Topic: Derivatives like futures will be great for bitcoin, before they destroy it (Read 1091 times)

Except that Quin doesn't realize that CDOs are not derivatives and were able to be liquidated just as easily as any other security by simply selling them to another bank or institution. Mortgages are not derivatives. CDOs are mortgages. A CDO is to mortgages as a mutual fund is to stocks.

This whole argument just stems from an objectively incorrect understanding of what a CDO and derivative is.

This thread certainly reads a lot better with the OP on ignore. I didn’t know there was a separate ignore list for PMs so judging by the irrelevant nonsense I received before finding it I guess the OP is still busy deluding themselves that the fact their interpretation of the word derivative differs from what professional derivative traders consider to be a derivative is somehow relevant or worth debating.

His analogy and therefore his argument falls down when you understand that Bitcoin will be the underlying asset to Bitcoin futures contracts and the value can be easily and quickly realised. CDOs, on the other hand, are a collection of loans secured on property assets and it is not easy or quick to call those loans in or sell the underlying property.

Anyone who stumbled across this thread because they are actually interested in what effect CME’s new futures contract will have might find the following article interesting.

https://www.coindesk.com/fud-sides-defense-cmes-bitcoin-futures-plan/


Also, the CME has published details of the contract specifications.

http://www.cmegroup.com/trading/equity-index/us-index/bitcoin_contract_specifications.html

5 BTC per contract, $5 tick size so $25 per contract.
Circuit breakers:


i.e. The same as for existing equity and currency futures contracts.

1. You clearly know nothing about jewelry. There is a reason gold and platinum jewelry is more expensive than silver, and copper jewelry is just garbage. It's because those materials are more rare and inherently superior for jewelry. They are heavier, better looking, and in the case of platinum, much more durable. Why do you think a wooden guitar is more expensive than a plastic one? Because people believe it is worth more? No, because it sounds better... its properties make it better, just like gold and platinum have properties that make them valuable.

2. Almost every other cryptocurrency offers all of the listed properties, so your statement that no other financial asset offers even half is just flat out wrong. Furthermore, it is trivial for anybody to go out there and make another cryptocurrency that has all of those properties, and people are constantly doing this. This is ironically where crypto falls short of government-backed currency - USD inflation is controlled, whereas crypto inflation is completely uncontrollable as anybody and everybody issues more and more ICOs.

3. The fact that you think you would be able to pick out the peak and sell before a crash shows that you know nothing about investing, and honestly you are probably very new to bitcoin. I'm guessing you weren't around for the 2013 bubble and it sounds like bitcoin is the only financial asset you are familiar with. It is practically impossible to pick out the peak of a bubble. Anybody who does is doing so out of pure luck.

Can you really hear yourself, your rhetoric? Same set of jewelry can as well come from copper, Aluminium, platinum and gold, it is the people's belief that set the prices. That is why companies spend tirelessly on advertisement - to put their products everywhere for people to see and accept.
All the attributes highlighted above are what makes Bitcoin thick and because we have not had any other financial asset that offers even half as much, Bitcoin will know no upper bound.

The introduction of Futures contracts will plummet the price of Bitcoin? Yes.

Most hodlers are going to become rich?  Quite obvious.

A crash would likely follow? That would be nice, another excellent opportunity to start a profitable venture again after maximizing and taking profit from the former. I can't wait!

literally the definition that you provided clearly 100% supports my argument:

"An arrangement or product (such as a future, option, or warrant) whose value derives from and is dependent on the value of an underlying asset, such as a commodity, currency, or security."

A CDO is just a collection of mortgages. It doesn't derive value from mortgages, it IS mortgages.

You are grasping at straws here. If you really think a CDO is a derivative then you must think that index funds and mutual funds are derivatives too. CDOs are bundled collections of mortgages. Index/mutual funds are collections of stocks. These are NOT derivatives. Derivatives are securities that are separated from the underlying asset by an additional degree. If you buy index options, those are derivatives. If you buy credit default swaps, that is a derivative. Investing in the derivative means that your money is not going directly into the underlying asset. With CDOs, your money is going directly towards buying mortgages.

