you wait one month for the Futures contract to expire (Jan 17 th) , let us examine two scenarios by contract expiry Jan 17 th .
case 1: Bitcoin price shoots to $25,000
case 2: Bitcoin price drops to $8,000
In both cases on the futures contract expiry date that is January 17 th 2018, bitcoin Futures price and Spot price will be almost same ( give or take $100)
In both cases professional traders profit is $2000 for each futures contract on the investment of $16,700 Spot + $10,000 future initial price.
That is $2000 profit on $26,700 investment for one month period , that works as 7% return per month, annualized 84% . You may need to deduct cost of money that is interest on investment or loan say 6% per year .
One risk I see is, on the Short sell Futures contract, if the bitcoin is keep rising in price , trader needs to supply more money to meet the margin call ( just a technial issue because he is gaining on the LONG Buy bitcoin spot price )
As others pointed out, when you buy/sell futures, you risk counterparty risk. But it's not that bad because that exchange is really good and people entering the market pay margin calls every day.
There is also a financing cost (ie. the cash you use to pay for your margins, transaction costs, and to buy the bitcoins will not pay you any interests over the time of the position). But again, the effect is not very large.
What really makes arbitraging bitcoin futures difficult is the illiquidity of bitcoins. "Simultaneously" is a hard thing to do in bit coin world where transaction are slow to process and price is very volatile.
And you not only need to do this when you buy into the position, but also when you want to end it. At the end of the contract, you're left with a bunch of bitcoins, and some cash (or not). Now you need to liquidate all those remaining bitcoins. This could take some time, and the price you get in the end could be quite different from the price the future settled into.
That said, the difference between future and spot is likely to become closer as the market professionalizes and more arbitragers get in.
> As others pointed out, when you buy/sell futures, you risk counterparty risk.
Yes, but: There is a chain of companies that have to fail before you incur the loss. The clearinghouse will cover the default first, and bill it back to the clearing broker. So you need someone of the order of Goldman Sachs to fail before counterparty risk affects payments to you.
The bitcoin exchanges have plenty of liquidity, and executions happen in less than one second.
The real risk for arbitrage is with the crypto exchange itself: these can go bust, or disappear overnight. You wanna keep $1M sitting on one of these exchanges?
Wrong kind of liquidity. Trading firms, hedge funds, etc. care care about liquidity of the "Can I convert this into the kind of money I use to pay taxes and employees and investors?" kind. BTC has basically zero of that, as evidenced for the fact that there isn't a deliverable version of this contract.
I'm not sure a sensible institution would even consider BTC held at exchanges to be real BTC, just a kind of IOU. There may even be regulations preventing them from doing so. So they will probably want to hold the BTC themselves. Or with a clearer, which is likely to think about these things even more conservatively. And 20 minutes (the last figure I heard for how long it takes to execute a bitcoin transaction) is an eternity to an industry that is starting to think in nanoseconds.
> I'm not sure a sensible institution would even consider BTC held at exchanges to be real BTC, just a kind of IOU.
Nor should they. BTC held at an exchange is, by any sensible definition, an instantly redeemable promissory note denominated in bitcoins. Several exchanges have defaulted on these types of obligations.
> BTC has basically zero of that, as evidenced for the fact that there isn't a deliverable version of this contract.
How can anyone claim Bitcoin is a useful currency if it's less practical to deliver than, say, KC Winter Wheat?
> And 20 minutes...is an eternity
This is for a futures contract one month out. You would close your position at the same time that you agreed upon the rate for the blockchain transaction. When you sold the BTC you could verify receipt of the USD quickly (fiat FTW), whereas the blockchain propagation time is more of a risk to the BTC buyer.
From my experience, the way you find out there's an issue with the exchange is when you see people posting on /r/bitcoin about having waited weeks for their withdrawal to be processed. Meanwhile the exchange continues to accept deposits.
If you buy bitcoin, I assume it works that you receive btc from a wallet, and that wallet belongs to the exchange. If you sell at an exchange then you send your btc to a wallet, and ...
They could hide transfers by making new wallets, but that's strikes me as massive red-flag behaviour that an exchange wishing to continue in business is unlikely to take part in?
Sure, but you still need to put funds into the exchange to buy the coin in the first place. And likely you would leave the coins there in case the trade goes the otherway. Managing that many coins in your own wallet is a whole other headache. But I guess your point is to not leave much on the exchange at any one time.
True, you're exposed to the exchange at least to enter and exit the trade. But you'd expect sophisticated arbitrageurs to know how to manage their own bitcoin wallets.
Perhaps the discrepancy is there because such people don't exist yet.
Does this remind us of some glorified Ponzi scheme?
How does Bitcoin get hacked? It certainly isn't easy unless you are an insider. And perhaps NSA, since they created SHA-256.
I believe the hacks OP was referencing doesn’t have to do with SHA, but more to do with bitcoin exchange security and not protecting their btc correctly.
I personally just lost $200 on NiceHash; not a big sum, but enough to give me a scare. Its frustrating, because I've had concerns about this happening before, but its so difficult to find a good service outside Coinbase.
