First time hearing about Zero coupon bonds and Perpetual bonds... Nonetheless, wouldn't author's description of perpetual zero coupon bond apply to many (most? all?) fiat currencies as well, since these are not really backed by anything anymore?
You can think of currency as a negative coupon bond, even - if you hold onto cash you generally expect it to lose value.
In order to function properly as a currency, an asset needs to be the least volatile liquid asset available in the economy (or at least to be competitive along this axis). The expectation the asset will slowly depreciate is compatible with this requirement. The expectation that your currency is a highly deflationary lottery ticket to be traded on 100x margin (and the kicker is that your collateral is some other highly volatile cryptoasset) - not so much.
That's why the price of goods and services are almost never set in Bitcoin (rather, the price is set in dollars and floating in Bitcoin). It's too volatile to fulfill all of the roles of a currency, but if you're quick about it you can use it as a medium of exchange.
This is more or less a summary of Taleb's argument that the net present value of Bitcoin is zero.
Cash does not have a negative coupon. Cash has no coupon.
I feel introducing quasi terminology helps confuse rather than help.
Index linked bonds, I think you're getting at the concept by talking about inflation, are linked to price changes. Check the actual price index (CPI, RPI, etc) of linkage for what price changes.
Most bonds are not index linked, not hedged against inflation, and have a fixed coupon. Whether or not that fixed coupon is or isn't above inflation depends on what inflation is. That's why bonds are classed as 'fixed income', or in alternate terminology 'financial assets' (not 'real' where 'real' has some link to inflation, or nominal incomes).
Further, bonds vary widely in terms of coupon, can be stripped of coupons, etc. So rather than coupon, yield to maturity might be more useful to look at vis inflation.
Cash has no coupon, so it has negative coupon as soon as you switch your analysis to real terms.
In fact, in the context of the fundamental theorem of asset pricing (every asset discounted by a suitable numeraire is a martingale under the probability measure induced by that numeraire), cash isn’t even an asset (instead, the interest bearing bank account is one).
Inflation is a necessary evil because paper is static and can't display real values.
People who expect money to store value directly must be insane. I mean think about Roman empire currency being valid today. That is impossible. Money is only valuable within an economy that accepts it.
Money from the past is no longer in the economy that is used to be accepted in. Every time period could be considered its own economy. Storing value or carrying value into the future can only happen in the real world, not with money itself, which is just a managerial system.
In the real world, objects degrade, expire, require maintenance or constant energy inputs. Once humans are gone, nature will simply take over.
The disconnect between money and the real world must manifest itself as inflation.
> Inflation is a necessary evil because paper is static and can't display real values.
In some way (low) inflation is a feature and not bug: having money just sit around unproductively Scrooge McDuck-style is a waste of resources. Having cash (slowly) lose its value incentivizes its investment into productive assets and help move the economy around.
Why does anyone expect / 'deserve' to earn returns on money that just sits around doing nothing?
I don't understand claims like this, if the net present value is zero, why is the price not zero? You have to convince yourself that everybody trading or holding the cryptocurrency is deluded and just playing a ponzi scheme with each other, but even if you believe this, those participants itself believe it has value.
You don't need to believe they're deluded, they can rationally and correctly believe that their particular trading activity will be be profitable. All it implies is that some of them will be wrong and that their losses will the the other trader's gain, and that the overall sum is zero or negative.
NPV, price, and value are each distinct [1]. Individuals judge value according to their own idiosyncratic needs and views, the market determines price, and a valuation model determines NPV - market forces will tend to align these, but there's no guarantee they will and no contradiction if they don't. (Note that NPV might be better termed "net present cash flow," it's more like a price than a value.) The S&P can go to zero on Monday and a million the next day - it's not likely (presumably the exchanges would halt trading long before that happened) but there's nothing to stop it. It's not like a physical system which is constrained by the universe to behave a certain way, it's closer to a series of independent dice rolls.
It seems to me like many people engage with this market for ideological reasons. I don't mean to say that's an illegitimate choice. But it can surely push the price past the NPV, if there's a contingent that's insensitive to the NPV. (This is why it's important to separate price from value. People investing for ideological reasons have a view about the value of Bitcoin, not the price.)
(Apologies that this is a meme, it was the first instance of the clip I found & I didn't feel like looking for a non meme version.)