Once again, this is not a debatable topic. You are wrong, even by your own definition from oxford dictionary. Furthermore, if you think Investopedia and Wikipedia are unreliable sources then you are simply denying the clear truth. They are absolutely reliable sources of information. So is Oxford Dictionary. They all support what I have said.

You are not even subscribing to alternative facts here - you're just making up your own. I think you are starting to understand that I am right, but I know you will never admit it. I don't expect you to, but I expect that you will slowly admit it to yourself eventually.

Because Wikipedia and Investopedia are so authoritative.

I'm a professional futures trader and have many years of experience in the City and on Wall Street. I am fully aware what a derivative is, but for those that don't know (including the muppets at Wikipedia and Investopedia), the Oxford English Dictionary is the definative authority on the English language.

https://en.oxforddictionaries.com/definition/derivative


A CDO derives its value from the underlying value of the property that the loans are secured upon.

Bitcoin is the underlying asset.

Hence they are not comparable.

You just made my ignore list, or should that be the ignorant list. Goodbye.

LOL wtf this argument makes zero sense at all. Chocolate wrapper jewelry? What are you even talking about or trying to say? That the only thing that makes gold more valuable than chocolate wrappers is belief? Not the fact that it is infinitely more useful? I'm sorry dude this argument is unbelievably dumb.

Check how things are in Sweden.
Less than 2% of transactions occur in physically form with "cash".
I'm probably making more than 75% of my shopping with a cc card and I would increase this if merchants weren't so keen on tax evasion around here.



You really are confused and your explanations are even worse...
You don't pay with paypal or netelller or bitpay, you still pay with dollars and euros in digital form.
If you use a bitcoin debitcard in germany (you being from the us), what do you pay with?


We can check this out pretty easy.
Try giving your girlfriend /wife a gold ring and one made out of chocolate wrapper.
Since she obviously won't chose the golden one for it's thermal conductivity I wonder what would be her reason

This is horribly written and barely coherent English but I'm going to try to take a crack at your last point (the first points didn't make any sense and it is not clear at all what you were trying to say).

USD is not being destroyed in value against bitcoin. Bitcoin is flying ridiculously high to unjustifiable levels. USD value hardly changes compared to bitcoin. If you honestly believe that a cryptocurrency is impacting a real government backed currency with a market cap in the tens of trillions of dollars, if not higher, then you don't understand money at all.

Honestly you need to just go back and rewrite your argument because it makes no sense and I have no idea what you are trying to say. It's very poorly written and pretty much incoherent.

Explain why you think it has intrinsic value that cannot be easily replicated and improved. Bitcoin's value comes from its use as a currency and store of value, but it is currently 100% useless as both due to its volatility. In order for something to be a good store of value, it 100% HAS to be very illiquid, like USD or other government backed currencies.

Or you can just sit here and hurl insults.

I'm not arguing that crypto itself is useless and will never have a place in society, bitcoin does not warrant current prices.

Yeah you are 100% objectively and demonstrably wrong. You don't know what a CDO or even a derivative is. Here is your definition, bud:

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

"...a CDO made up of loans is merely a securitizing of loans that is then tranched based on its credit rating. This particular securitization is known as a collateralized loan obligation (CLO) and the investor receives the cash flow that accompanies the paying of the debtor to the creditor. Essentially, a CDO is held up by a pool of assets that generate cash. A CDO only becomes a derivative when it is used in conjunction with credit default swaps (CDS), in which case it becomes a Synthetic CDO. "

That being said, even in your analogy you are still wrong, as I already explained. If bitcoin is the equivalent of the loan, or even the house, then it still does not have the advantage you were arguing. You were saying bitcoin can be sold easily but the mortgages and homes in the CDOs could not. This is just flat out false. They COULD be sold easily at very high prices, which is why there was a bubble. The problem is they weren't worth that much, and many of the people taking out these loans would not be able to pay them eventually.

The above paragraph is completely irrelevant though because you have shown that you have no understanding of what CDOs or derivatives are. Go to investopedia and wikipedia, do some reading, do some research, and come back when you've learned a little bit more about this topic. You'll realize that there is no argument here. You might as well be arguing that 2 + 2 = 9.