> In all these cases. You are likely to loose 100% of the sum you invested.
Nah, for example in case 3 you don't lose your full capital. You just have either position open without hedging the risk whatever reason.
Case 4, case 5, for you to lose your full capital it has to happen for both exchanges.
There are risks and I'm not saying that it might make sense to take those risks, just saying that you are now giving equally wrong picture of the risks.
When you buy base and simultaneously sell future contract, you effectively lend your money to other counterparty. In ideal market this should be equal to interest on loan (as you mentioned).
There are two possibilities of what is really going on:
- either there are not enough arbitragers yet
- or you should factor in commissions, fees, ease of transferring money between exchanges, etc
> When you buy base and simultaneously sell future contract, you effectively lend your money to other counterparty. In ideal market this should be equal to interest on loan (as you mentioned).
Good point. But the interest on what amount, exactly? You need both 1) capital to buy bitcoins and 2) capital used for margin on the futures exchange. The latter amount is unpredictable, and if the bitcoin price shoots to 10x the spot purchase price you will need to borrow ~35% of this amount for margin, thus making the effective interest around 4x the market rate.
So, in short, the amount that the futures contract price will deviate from spot should be proportional to the volatility of the bitcoin price (because you need to borrow an amount proportional to this for use as margin).
But this only applies to cash-settled bitcoin futures contracts. If settled in bitcoins, it should be sufficient to deposit bitcoins at the futures exchange as margin — thus making the price of these, physically settled, futures contracts only depend on the prevailing short-term rate of interest, as far as I can see.
Crypto-collateralized loans are being launched by a startup called Salt Lending. I’m expecting rates to start around 10%, although I’m unsure where I heard that.
https://www.saltlending.com/
What you're missing is that these prices will converge as the Futures market develops and more professional arbitragers get on board. When that happens the gap will shrink significantly and be far less profitable.
Why is there a gap of 11% between the CBOE Future contract price and the BTC Spot price? Should they not be closer in a perfect market? Maybe the gap will be the same on the contract expiry date?
Is this because the arbitragers still need to integrate the CBOE Futures into their system?
Even between bitcoin exchanges, the bitcoin price varies. $17240 on cex and $16310 on bitstamp.
Thought it is not exactly same, but similar case is Where you pay Premium with Stock Options to have the right RIGHT to buy the stock one month from now.
Regarding cex & bitstamp they are exchange out side of USA, each of them have different Risk factors associated to each of those exchanges, that is why that price difference .
Coinbase and CBOE are both US based exchanges and are under govt. regulation and are reputable than any other bitcoin exchanges in the world.
Is 11% not a huge time value premium for something that expires in a month? Can we compare the time premium with the interest rate? I have traded options, but never futures. With options there several components that increase the premium besides just the time component.
According to [0] futures shouldn't have a time premium because both parties are obligated to to fulfill the contract.
As you stated in the OP, the 11% spread should be a "riskless" arbitrage. If so, I suspect that this spread will decrease.
It is a huge premium. In reality it should only be the future value of the current spot, given the current interest rate. For other types of futures (oil, grains) that have storage costs or seasonality there are other factors that affect the difference between the spot and future price, but for financial futures (especially cash-settled) it should be nearly no difference for a one-month expiry.
You are correct it trades to Gemini's spot price, but you are wrong in terms of the difference between the two. As I write this there is a 5 cent different between GDAX and Gemini.
in general they are very close but at times of extreme volatility they can differ quite a bit, as was the case several days ago when GDAX surged up past $19,000/BTC and then crashed.
Has a lot to do with trader preference. Stable exchange platform, 1256 contract tax treatment, the list goes on and on. A large scale arbitrage may not be feasible. In addition, market makers on the futures market are likely working off of a sizable inventory/pool of BTC. And they are likely pricing in a fat premium on top of anticipated buy orders. So they’re effectively acting as arbitrageurs. Bid-ask spread plus futures premium. 10-12% is rich but understandable.
Liquidity I assume. It may be difficult to sell $25,000 worth of Bitcoin at the settlement price on the settlement date. Slippage could be more than the $2,000 profit you estimated. Especially if many people do the same trade.
Can’t really wrap my head around the rise of BTC in futures trading, as they are all cash settled. In other words, pure betting and gambling with the futures, as they really do not touch the underlying BTC. I guess, just a regular day in the massively manipulated crypto currency world...
The markets are not as independent as they might seem. If the futures market gets ahead or behind of the other BTC markets, it creates opportunities for arbitragers to profit from the difference which has the effect of reducing the gap. It doesn't matter that they are cash-settled.
For example, if lots of money start pouring into Bitcoin futures, the futures price will rise above the price on BTC exchanges. It will then be profitable to sell the futures while buying Bitcoin on the exchanges, which drives the price of Bitcoin up on the exchanges. When the future matures, you just sell the Bitcoin on the exchange and pay your cash-settlement on the future for a guaranteed profit.