Tl;Dw this is Saylor encouraging people to mortgage their house to buy Bitcoin. I think Saylor is some mixture of con artist and true believer, but I would call that close to unhinged. So yeah, some participants might be delusional (not a doctor). But I assume it's a minority.
[1] If you'd like me to define these terms, please see these previous comments of mine.
The value of cryptocurrencies, in spite of a collapse in value, is stopped from falling to their natural value, i.e. zero, by a combination of market manipulation, investor ignorance and a tsunami of lies on social media from those paid to promote these worthless frauds.
Which isn't how the US government backing the USD works at all.
This is the real reason the Bitcoin maxis - in contradiction to the narrative of government controlled money being evil - were so stoked about getting El salvador, or any sovereign government with aterritorial boundary recgnized by international convention and defended by men with guns, to adopt Bitcoin as a currency. " backed by math" doesn't amount to much when there are mortars aimed at the middle of your mining farm complex.
It's not a Ponzi scheme if you have a real economy generating real economic activity. The military isn't really the important part, it's the ability to tax a massive economy and then invest that money in eg infrastructure projects that help the economy grow. Ponzi schemes fail because the money isn't invested anywhere, it's just moved around. This makes it impossible for Ponzi schemes to be positive sum, so they're inherently unstable because when they are stressed everyone is forced to turn on each other because they're not all gunnuh make it.
Are you staying that fed taxes are positive sum for the economy? That's a pretty bold claim, as most people would have trouble citing $3 trillion in real value the fed gov creates each year.
Things like creating highways, making sure our food is uncontaminated, running the GPS, etc, etc, provide incredible value to the economy, yes. We are after all talking across an internet developed with public funding. They might not do so in a way people take note of, but it doesn't seem like a particularly bold claim to me.
the things you cited are like 2% of the budget, and I fully agree. For the other 90% of the budget, I still am very skeptical that its GDP positive (our defense budget is mostly about blowing things up, which destroys wealth instead of creating it)
Well, when the government spends $1 it contributes $1 to GDP (regardless of what it's spent on), but note that whether or not an investment helps the economy of the US expand is an entirely different question to how it impacts the world. Things can be a net negative to the world and expand the economy.
Also note that I intend these as descriptive and not proscriptive statements. I'm not trying to say the government isn't wasteful (though 90-98% waste is an overstatement) or that it's the best way to do things, I'm just trying to illustrate why seemingly ponzi-like systems like national currencies can be economically productive and stable over long periods of time while truly ponzi-like systems rarely have longevity (Herbalife and Amway being exceptions to this rule, in my opinion) because they don't actually produce anything.
Cash is a bearer bond. It represents a liability against the central bank but what does the central bank owe you? It owes you another bill of the same type but in good condition.
So yes, paper bill currency is just as speculative as cryptocurrency. The difference is that nowadays most money is created with a contractual obligation to get rid of it eventually, which means its value is stable(=opposite of volatile) over time.
Stocks are distinct from bonds, they're an ownership stake in a business so dividends are only a small component of their value. Share buybacks, liquidity events like exits, voting rights, etc all feed into value. Stock buybacks in particular can have tax advantages over dividends leading to companies like apple favoring them as a way of distributing value to shareholders. And the the terms of a stock aren't set at stock issuance, since they represent shares in a business they can go from dividend paying to not dividend paying and back.
If you have a company that is ideologically against paying dividends or doing stock buybacks and instead buys gold with its profits, its value would still go up as if it did stock buybacks because share owners also own a fraction of the gold. Now imagine a real business like Amazon reinvesting, the investments raise the value of the company's assets.
Through "funding". If the perpetual future's price is above (below) spot's price, long holders pay (receive) short sellers an interest at a regular interval (every 8 hours at most crypto exchanges).
Periodic exchange of money between longs and shorts, AKA "funding".
If the contract price is above the price of the physical good, holders of the contract ("longs") pay the sellers of the contract ("shorts") a small fee every few hours.
This makes it less valuable to hold the contract, and pushes the price of the contract down, until its on par with the price of the physical good.
If you are an American and want to experiment with perps and aren’t confident with defi, you can become a Palauan resident and trade on Bybit (Dubai) and some other offshore exchanges legally.
Children are an insurance policy - negative EV for sure, but if you raise them right, and they do alright, and you hit skid row in your dotage then they’ll take you in and provide free food and board for the rest of your life.
Ice floes were always a risk to policy fulfilment, so Boomers invented Global Warming to remove them.