Ok right now I've read all comments of this thread and it seems like that the OP is either a complete dummy and doesn't even understand the basics of what he tries "intelligently" to talk about and prove, or he is just a troll.
I'm not even sure if he really understands basics of Bitcoin and why it won't be used as a currency in first place.
Torque and TheQuin brought up all necessary points and arguments.
Contiuing arguing with the OP is a complete waste of time. He does not get it!

Bitcoin goes stable everytime it reaches a specific point, but if everyone here is about to become rich only, they must be dumping it down to hell.
USD is backed by government, and so are your finances which doesn't allow you to store it "anonymously" without showing it to your government.
I believe Bitcoin is one of the best ways to save taxes and even if we pay on it, why to worry here as your "money is making you money over it".


If you are so concerned about regulations, you shouldn't be here. No, this place and Bitcoins both are not for you, dude! 


Knock knock, forgot something? To push the price up too, those who are ^trying to get rich^ need to buy it through fiat in which your "government-backed USD" comes at the top. So, it's typically being destroyed against the "value" of Bitcoins while Bitcoin is gaining over it.

Anything more left to say, eh?!

This where you are completely wrong.

Bitcoin will be the underlying asset to any futures contract. CDOs are a derivative, synthetic CDOs are a derivative of a derivative. Property is the underlying asset to CDOs, synthetic just added another layer and is irrelevant. When you finally get your head around that you will see there is no similarity at all in the two situations.


When discussing whether the introduction of a derivative can cause an economic meltdown the market value of the underlying asset at any moment in time and whether it can be easily redeemed is all that matters.

Torque summarized it beautifully:


If you can't even grasp the fundamental difference between an asset and a derivative then I'm wasting my time here.

Honestly you could argue that USD no longer has value since abandoning the gold standard... but it is backed by the US government and accepted everywhere. Furthermore it is a fantastic store of value due to its high liquidity. This separates it from bitcoin, which cannot be used at all as a store of value due to its lack of liquidity and extreme volatility.

Basically it comes down to this: USD is backed by the US gov, and bitcoin is backed by its block chain. You can argue that both of them get their value from belief, but I would argue that the backing of the US gov gives it more intrinsic value that is not based on belief, but based on the power and influence of the US gov to regulate USD as a currency. Bitcoin’s value comes from its properties as a currency, and its price is not in line with its value. Price is determined by belief, value is determined by its properties. Bitcoin price is high because everyone is trying to get rich by pushing bitcoin price up - not because itnis genuinely undervalued.

Wait, objectively wrong? About the "belief" part?
Don't tell me that if I give you a million bucks, you won't believe because they are just 100 USD x 10,000 bills, right?
We trust fiat because of that "number" that's on it, "believe" that it's worth what's written over it.
I am from India, we recently went through an extremely worst situation that's called "demonetization" where the currency valued at 500 and 1000 Rupee based on the numbers written on it, became dust the minute our PM declared that such bills won't be acceptable for use from the date.
But with Bitcoins, the case is not the same because nobody from either the world or the Galaxy could intervene to tell you whether your Bitcoins are worth this or that, but you can set it at your own "belief". So, what else do you need to understand about the "belief" theory?

Belief is the only reason why we are seeing "users" coming in through mainstream and investing with a belief to turn their investment into something better with a "safe-haven" asset. Don't try to make Bitcoin a currency, we really don't want it now as we don't want it to get governed by some bullshit governments, and consist the fear of losing on it by letting them "demonetize" the usage of Bitcoins itself.

Looks like you didn’t read the rest. Your statements here are objectively wrong. You are way oversimplifying the concept of value, and you provide no counter points to what I said at all.

The state of the housing crisis hat you are describing is after the market was already collapsing. I’m sorry man but you are wrong here.

First of all, let’s make sure that you understand the analogy correctly. Bitcoin is the equivalent of a CDO in this analogy, and bitcoin derivatives are the equivalent of a synthetic CDO. You are arguing that bitcoin derivatives are different because the underlying asset (bitcoin) can be sold at the current price easily. However, before he housing bubble popped, CDOs could ALSO be sold on the market easily, at whatever the going rate was. Furthermore, the individual mortgages could be sold easily (even though they were crap) and EVEN FURHERMORE, the houses that those mortgages were secured by could be sold easily themselves, at the very high value of the pre crisis housing market.