More precisely, it is possible to replicate the final value of a futures contract (on Bitcoin or any other asset) up front, by trading in the spot market, even though a futures contract’s payoff is uncertain until it expires. Whatever the future’s value ends up being at its expiry, you can put together in advance a portfolio of holdings that will have the same value simply by borrowing a certain amount of cash and using it to buy in the spot market a corresponding amount of the asset on which the futures contract is written; if you do this, the value of your holdings in cash (after paying interest on your borrowings) and in the asset are guaranteed exactly to equal the value of the futures contract at expiry, no matter what price the underlying asset ends up trading at then. So if there is any deviation in the value of the futures contract (at any point in its lifetime) from the aggregate value of the cash and assets in the portfolio that replicates its final value, then there is an opportunity for a pure arbitrage. Consequently trading by arbitrageurs bounds futures prices in a tight range determined by the variables that set the cost of putting together this replicating portfolio: the price of the underlying asset, the interest rate on cash and the yield on the asset (if any), the time until the maturity of the futures contract, and cost of transacting in these markets.
This arbitrage relationship is about as hard they get, so trading futures is tantamount to trading the underlying asset itself, since changes in price in the futures market will be translated directly via arbitrage into changes in price in the spot market for the underlying asset, and vice versa.
> by borrowing a certain amount of cash and using it to buy in the spot market a corresponding amount of the asset on which the futures contract is written;
So if 1 BTC@januar17 is priced 10 000 USD, you borrow 16 000 USD and buy 1 BTC. How does that help you?
> if you do this, the value of your holdings in cash (after paying interest on your borrowings) and in the asset are guaranteed exactly to equal the value of the futures contract at expiry,
Why? If the spot price at expiry is different from 10 000, let's say it sunk to 5 000, then you have to give back cash and you have 1 BTC that is now worth 5 000.
Could you illustrate how the equivalence comes out?
> So if 1 BTC@januar17 is priced 10 000 USD, you borrow 16 000 USD and buy 1 BTC. How does that help you?
You don't offer 1 BTC@january 17th for 10,000 USD if 1 BTC spot costs 16,000 USD.
> Why? If the spot price at expiry is different from 10 000, let's say it sunk to 5 000, then you have to give back cash and you have 1 BTC that is now worth 5 000.
You don't have to give back any cash. You sell the BTC, that gets you 5,000 USD, you give the 5,000 USD to the owner of the futures contract (cash settlement of the value of 1 BTC), they pay you the agreed-upon 10,000 USD (in reality, those two payments are netted, so they pay you 5,000 USD, that's it), and you pay back your 10,000 USD loan.
I do wonder how counterparty risk will be priced into the futures contracts. There've been a number of cases - Mt. Gox, Bitfinex, any Chinese/Korean/Zimbabwean exchange if you're not a resident of that country - where you can sell a Bitcoin for a nominal price on the exchange but not be able to withdraw that money into the fiat financial system. That's led to structural differences in prices between exchanges which don't get arbitraged away because potential arbitrageurs can't get their cash into or out of the exchange. What happens if that happens to institutional investors trying to settle futures contracts?
Right now 1 BTC on Gemini (the reference exchange for CBOE Bitcoin futures) is $16,600 and the futures price is $17,800 for a 1 or 2 month contract. Since the risk free rate is about 0.125% monthly and this spread is 7.2%, it looks like the market is pricing the counter-party risk at about 7% for one or two month durations.
That seems pretty high to me though, you can arbitrage on Coinbase and Gemini which are both US based regulated exchanges (they have licenses, insurance, and audits) with what I would expect to be less than 7%/month risk. Perhaps there just aren't many arbitragers with access to the futures market and knowledge of Gemini/Coinbase yet. I'd arbitrage it myself but I have no retail brokerage access to shorting the future contracts.
Further evidence the market just isn't acting efficiently yet: volume of 3.43k contracts today, which is only $61M. The 24 hour trade volume of the top 5 Bitcoin exchanges is $5 billion.
But if a lot of traders think this way, they may have high execution cost when the contract expires and they try to sell the spot. Specifically, a lot of selling pressure by this kind of trade will push down the spot price and the traders may not be able to sell the spot at the price of the futures cash settlement. So, there is a connection but only up to a point.
Of course there a probably traders doing other kinds of trades that have a different effects on the prices, but it's quite tricky to analyze, compared to a physically-settled contract.
Because it is cash settled, if multiple traders are using BTC to hedge their futures and all sell their BTC at futures expiration they'll move the price introducing risk into the transaction.
My read is that futures trading legitimizes Bitcoin, perceptually at least signaling mainstream financial adoption of Bitcoin.
I'm sure that read is only one of the myriad of subjective factors involved (let's all agree that Bitcoin rises and falls in clouds of collective subjective perception), but I think it may be the dominant one.
I'd say the dominant factor is "the sheer number of exchanges that have varying degrees of resistance, from mild to total, of converting BTC to USD" ...
Be they delays on withdrawal, explicit, or just ghosting.
Be they unrealistic minimums (Bitfinex will not process such a transaction for >250BTC, $4.5M or so at today's rates).
Be they whatever flavor excuse-of-the-day.
