bitcoin futures specifically, I interpret this to mean that the exchange would rather not handle Bitcoin directly, because historically holding a large amount of Bitcoin at once invites hackers to try and steal them.

That's pretty savvy and does seem good for overall safety, but from the perspective of financial stability, I think it's bad for Bitcoin's overall market confidence long term. My concern is that since Bitcoin is convenient to purchase and trade directly through existing exchanges, people who are long on Bitcoin should just buy Bitcoin directly, instead of Bitcoin futures.

[xbzbanna]

Does this mean that tons of money could be invested in these - let's say a trillion dollars going long on bitcoin via cash settled futures - and the underlying price wouldn't necessarily go up at all? I always thought the play with bitcoin was to wait until the "dumb money" got in via financial institutions. But if the whales are just betting on the real price with cash settled futures, does that mess up my assumptions about supply/demand?

[kgwgk]

Let’s say the price of bitcoin is $10000. You want to go long using futures, so you start buying contracts. A few people will want to sell futures at $10000, but not for a trillion dollars. If you want to buy more futures, you will have to pay more. If you offer $11000 there will be more people willing to take the other side of the bet. And if the price of the underlying is still $10000 arbitrage is possible. I could buy one bitcoin for $10000 and sell you the future for $11000, pocketing $1000 no matter what the future price of bitcoin may be. That creates demand for bitcoin if there is huge demand for futures, pushing prices up.

[maxerickson]

The contracts would still involve real Bitcoin, the exchange would handle the Bitcoin side for the trader.

[xbzbanna]

So I buy a future for 1 bitcoin in 10 days with a price of $10k. The future is cash settled, so in 10 days the exchange will give me [price of BTC] - $10k, or I can sell the future before then. Where does the bitcoin come in? Is the exchange required to hold bitcoin = to the net of all futures?

[QML]

I’m guessing no fiat to crypto or vice versa; 1. That’s a taxable event. 2. Wouldn’t that lead to more financial scrutiny?

[tzakrajs]

For CME (and perhaps NASDAQ) they are doing cash settlement instead of physical settlement of the Bitcoin since it would introduce significant overhead. They are going to use a reference rate called their "Bitcoin Reference Rate" which has a collection of exchanges that it uses to determine the spot price.

[babaganoosh89]

What's even cooler about futures, is they are taxed at 60%/40% long term / short term capital gains. Great for anyone who holds less than a year.

[elmar]

> volatility of the future and for something like Bitcoin I wouldn't be surprised if was 100%

100% is really farfetched more like 30%

[whatok]

historical volatility on pretty much any time window is well north of 30%

[rictic]

Yeah. The price has varied by 20% in the past 24 hours.

[Frogolocalypse]

The price has gone up by 60% in the last 30 days.

[rictic]

Yep! High volatility.

[rndmwlk]

If it's anything less than 90% I would be surprised. It will not be in the ballpark of 30%.

[swalsh]

I think it kind of does, in a way. Let's say I go long on bitcoin, but purchase futures that are short on it. If bitcoin plummets, I may lose on the bitcoin position, but the futures I purchased will go up, limiting my losses.

Southwest did something similar with oil a few years ago. Fuel is one of the biggest costs to an airline, so when the price of oil spiked a few years ago, many airlines had to raise ticket prices + add fees to make up for the loss. Southwest, on the other hand, had oil futures betting on the cost of oil going up. When the spike happened, their costs went up too, but they could make up for it with the futures.

[otakucode]

That's called 'hedging' and is literally all hedge funds do. So long as markets remain 'sensible' its a brilliant strategy. Markets, of course, do not remain sensible for long. I'm presently listening to 'When Genius Failed', a book about the implosion and utter failure of Long Term Capital Management, one of the biggest hedge funds who learned just how utterly batshit irrational the market can actually be.

[0xBABAD00C]

> That's called 'hedging' and is literally all hedge funds do.

Uhhh, no

[sjcsjc]

Yeah the term hedge fund seems something of a misnomer nowadays.

For anyone interested:

The term "hedge fund" originated from the paired long and short positions that the first of these funds used to hedge market risk.

https://en.wikipedia.org/wiki/Hedge_fund

[perl4ever]

For practical purposes, these days, I believe a "hedge fund" is basically defined by its high fees (2&20), lack of regulation and disclosure compared to a mutual fund, and its restriction to "qualified investors" who are supposed to be wealthy enough to absorb losses. Certainly quite a few so-called hedge funds get a lot of publicity for the opposite of hedging - making wildly risky bets to try to beat benchmarks.

[wyldfire]

At least in bitcoin's case -- if its market cap increases substantially as a result of being listed, then that would stabilize its exchange rate.

[ISL]

The test case for this is in onion markets. Futures trading in onions was banned.

https://en.wikipedia.org/wiki/Onion_Futures_Act