[Nursie]

Have you ventured over to bitcointalk?

The speculators aren't in any danger of disappearing, no sir, this is just an opportunity to buy 'cheap' bitcoin and increase their holdings. Because obviously squirrelling away as much of it as possible will help it become a viable currency...

[dragontamer]

Indeed. But with a futures market, they will be able to speculate in both directions. Futhermore, businessmen who rely on the BTC <--> USD price will be able to buy futures, and be able to settle down on a future spot price on BTC.

IE: A business expects to get say 10 BTC in 30 days... but wants the money in USD. So he wants to buy a contract to sell 10 BTC 30 days from now. It can even be in the form of call / put options.

A vibrant speculative community will provide these businessmen with contracts. And then everyone benefits. Speculators will begin to add value to the market. As opposed to now, where all of them seem to be relying on the greater fool theory.

[rrrrtttt]

Could you say a bit more about how a futures market can reduce volatility in the underlying asset? This is an honest question, not being cynical. To me it seems that assets that have futures markets can be very volatile (say gold or oil), but I guess causation goes the other way?

[dragontamer]

Sure. The "futures market" is primarily composed of call / put options. I'll focus on a call option.

A call option is a contract, allowing you to buy the asset at a specific price at a specific time. I'll put parenthesis to make it easier to understand... IE: I'll sell you a (contract to buy 10 BTC for $30 each on April 30, 2013) for $300.

So today, you can buy the contract from me. In April 30, if BTC remains high in price, you can execute the contract and buy 10 BTC @ $30. If BTC crashes in price, the contract is worthless, and you can instead buy BTC from the market. You make a profit if on April 30, the price of BTC is $60 or higher.

The opposite is true for put options. You buy put options to sell BTC on the market at a particular price at a particular time.

Here's the kicker: options are bought and sold on the open market. IE: The futures market. So the spot price of $300 for this contract will go up / down based on what speculators believe the price of BTC will be in 30 days. (The terms of the contract don't change. Only the cost of the contract changes)

For businessmen who primarily work in USD, getting a spot price of BTC way off in the future will help solidify his business.

The underlying asset may be volatile, but futures allow the businessman to guarantee a price on the BTC <--> USD exchange.

[jhaywood]

I wouldn't say that futures markets make the price of a commodity less volatile. They do however let you lock into contracts at certain price levels to let you manage your risk in a volatile market. Which makes all the difference

[dragontamer]

It will somewhat stabilize. With Call / Put options, you can start to create a straddle for instance, and make money if the market moves in either direction.

http://commodities.about.com/od/futuresoptions/a/futures-opt...

I'd expect the first strategy people will do when a futures market opens is to start making a lot of straddles. Therefore, these people make money if the market moves in ANY direction, up or down. (the more the market moves, the more they make money). Thanks to the magic of options.

A ton of people buying straddles will slow down the movement of the market. Then the straddlers make less money when the market fails to move.

Every time someone profits off of straddling, the market volatility decreases, leading to an overall more stable BTC market.