300 grand minimum for the chance to throw half your genetics into the future.
That worth 300k? Opinions differ. I don't have an enormous farm filled with livestock for tiny hands to help with, so I'm going with "no".
Some people think I am immoral for thinking this, but they do not have farms either, so I'm not confident in their judgement. On the other hand, urbanites seem to think children can be replaced by kittens. This is more or less the core of the Culture Wars, so probably starting a huge Internet Fight here.
Dang, sorry that came off that way. I like kids. I didn't think that sounded like an anti-child troll. I got my three nibs for the summer, so I might let them know for their own good. Parents shouldn't leave their kids with trolls!
Humans have a complicated relationship with their "instincts". Why is that? We have culture, which can (theoretically) adapt very rapidly compared to information exchange via sex / virus / "some other mystery horizontal genetic transfer". How much more rapidly? It's faster, but how much faster is a hugely debated topic in anthropology and genetics. Same net effect: humans, probably since before they were humans, have felt almost constantly at war with their "instincts", since culture is always faster to adapt.
Here's another trick: how do you differentiate between an "instinct" and a general want? You kind of don't, and this opens up a rhetorical relationship with the whole concept of "instinct" that has a heavy history and lives into the present day. But do we know what our instincts are? We could jump deep into the fMRI rabbit hole here, saying this "pathway" this, and "horrible abuse of stats" that, but I think that's a waste of effort. It doesn't matter - not in this context, I DO think it's needed science - because both instinct and culture have the same desired end state: human - and American, if possible - survival. Why not just break it down old fashioned utilitarian style? Which is why I bring up farms. Post-agricultural, an industrial state NEEDS to support birth rates via direct subsidies, as in paychecks.
This never happens, so kids don't happen either, and we start talking about three hundred grand and instincts and trolls and all the rest.
We love blaming those at our same socio-economic level for the ills that we perceive in the world, but often it's our masters who gain the most from pointing us at each other's throats. The loss of traditional values, the shattering of the working class, the collapse of masculinity, the dehumanization of the black and of the woman, the ever-shrinking family, the escalating violence of state security, the complete loss of any sense of privacy or decency - it's the same force making these things happen. HAS BEEN MAKING them happen, for years, decades or even centuries.
How this country responds to that fact decides everything, including how we respond in a peer conflict. Would the Democrats necessarily mind a losing ground war that drains the countryside? Would the Republicans necessarily retaliate after a few dozen megatons land on NYC, LAX, SFO, PDX, and SEA? That's why I worry about this shit. Because as much as we might hate <INSERT AMERICAN YOU DISAGREE WITH>, I guarantee we really need to hate the PLAAF more.
this was one of the most amusing aspects of KYC to me, the concept of dirty funds becoming clean it if is touched/seized by a sovereign country and how chainanalysis doesnt really factor that in right now unless it was touched by the US Marshalls. But really whose to say that Palau, for example, doesnt just offer cleansing as a service, a soveriegn mixer equally as unquestionable as a sovereign’s designation of funds as dirty
Perpetual futures are so nice compared to regular tradfi ones. Having to roll over your ES or NQ futures serves no purpose (and it's not like any other future besides the front month is liquid anyways) and is probably just a scam by CME to induce more trading volume.
That being said regular futures do make sense for stuff like commodities.
Because perpetual future doesn't make sense for a lot of things people trade futures for: corn, soybean, crude oil. They have physical presence and in some cases an expiry date.
There are futures for other financial instruments or indexes where it might make more sense, but there the use of futures is more about hedging than owning the underlying, since it's not as complicated as owning your own crypto and keeping it safe.
Well it actually makes sense, production is often continuous, most producers just want to hedge some risk due to price fluctuations over the time, they have no interest in physical delivery because it is often expensive.
One answer here is that with dated rates products (I.e. all futures and options, not to mention spot ficc) is
* pricing is well understood
* shares similar risks across all products
If you add an ES perp, that might be a fine instrument in isolation, but it behaves totally differently than most other rates instruments so might be hard to fit into a portfolio than dated futures that you roll.
I ran a trading desk in the past that did both dated and perpetual products and this was a major point of focus.
The liquidity would be terrible and all retail trading. Most CME futures are bought and sold by Market Makers, not us retail little guys. The liquidity on Nasdaq (NQ) or S&P (ES) futures are so impressive that I can put in a sell stop order with a limit of only 1 tick from the stop and it will always fill outside of major market events.