I understand that the borrowers were eventually going to default, but this is not relevant to the fact that their loans could be bundled and sold easily, just like bitcoin is sold easily today. I am arguing that in both cases, the asset itself was overvalued (bitcoin and the crappy CDOs).

And to your last point, the market thought that housing prices were justified in 2006. Clearly they weren’t. Value is not as simple as supply and demand in the current moment.

And with that idiotic failure of recognition at the heart of the argument, I'm out.

TheQuin summarized it beautifully:

Have fun trolling.

/ignore

Belief is not what gives value to gold or anything else. Gold has value because of its intrinsic properties and rarity. It is useful for making jewelry, among other purposes in different industries. Fool’s gold does not have this value and it is far more common.

This feedback loop that you described is 100% real in many assets, including bitcoin. You are spot on in your description of how it works, but you failed to mention that if price is driven up simply by demand (or “belief”) and not by intrinsic value, then that is how bubbles form (and eventually, inevitably pop).

OK, I give up trying to explain it to you.


No, the problem really was that you couldn't sell the assets for anywhere what they were valued at in the CDOs.


It's totally different. You can sell a bitcoin instantly for its publically known price. The value of properties in the CDOs was unknown to the investors and assumed to be far greater than it actually was.


The value a market gives to something is the sum of the opinions of all of that market's participants. Individual opinions will vary. Whether you or I think it is justified is irrelevant on its own. It is what the market as a whole thinks is justified that matters.

Belief. Belief (on a collective, mass scale) is what separates one thing of value from another similar thing that has less or none of that same value.

What separates Gold's value from that of "fools gold"? Belief, further reinforced by it's attributes. That eventually becomes a self-reinforcing feedback loop that grows to a mass scale. That's it.

How did Gold get it's value as money and store of value in the first place? The first 100 people that started using Gold as a barter/money first believed in it, when no one else around them did. And then the discovery of Gold's attributes further validated that belief. And then the belief spread to 1000, then 10,000, then 100,000 people. Then around the world.

I’ll read your link about tulips later.

As to your first point, commodities have intrinsic value and physical use. I would argue that bitcoin’s intrinsic value is very low. It’s value comes from its properties as a currency, and it has PLENTY of competition. All of crypto, however, is currently not viable as either a currency or store of value because of its insane volatility.

What makes bitcoin so much better than all other alt coins that it warrants a 100+ billion market cap? Why can’t I just create a new coin any one I want, that has all the good qualities that make bitcoin useful?

You could get the value of a CDO back by simply selling the CDO. Furthermore, you could get the value back in the actual houses themselves, which were selling at crazy values. By that standard, the “value” was there. The issue was that the houses weren’t actually worth that much despite the fact that you could find some schmuck who would take out an adjustable rate mortgage and pay you a crazy amount of money for it, and then turn around and sell that mortgage to a bank who puts it in another CDO. The market was willing to pay that much, but that doesn’t mean the houses are worth that much. That’s what I fear will happen with bitcoin as people start trading derivatives and using leverage. I don’t think bitcoin is any different in the sense of the underlying asset potentially being overvalued.

As to your second point, I could see the crypto market reaching trillions as a whole at some point, but I don’t think it will be justified.

almost all of bitcoin's current value is from speculation.

in future its use as a store of value and form of financial protection will be just as big if not bigger.

currency will possibly never become one of its main uses.

These people who sold at the bottom are funny.

I’d rather be in the bubble than being negative with it all the time and reading your latest post is convincing. Bitcoin will not hit 5000$ and so on.. I really love reading someone’s opinion who hardly believe that bitcoin is nothing in this world and looking forward of its downfall but keep on being disappointed and dismayed for it still unstoppable.. This is something that needs attention by the way,, it is signs of depression..

Bitcoin will and always be increasing and those trying to paint it black and give bad comment about it like disc embedded with scratches that it’s keep repeating but no sense..