Some exchanges need to learn to walk before they run.
As far as I can tell it's just a way to outsource holding the BTC.
A BTC future can be perfectly hedged by taking a loan until the settlement date and using it to buy 1 BTC, holding it until settlement and then selling, so that's probably what the counterpart selling the future is doing.
As others have mentioned, contracts are marked-to-market on a daily basis, which impacts the margin needed to hold the contract. With wide price swings, this can force you to close your position before it settles in order to meet margin, especially if you're trading with leverage. CBOE also has a really high margin requirement (I think 40%+), so the capital costs to play are quite high here.
Just the next step from the Bitcoin economy, to the Bitcoin Standard economy, to the eventual Bitcoin Fiat economy.
Seriously, the Lightning network looks a lot like the old Gold Standard, and the arc of Bitcoin seems to be reinventing modern currency, so I'm trying to figure out what's next.
I agree, and I'm skeptical of Bitcoin on many levels. The vision it offers is very attractive, but each so-called feature comes with so many caveats that it's never clear there is a real advantage. Still, I think people hold onto the vision.
As digital cash, I can buy something online more or less anonymously, without a middle man. Well, except for the miners. And my anonymity is blown if the person from whom I purchase ever reveals my real-world identity. And the fact that the transaction may reveal my entire spending history. Other cryptos offer better privacy guarantees of course. Oh and the tax burden of buying a pair of socks with BTC makes it terribly unattractive for practical uses.
A nearly instant, low-fee settlement layer is great. Except the fee schedule is market driven which sucks for fee calculations, and the instant part is no longer true with full blocks, RBF, and other realities of a popular distributed ledger.
The deflationary model is interesting and is great for investment but not so great for money. And the volatility is too high to consider Bitcoin an investment.
The currency exists independent of national borders. But, rogue states can horde it and work around international sanctions, and it's quite popular for money laundering.
Be your own bank - with all the risks that may not be so obvious at first glance, and none of the benefits that real banks get.
The list goes on. These "features" will keep selling bitcoin, I don't know the dream will ever really die.
IF you want privacy, there are alternative coins that are fairly active with development: Monero, zcash, etc. I am not endorsing anything, but i believe the privacy & fungibility are important in a digital currency.
On the sad side, people who put money in bitcoin are thinking it's a great investment. This is not to devalue your comment, but for the past 10 years, almost every years, the low lows have been increasing.
Be your own bank is not a meaningful goal, though, at least with the way things are. Coinbase, for example, holds about 10% of circulating bitcoin is what i hear.
Maybe this isn't the right place to ask this question, but how is Monero any different than the Bitcoin example you respond to, when the vendor you sent your crypto currency to to exposes your identity?
Monero uses ring signatures to mix your transaction outputs with others', providing "plausible deniability" of the subsequent inputs. It furthermore uses stealth addresses to hide the transaction history to an individual address. This is not foolproof and has been shown to be traceable in a number of cases, but it's a heck of a lot better for anonymity than bitcoin.
There are new improvement - there was a article about monero being tracable > 50% of the time, but it was fixed right around when the article came out to be.
As for the original goals of bitcoin, maybe monero is closer to it. I don't know.
To me, the Lightning network looks like a terrible idea. It achieves nothing that an increased blocksize would not have done on-chain yet wraps a faster-layer around the slower, deliberately crippled (1MB) blockchain and does require multi-hop liquidity that must be provided by interested parties. My understanding would be that the slower layer (like TCP) would be stacked on the faster layer (like IP). The lightning network seems all wrong to me.
If the Lightning network is so great, why do we need a blockchain at all? If not, why not just increase the blocksize? It achieves nothing that couldn't be done on-chain. There have been successful tests of blocksizes of up to 1 GB or 1000x the current size. Even getting it up to a small multiple of the current size would dramatically cut transaction costs and waiting times.
> It achieves nothing that an increased blocksize would not have done on-chain
Regardless of blocksize the block times are still 10 minutes which means you need one hour for the transaction to settle, per the 6 block standard. You can't compare that with LN.
Also good point - no matter how much you scale "onchain" you still end up with settlement periods, a few min at least. Impractical for offline payments.
> It achieves nothing that an increased blocksize would not have done on-chain
It lets one party in a channel send arbitrarily large numbers of payments ("arbitrary" subject to the total payment value being capped to the channel capacity, as well as to the Bitcoin divisibility) to another without increasing the UTXO set as you would on-chain.
> It lets one party in a channel send arbitrarily large numbers of payments ("arbitrary" subject to the total payment value being capped to the channel capacity, as well as to the Bitcoin divisibility) to another without increasing the UTXO set as you would on-chain.
No that is not true. Each Lightning Channel needs UTXOs to be created before it can be used at all.
Its goal is rather to do trustless multi-hop off-chain payments on pre-opened channels.
Notice that Satoshi himself implemented simple payment channels in Bitcoin. (Without the multi-hop part)
It is all but clear that the much more complex LN contraption will help in the real world.