Perpetual futures make sense for crypto because it has no physical presence and arguably no real uses beyond speculation. For commodities, for most of which finance and more specifically futures conrracts are really a secondary tool to smoothen the real world use cases, expiry and delivery etc. is a feature and not a bug.
Index futures are among the most liquid and highly traded instruments and have no natural expiries, a perpetual might make sense. There is a direct correspondence between the rates component of the index futures and all other naturally expiring instruments (options, bonds, commodity futures) so there’s an angle of “yet another weird rates product everyone has to care about” if you add perps.
I might have thought that, but the article says they were invented by actual real-world metal miners to solve a problem on the Chinese Gold and Silver Exchange.
The oil future prices drop to negative in an exchange in 2020. Funds rolling over the contract in subsequent months also took a big loss for rolling over contracts because price disparity in different months. Perpetual futures would eliminate such risks.
The facts regarding crude futures dropping to negative a day in 2020 are actually more to do with the fact every bit of storage in the US was full. The companies closing contracts were hedged by this point anyways, as demand had all but dried up completely. Perpetual futures would go against the entire point of having contacts for specified length of time. That point is time itself, the other major variable in finance.
I was on hn or reddit and I wished someone would buy an oil tanker for like $1 and sell for -1 if possible but for a brief period, I'd have owned a freaking oil tanker. Sadly couldn't convince anyone. Sad sad really. It could've been a nice story today.
I find it super helpful that cryptobros invented their own lingo. That's because that way, when I get emails from recruiters being mysterious and using words like "tradfi", I know I can safely ignore.
Missing from this list is OANDA, which had perpetual forex contracts for a long time. Interest was paid/received every second, instead of having a tommorow-next model as the other forex brokers do.
The way a perpetual future works is that it's basically a bet between two parties on whether the price of Bitcoin will go up or down. Every day, the loser pays the winner by the amount of movement.
But what if the loser doesn't want to pay? The winner is screwed.
To prevent this scenario, but both sides are required to post collateral with the exchange, which gets used to settle the bets. The collateral is required to be a certain percentage of the size of price of Bitcoin. If, due to losing your bet, your collateral dips below the minimum amount required, it is repossessed by the exchange and your bets are terminated.
This is considered leverage because it magnifies the risk of speculating on Bitcoin.
One way to bet on Bitcoin is to simply buy it. If the price of Bitcoin goes from $10,000 to $11,000, that's a 10% reform return.
But if there's an exchange that allows 100x leverage perpetual futures, what they're saying is that I can buy a perpetual future by only posting 1% of the price of the underlying as collateral. So if I buy a perpetual future on Bitcoin while the price is at $10,000 and it goes to $11,000, my return is way higher. I only need to put up $100 for collateral but I just made $1000. That's a 1000% return.
The problem, as you might guess, is that if the price falls, the exchange takes my $100, whereas if I had bought Bitcoin, I'd still own the Bitcoin.
There's also a problem that the exchange can easily blow up if the market moves too fast for them to liquidate the losers and make the winners whole. The greater the amount of leverage the exchange allows, the greater the chance of this happening.
I mean, pretty much every article about random database performance issues also turns out to be either, at best, an ad to work at the company which ran into the problem, or, at worst, an ad for the company that claims to have solved the problem in a turn-key product :(.
One thing I haven’t seen getting enough attention is the interest rate you pay for the loan implicit in taking out a leveraged position.
For a future with a fixed expiration date, you can easily compute the implied rate by looking at the basis and time to expiry. Back around 5 years ago, you could lock in 80% or so interest p.a. risk free [1] by buying Bitcoin and shorting the future (eg on BitMEX).
Everyone else that was yoloing long the future paid that (somewhat hidden) rate.
With a perpetual, you can’t lock in the rate (until the expiry, as you can on an ordinary future), but it depends on the funding paid (every 8 hours) over that period. It might well be the same, but would basically depend on the long or short sentiment of the crowd, integrated over that period.
At any rate, seems like most people ignore that substantial cost (which was and presumably is arb’ed and exploited by more sophisticated players fleecing the plebs).
[1] “risk free” modulo exchange/ops risk, which is substantial as FTX and others demonstrated.
> These two properties together - the elimination of expiration, and the elimination of contango/backwardation, led to massive cost savings for the miners.