We're getting somewhere now. The difference is that you can actually sell Bitcoins for the price they are quoted at. You could not get the value of a CDO back either from the people who held the mortgages or from selling the foreclosed property. Actually, the very definition of value (in the market sense) is exactly that. What someone is willing to pay for it. Futures and options that are backed by something you can sell at the value the contract trades at don't cause a financial collapse.
 

The internet bubble wasn't the internet, that had been around a lot longer. It was a whole bunch of startup companies that saw the potential to use it to launch innovative new businesses. Most were completely useless and fell by the wayside, a few of the biggest corporations that now exist survived.
The analogy is that blockchain is the internet. Bitcoin is analogous to a major infrastructure company providing the backbone to host the internet. That will come more apparent in coming years when things like Lightning Network happen.
As for my prediction of trillions, it's just that a prediction. None of us can claim to know really what will happen. I may be over-optimistic and be proved wrong, but it certainly isn't ridiculous.

That's not the only thing that gives Bitcoin its value. Its potential as a deflationary store of value is another. Doesn't have to be completely stable for that function to work either, look at Gold and Silver. Look at real estate, collectables, art, etc. Also, Bitcoin is decentralized, permissionless, trustless, borderless, censorship-resistant, no-middleman transactions, etc. the list of other attributes that give it value goes on and on.


This ignorant myth needs to die. Seriously. READ:
https://www.reddit.com/r/Bitcoin/comments/76fg7j/bitcoin_aint_tulips_in_fact_tulips_aint_tulips/
More reading:
https://stratechery.com/2017/tulips-myths-and-cryptocurrencies/

You got everything right in the first paragraph. Yes, I am saying that the value of the underlying asset is not there. Bitcoin has the POTENTIAL to be valuable because of its properties as a currency, but as I mentioned initially, it is useless right now due to its volatility. This is a whole separate discussion though. Also, just because someone is willing to pay x amount of dollars for an asset does not mean it is worth that much. People paid crazy amounts for tulips, just like they did for CDOs.

As to your second point, Bitcoin is innovative and crypto is a very interesting idea, but it is nowhere near the scale of the internet. The internet has impacts on all areas of our lives and bitcoin only pertains to money. Blockchain technology has a lot of potential, but not bitcoin itself (at least compared to the internet). I’m not saying the bitcoin bubble is going to burst tomorrow or that it is near its peak, but to say it will go into the trillions is ridiculous IMO.

So why don't other futures cause economic collapses? Why not gold, oil, wheat, Euro, bonds... there are futures in almost all commodities and financial instruments. The simple answer is that they are all backed by the value of the underlying asset being traded in. Only in CDOs did it turn out that the underlying asset wasn't really there. The properties the loans were secured on didn't support their value. That was the cause, derivatives were the means. Unless you are telling me that Bitcoins don't really exist and can't be sold in exchange for dollars to value they are quoted at there is no similarity.


Which is all good. The market cap of Bitcoin is $130Bn right now. In 1999 the internet bubble was in the trillions and that is where this is going. There probably will be a bursting of the bubble one day but it's a long time off yet. When it happens the best will survive and surpass their bubble peaks a few years later in the same way the best internet companies did.

There is a really interesting article on Reddit about what happened to the stock market in the 1980's when the CME first introduced futures for the S&P in 1982:

https://www.reddit.com/r/Bitcoin/comments/7d964e/1987_stock_market_crash_and_bitcoin/

The market pumped like crazy, and then crashed in 1987. I recommend everyone read that thread, it's an interesting window into how derivatives influence the underlying asset.

Did you forget to read the first paragraph of my original post? Futures can help vendors lock in prices when they are accepting bitcoin payments.

Of course the CDO ratings were a problem but CDOs alone didn’t crash the economy. You are right that synthetic CDOs magnified the effect, but they magnified it massively. That is why it had such a massive impact. Synthetic CDOs cause what would have been a large problem in the housing market into a massive once-in-a-lifetime world wide economic collapse.