Furthermore, a case can be made that this going closer to decoupling Bitcoin from the economy on top. The "gold standard" argument hinted at above might be a too close historical parallel, really.
Because, eventually, the gold standard got abolished.
The lightning network allows the payer and the payee to be anonymous from each other, which could be useful for some things, like for example anonymous charity donations.
> There have been successful tests of blocksizes of up to 1 GB or 1000x the current size
no need to be genius to just increase blocksize 1000x and "assume" gigabit connection which no one has.
Lightning network is a great idea, in theory, in practice however it will just not work for the problem you mentioned - no one is interested in providing this kind of liquidity.
As of why need blockchain at all - is because 1st layer is the court and guarantees you to own money from the channel. You just don't have to ask court for every coffee payment (i.e. broadcast to every single laptop in the world).
Crypto might even be manipulated, but in this case what’s the issue? I don’t get your logic.
Some independent financial entity decides to start trading futures on horse manure. That makes horse manure a heavily manipulated underlying financial product?
> That makes horse manure a heavily manipulated underlying financial product?
Yes. You will find people who use their fields of cows to pass off excrement as horse manure, injecting various gasses into the manure to pass excrement-inspections. You will also find actual owners of horses who discard half their horse manure.
was this a /s? IF it's not:
With the current HODL mentality, you can imagine the bitcoin price go even higher. I wish the same HODL'ers were around in 2008, things would have been much different. "Buy the dips" is the best investment strategy that became mainstream thanks to bitcoin.
There is a link between all currencies with value and major economic events. FOMC minutes, FOMC rate decisions, GDP, NFP... just to name a few. Look at your BTC quotes at the timeframes those events are released to see for yourself.
> 31. What is CME Group’s policy regarding hard forks?
> CME is developing a hard fork policy for capturing cash market exposures in response to viable forks. The policy may involve cash adjustments to position holders or listing related futures that are also issued to position holders.
Sounds like if a fork were to happen soon (not that it will) they would have to freeze the exchange, as they don't have a plan. I've noticed Coinbase does this as well, though they email a clear explanation about each upcoming fork-freezes and their intentions for each scenario.
It's ironic that wall street spent so many years saying Bitcoin is worthless, but is buying-in when it's lost its use case to competitors within cryptocurrency, and really is useless (except as a speculative vehicle or "store of value"). I guess BTC can fork infinitely, so there's that.
I think they (or some of them) are jumping on top of it because now they've got an abstracted (and regulated) market product, something that should come with a lot less risk and with interactions with the existing stock market systems. They don't care about bitcoin, they care about the futures market, speculating with virtual products (= futures) on virtual products (which used to be physical ones like oil and tulips and whatnot).
If Segwit adoption (~12% after launching toward the end of August) by 3rd parties is any indicator even if lightning released today we wouldn't be seeing huge benefits for months if not years.
There is a certain elegance to increasing the block size as it allows you to continue using the chain as you've been using it for years (on-chain transactions). As a bitcoin community member for nearly its entire history myself and others have worked hard to get the level of merchant adoption we enjoyed in early 2016. Today bitcoin is accepted in less places than it was 2 years ago and transacting with is is a luxury only reserved for us privileged early adopters. It was never supposed to be this way.
Lightning Network has already proven themselves using real bitcoins in test videos. Don't want to deploy too fast at risk of making major screwup, so patience is necessary. Trying to modify bitcoin core such as with a blocksize increase has proven to be impracticably. So Lightning Network has a much greater chance than modifying bitcoin itself.
To be fair, Lightning works, and it works now on the Bitcoin mainnet.
The idea is sound, the code is written and somewhat tested, and it has been used in a very controlled fashion on the real bitcoin network already.
At this point it's just a matter of further testing and validation that the logic is sound and there isn't anything everyone is missing, and getting vendors on board and adoption started.
Still no guarantee it will happen, but it's looking more likely that it will at least make a good push, and it's no longer a vaporware promise of "in 18 months".
I'm struggling to find references, so apply salt as needed, but I'm fairly sure I've read multiple references to the fact that the LN developers themselves describe it as pre-alpha and still a few years away.
Which, to be clear, isn't necessarily vaporware - I think most people are in agreement that the concepts are sound, but that integration of the execution into the mainstream are quite a ways off.
It is still "early alpha" but bitcoin developers use that term as it was meant to be used.
"early alpha" is just that, early access to a fully working product with all the features that are needed, and it needs a LOT of testing and validation. And because of the "network" nature of it, it needs people or vendors that are willing to try it out before it can even be tested outside of controlled areas.
I agree that we are probably a few years (probably more than a "few") from Lightning being the "default" way to use bitcoin, but I fully expect by Q3 of next year there to be a few vendors which accept lightning natively, and a few "consumer friendly" wallets that have some integration.
In my opinion, I wouldn't want to call it "beta" until there are a few implementations with "user friendly" UI that abstract away the dirty details, and until there are at least enough people on the "network" that it would be feasible to actually use it.
If you want, [0] is a video from last week that shows lightning network running on mainnet. It's a bit of a "fluff video" with nothing really substantial in it, but it at least shows that it's working, and if you compile the tools he used in the video yourself (to target them at mainnet) then you could do it right now too, but without anyone to "network" with, it's kind of pointless right now...
I think Bitcoin will become the principal store of crypto value.
There will be other cryptos for different uses and Bitcoin will serve as a medium of exchange among them and as a long term store of value, it probably won’t become the everyday currency we all want to use.
Hopefully these futures will reduce its volatility and help stabilize the price
I hate to break it to you but none of the existing cryptocurrencies know how to scale transactions yet. There are, however, many proposed solutions. Bitcoin is aggressively pursuing those solutions.
The worst proposal, increasing blocksize, is not currently being considered because of its impact on centralization.
Have you heard of bitcoin's lightning network? There is a layer they're working on that, as I've heard it, allows 1 million transactions a second for a fraction of the transaction cost. It's not VISA, but it's a huge improvement, and makes Bitcoin much more viable. They've been showcasing successful tests, but are open about it not being 100% ready. Still exciting.
Lightning doesn't scale with users. It can handle 1 million transactions between 2 people in seconds, but 2 transactions between a million people would take weeks.
It's not just hard drive space. A CPU is needed to verify the contents of the block (and, in ethereum's case, validate the results of any smart contracts). Increasing blocksize also increases validation time. In some cases, the validation times don't scale linearly with size.
I myself use Litecoin when moving between exchanges but Bitcoin is in my opinion to other cryptos what USD is to stocks. You can compare AAPL and GOOG, but you usually compare AAPL USD and GOOG USD
>Hopefully these futures will reduce its volatility and help stabilize the price
Only if you ignore the constant threat of bad actors, technical failures, and lack of regulation. We might even see previous financial/accounting scams and fraud replayed in the Bitcoin world.
Correct. All of the big unlicensed and unregulated exchanges that provide no transparency of their ownership, or as to how customer balances are held allow significant margin trading. And they have no impartial 3rd party proof of reserves.
Many major exchanges have financial institution licenses. It's not a banking license, but it's a license that still means a lot of regulation. (Also the history has shown that a banking license is in no way a guarantee that a bank cannot fail.)
It's like speculation on top of speculation. Reminds me of the MBS/CDOs of the housing crisis. Speculative loans of speculative loans.
> All we need now is someone adding leverage and hilarity shall most certainly ensue
Oh, it's already starting. Believe me.
Usually when you start hearing of "record setting" purchase of art, you start your clock on the next recession. I guess this could be that moment. Wouldn't be surprised if we have a recession in the next 2 or 3 years.
This. And it is what I say when friends & family say it "must be a bubble" or "journal X say stay away". Investing/risking is not a binary, all or nothing bet. Just set aside some money you have not immediate use for, and you won't regret losing or many nights without sleep, if a crash comes. It is still early enough, and one can learn a lot of crypto technology, which won't be going anywhere regardless of future prices.
The idea is that there are two kinds of investors: Sophisticated ones who can look out for themselves, and regular joes, who are protected against being ripped off by extra regulations and extra paperwork. Bitcoin futures aren't the kind of product for which anyone will go though those regulations and do that paperwork.
Now, how do you become a sophisticated investor? First of all, have a spare million or tow. Next, fill out a quite simple form.
Interactive Brokers is providing access to the CBOE futures to retail investors. Appears to be long positions only at the moment with high margin requirements, but it's something.
Many of the other large retail brokerages said they would offer them pending liquidity/volume thresholds.
I can imagine bitcoin will one day become tightly regulated and only available to sophisticated traders; the network only supports 15 transactions per second, limiting who can do trades is one way to deal with it. NYSE can do about 11K a second (based on https://www.quora.com/What-is-the-average-total-number-of-tr...)
The price of energy would gradually increase, to the point is no longer feasible to mine bitcoin with it. That's how markets work: the higher the demand, the higher the price, to the point where demand meets availability*cost.
It should be noted that Bitcoin doesn't actually need much energy to process the transactions; I believe you could run the whole thing in a single computer. It only burns a lot of energy to avoid malicious miners from subverting the process. More mining means more energy must be burnt, but it can be scaled up or down, and doesn't affect the transaction rate.
As I understand it the transaction throughput is limited by the block size. The difficulty adjusts so the rate at which blocks can be mined remains roughly constant, but each block is size limited so it can only contain so many transactions.
Yes. Correct me if I'm wrong, but I think it's like a regular bus service to a desirable destination. 40 seats every few minutes. Highest fares at any given moment get a ride. But if there are hundreds of people wanting to go, those willing to pay peanuts get left waiting.
The purpose of this restriction is to protect the decentralization of bitcoin nodes. It is this decentralization of nodes that separates bitcoin from every other crypto competitor, and by some margin.
An increase in blocksize means an increase in propagation delay. Too much delay and miners who are closest to the most recent block get a head start mining the next block. Mining is suppose to be a lottery, not a race.
Research done on the matter shows that for each kb above the current 1mb block, 80ms of delay propagation is added.