You say that derivatives of bitcoin won’t cause investors to throw an irresponsible amount of money at bitcoin because they’ve already done that, and you also say it attracts a new class of investor... but you fail to mention that the new classes of investors being brought in are institutional, and derivatives allow them to throw even MORE money into bitcoin. Just because it is already overhyped doesn’t mean it can’t get even more overhyped.

If you believe your post headline...

..then can we at least get to the 'Derivatives will be GREAT for Bitcoin' part first, before talk about destruction? Or are you deliberately trying to jump past that part? 

No, that really doesn't change anything. It was the CDOs that had no actual value. The loans they were made up from were sliced and diced so as hide the fact that most of them were subprime and worthless. The rating agencies gave them AAA ratings which then allowed funds to invest in them that couldn't have done without the AAA rating. Derivatives may well have magnified the effect but they were not the underlying cause. The obfuscation of the intrinsic value was the problem, not the leverage. In the same way, a Bitcoin futures contract will not cause "people to throw irresponsible amounts of money" at Bitcoin, that happens already. It just allows a new class of investor to get involved through a trusted exchange. There will be full transparency of what the underlying asset is and what it is worth at any time as it is Bitcoin.

No you get it wrong mate,
Bitcoin can not be a 'Currency',that mean it can not be used as a payment in our real life.
but right now we can use it to pay something,which mean it has an usability as a payment system.
payment system and currency are totally different mate,
currency need a physical form because it will be used in the real life,
online payment system did not need it at all,for example paypal,neteller and something like that.
in other words,it has a value because it can be used as a payment,but it will never can be a 'currency'.

Currency = Fiat ( Dollar,Pound,Bath,etc etc)
Payment Point/Online payment = Bitcoin or something similiar to that.

If bitcoin is never used as a currency then it has zero value and should trade at exactly $0.00 per coin. That’s literally what its purpose is. It is not needed at all as a form of online payment since we have credit cards, bank transfers, Venmo, and tons of other services for that.

You missed the word “synthetic”, which completely changes what you are talking about. Synthetic CDOs are a derivative of CDOs. There is nothing wrong with CDOs and they themselves did not cause the economy to collapse... its the derivatives of them that did this. Futures and options both allow vastly more money to be invested in something than the intrinsic value of the underlying asset. This is a quality of synthetic CDOs too, and it will allow people to throw irresponsible amounts of money into extremely volatile assets backed by bitcoin, which is really dangerous.

That's a misunderstanding of what futures and options are compared to CDOs. Futures and options are deliverable, that is you can hold them until they expire and then take delivery of whatever the contract is for. Or if you hold a short position then you can settle it by delivering whatever the contract is for. So they do indeed have intrinsic value.
CDOs are just a means of selling debt in packages, there is no comparison at all.

first of all Bitcoin will never can be used as a currency,
at best it will only be an online payment,
it can not be used as a currency because it does not have a physical form.
we ever heard about 'casascius' as its physical form,but it's far from enough to replace the Fiat itself.
in brief 'casascius' can not be used as a payment in real life and because of that Bitcoin will never can be.

and about Derivatives or futures or something else,
it's all about our own view.
some of them think the other way and some people think another,everybody have their own perspective.
it's a gamble in my opinion,but Bitcoin need it.
for Bitcoin everything is a double edge sword because it has an advantage but at the same time it has disadvantage.
we need to get out from the safe zone,

Bitcoin has a few major problems that prevent it from being usable as a currency. The largest is its volatility. Futures can help vendors deal with this by locking in prices. This would allow bitcoin to move from it's measly little market cap in the tens or hundreds of billions, up to the trillions, where it needs to be as a currency. It can also help stabilize the volatility. Without something like futures, it is highly unlikely that bitcoin will survive (currently it is definitely in bubble territory, being overinflated based on hype rather than intrinsic value).

All that being said, derivatives will be the downfall of bitcoin as well. It's only a matter of time before people start trading bitcoin options in addition to futures. Where has trading derivatives of securities that hold no intrinsic value caused problems before? Just take a look back at the synthetic CDOs that allowed billions of dollars to be invested in mortgage securities that contained nowhere near that value in assets. Banks have done this before and crashed the entire economy. Bitcoin isn't on nearly that large of a scale yet, but it seems to be following a similar pattern and heading in a similar direction.