Bitcoin is limited at 21 million coins. After that, no more btc, and people will trade in btc divisions such as satoshis. But there are hundrerds of bitcoin alternatives now, some very interesting.
If there's no more miners / mining, who verifies the transactions? (iirc that's what miners did, but correct me if I'm wrong and miners only generate currency and don't verify transactions)
There is no more BTC created after 21 million coins, but the mining continues. This just means that each block no longer comes with a fixed reward, but the miners will still make money from transaction fees.
As far as I understand, the process of mining is verifying the transactions as well. The miners are generating bitcoin as part of the process of verifying the transactions. After the 21 mil limit is hit, they will be rewarded from the transaction fees. (Someone with more in depth knowledge feel free to correct me if I am wrong).
You're not wrong. They currently get the block reward and the transaction fees. When there's no more reward to be had they will get just the transaction fees.
They don't verify transactions actually. That is what nodes do. They retrieve valid transactions from nodes, order them, and then hash them according to the consensus proof-of-work algorithm, which in this case, is SHA-256, until it produces a block that will satisfy the node consensus requirements.
Miners require nodes, so they have them too, because without nodes they can't source transactions. Every node, applying consensus rules, extends the blockchain by accepting valid blocks that meet consensus rules.
We have had a year long education in the limited power of miners with many people incorrectly attributing responsibility for maintaining the protocol. Miners were rightly shown to be powerless to force consensus changes on the nodes. When push came to shove they did what they were told, at the threat of being crushed with a pow change.
There is no such thing as "most interesting", it depends on what you look for (technical quality, investment, compatibility, etc), what you need (bleeding edge, stability, doc, popularity...). Plus it's hard to assess innovation, some coins may very well be genius and we are not visionary enough to know.
Some characteristics to look for:
- ASIC resistance. Some currencies make sure you can't just throw money at GPU and become the king of the hill like with Bitcoin. E.G: Vivo, VTC, XMR.
- CPU friendly. Some currencies can be mined on CPU, not just GPU. It makes it interesting for embedding in web pages or viruses. E.G: Monero, Aeon, etc.
- Privacy focused. Some currencies make it hard to know where does the money comes from and goes to. E.G: Monero, Zcash and co.
- Smart contracts. Some currencies are not just money, but gigantic programmable public databases. Ethereum being to smart contracts what bitcoin is to cryptocurrengies in general.
- Master nodes. Some currencies provide very fast transactions by featuring nodes responsible to pre-validate them. E.G: Vivo, Dash.
- Community. You may want big name supports (Bitcoin, Ripple), great tooling (Ethereum, Monero). You should check if your exchange deal with the currency your target.
Personally I like:
- Vivo. The team is close to home. The master nodes give me great rewards and I help friends and family to setup theirs, for a fee. Best investment to date, appart from BTC. But only cryptopia deals with them which make it hard to trade.
- Monero. Simple to mine, and nobody knows what I do. But a bad rep because of the viruses.
- Ethereum: it's the most stable currency IMO, because of all the ecosystem, it's not gonna die. Also awesome team. Very little downside to this one.
- Ripple: big names trying to do official things. I'm curious of the result. But it's premined.
Sometime I feel like I should stop writing blogs post about Python and be paid as a full time crypto explainer, cause it's like I answer the same questions every day.
Anyway, good luck. And don't believe any people telling you they perfectly understand this market, because it's the most irrational one I ever seen. It's unstable. It's exploding. It's crazy. And so fun. Until you loose everything :)
> ASIC resistance ... make sure you can't just throw money at GPU and become the king of the hill; CPU friendly
first of all, asics are specially designed hardware, not gpus
second, switching to actual gpu- or cpu- friendly algorithm comes with it's own drawbacks - anybody controlling large enough botnet can perpetrate 51% attack against you
Existing bitcoin stock will just split into smaller parts (= the BTC price goes up further and trading happens in smaller fractions).
If the network however becomes so bogged down that transactions take weeks, I'm fairly sure people will gravitate towards some of the other currencies; hopefully this is a gradual process, and the BTC price won't be affected too much / too directly.
I don't think there will fewer miners. I think it's more likely that the price of Bitcoin would increase.
There a lot of very large mining operations that cannot afford to scale down, and they won't sell their mined Bitcoin at a loss. If there are fewer transaction fees, this smaller amount of BTC would have to pay for all of the electricity that was used to mine a block.
Maybe everything would change if the mining operations started to run their own power plants that use free and renewable energy. They could buy some land next to a river and set up a hydroelectric power generator. That would just be a capital cost, and if you do it right, then it could cost very little to maintain. The operational cost would be maintenance, the internet bill, and fixing/replacing broken miners. Even if the mining doesn't work out, I've just been reading about some people who do this and sell excess power to their power company.
The price will not be able to increase to the point that the mining block bitcoin reward itself will incentivize miners. As the mining block reward approaches zero, transaction fees will be the only way to incentivize miners. Since there will be fewer transactions, transactions won't have to provide a large fee just in order to get the transaction in the next block. The reduced transaction revenue will cause many miners to leave the network. Fewer miners will mean easier difficulty. This phenomenon stabilizes when mining is still profitable at the lower transaction revenue level.
In a sense, almost everything you do with your money is 'gambling', spending it one way or another in the hope that the benefits of that decision outweigh the drawbacks (but without being 100% certain of that). Certainly, insurance, having a mortgage, and a pension scheme are also forms of 'legal gambling'.
At least traditional modern financial instruments still have some connection to an underlying real-world market, even if they are 10 layers of financial abstraction removed from reality. They can also always sort of justify it by saying that it provides liquidity and so on.
Harder to justify what the point of Bitcoin financial instruments is though, since it can't really be used for much at all in its current state. Maybe if it stabilized and became a proper store of value (whether the incentives to keep a cryptocurrency stable are even there remains another question), but now it's just so hype driven.
I guess ultimately 'the point' of it all it doesn't matter, people can trade in imaginary goods no problem. Still exposes the strangeness of modern financial markets.
The same will hold for Bitcoin almost surely. The fraction of transactions that are speculation and the fraction of holdings that are speculations are very different things. Most stock market transactions are speculation but they don't hold capital for very long. But most stock holdings are not speculation, they're just boring holdings of assets by pension funds, retail investors, etc.
> That's pretty much what people use stock market for anyway
That's what I used to think until I began to understand (through Mr Money Mustache posts) that lots of people with large amounts of money invest (i.e. buy-and-hold) in the stock market because, despite the annual ups and downs, it has historical net annual gains of 7-10% over the last hundred years...
> Investors try to build something while speculators just try to make money, no matter the cost to anybody else.
Based on your definition, what would you call Carl Icahn then?
I tend to agree with John Bogle's definition that both types of people are in it for the money, the only fundamental difference is the time horizon either is willing to wait to reap the returns from their investment.
The main difference between investment and speculation lies in the time horizon. Investment is concerned with capturing returns on the long-run with lower risk, while speculation is concerned with achieving returns over a short period of time. Bogle believes this is an important analysis to be taken into account as short-term, risky investments have been flooding the financial markets.
> Anybody that holds an financial instrument for less than five years (my definition) is a speculator.
So you think for instance that someone who puts all their income into a savings account, taking from it during the month to pay their expenses, is a speculator?
There are uses for short-term financial instruments other than speculation, for instance protecting the principal from inflation.
I'd argue that some investors - the angel / startup investors - are gamblers, they place their bets on 100 startups and bet that one of them will be the next Facebook and eventually either sell for billions, or go to the stock market itself to get billions.
The more traditional investor gets a stake in a company and due to that stake gets a say in the running of the company, thus having an influence on its future and growth (or decline). Less of a gamble there, it becomes part of their own responsibility then.
It's a shame that there isn't a common word in English to distinguish between positive-expected-value gambling and negative-expected-value gambling. They are fundamentally different pursuits.
The Ethereum network is imploding under its own weight. Running an ethereum node has become quite expensive and requires very state of the art hardware just to keep up. There’s a reason bitcoin chose the constants it did.
When syncing, you can choose to either build and save the state for every block ("archive" mode), or save only the latest state ("fast" mode). The former requires quite a bit more data than the latter (currently 500 GB vs 32 GB for the Geth client) [0]. The default for most contemporary clients is "fast" mode.
Note that with the "fast" mode you still have all the blocks, and with that all the information needed to recreate the state at a certain block somewhere in the past. And you can still help the network by syncing those blocks to newly spawned archive or fast nodes. It's just that requesting the state (e.g. balance) at a certain block in the past takes some computational work. Most people are not interested in that however, which is why it's the default synchronization mode.
They don't know what they say , but what the news tell them. I run an Ethereum node in a crappy hardware just for the network. and , as they may not know, you can run light ethereum nodes as they https://slock.it/ethereum_computer.html do. They are all focus in price , we are focus in technology and of course MOON
Let us say, some professional trader "Short sell CBOE Future contract & Buy BTC Spot at Coinbase simultaneously"
At the time of this writing, Futures contract short sell @ $18700 and BTC Spot buy @ $16700 simultaneously. http://cfe.cboe.com/cfe-products/xbt-cboe-bitcoin-futures
you wait one month for the Futures contract to expire (Jan 17 th) , let us examine two scenarios by contract expiry Jan 17 th .
case 1: Bitcoin price shoots to $25,000
case 2: Bitcoin price drops to $8,000
In both cases on the futures contract expiry date that is January 17 th 2018, bitcoin Futures price and Spot price will be almost same ( give or take $100)
In both cases professional traders profit is $2000 for each futures contract on the investment of $16,700 Spot + $10,000 future initial price.
That is $2000 profit on $26,700 investment for one month period , that works as 7% return per month, annualized 84% . You may need to deduct cost of money that is interest on investment or loan say 6% per year .
One risk I see is, on the Short sell Futures contract, if the bitcoin is keep rising in price , trader needs to supply more money to meet the margin call ( just a technial issue because he is gaining on the LONG Buy bitcoin spot price )
Am I missing some thing ??