This is either an Ad or the writer has no experience trading these instruments. As someone who traded these instruments, I'd take the defined future which has a fixed contango/backwardation over the "risky" perpetual which charges daily "funding/interest" that is more volatile than crypto itself.
If Basis risk is annoying, interest rate risk is a real and dangerous risk.
While perpetuals are riskier, you're under playing the risk of traditional futures: even though your rate component is locked in if you hold to expiry, you could still get liquidated in the meantime if the curve moves violently against you.
78 comments
[ 3.7 ms ] story [ 156 ms ] threadIn order to function properly as a currency, an asset needs to be the least volatile liquid asset available in the economy (or at least to be competitive along this axis). The expectation the asset will slowly depreciate is compatible with this requirement. The expectation that your currency is a highly deflationary lottery ticket to be traded on 100x margin (and the kicker is that your collateral is some other highly volatile cryptoasset) - not so much.
That's why the price of goods and services are almost never set in Bitcoin (rather, the price is set in dollars and floating in Bitcoin). It's too volatile to fulfill all of the roles of a currency, but if you're quick about it you can use it as a medium of exchange.
This is more or less a summary of Taleb's argument that the net present value of Bitcoin is zero.
https://arxiv.org/abs/2106.14204
https://youtube.com/watch?v=XeG0FzPxSh4
I feel introducing quasi terminology helps confuse rather than help.
Index linked bonds, I think you're getting at the concept by talking about inflation, are linked to price changes. Check the actual price index (CPI, RPI, etc) of linkage for what price changes.
Most bonds are not index linked, not hedged against inflation, and have a fixed coupon. Whether or not that fixed coupon is or isn't above inflation depends on what inflation is. That's why bonds are classed as 'fixed income', or in alternate terminology 'financial assets' (not 'real' where 'real' has some link to inflation, or nominal incomes).
Further, bonds vary widely in terms of coupon, can be stripped of coupons, etc. So rather than coupon, yield to maturity might be more useful to look at vis inflation.
In fact, in the context of the fundamental theorem of asset pricing (every asset discounted by a suitable numeraire is a martingale under the probability measure induced by that numeraire), cash isn’t even an asset (instead, the interest bearing bank account is one).
People who expect money to store value directly must be insane. I mean think about Roman empire currency being valid today. That is impossible. Money is only valuable within an economy that accepts it. Money from the past is no longer in the economy that is used to be accepted in. Every time period could be considered its own economy. Storing value or carrying value into the future can only happen in the real world, not with money itself, which is just a managerial system.
In the real world, objects degrade, expire, require maintenance or constant energy inputs. Once humans are gone, nature will simply take over.
The disconnect between money and the real world must manifest itself as inflation.
In some way (low) inflation is a feature and not bug: having money just sit around unproductively Scrooge McDuck-style is a waste of resources. Having cash (slowly) lose its value incentivizes its investment into productive assets and help move the economy around.
Why does anyone expect / 'deserve' to earn returns on money that just sits around doing nothing?
Who is value set by, if not the market?
NPV, price, and value are each distinct [1]. Individuals judge value according to their own idiosyncratic needs and views, the market determines price, and a valuation model determines NPV - market forces will tend to align these, but there's no guarantee they will and no contradiction if they don't. (Note that NPV might be better termed "net present cash flow," it's more like a price than a value.) The S&P can go to zero on Monday and a million the next day - it's not likely (presumably the exchanges would halt trading long before that happened) but there's nothing to stop it. It's not like a physical system which is constrained by the universe to behave a certain way, it's closer to a series of independent dice rolls.
It seems to me like many people engage with this market for ideological reasons. I don't mean to say that's an illegitimate choice. But it can surely push the price past the NPV, if there's a contingent that's insensitive to the NPV. (This is why it's important to separate price from value. People investing for ideological reasons have a view about the value of Bitcoin, not the price.)
And then there's stuff like this.
https://youtube.com/watch?v=wIhTGB3wqV0
(Apologies that this is a meme, it was the first instance of the clip I found & I didn't feel like looking for a non meme version.)
Tl;Dw this is Saylor encouraging people to mortgage their house to buy Bitcoin. I think Saylor is some mixture of con artist and true believer, but I would call that close to unhinged. So yeah, some participants might be delusional (not a doctor). But I assume it's a minority.
[1] If you'd like me to define these terms, please see these previous comments of mine.
https://news.ycombinator.com/item?id=32857769
There's some debate in this thread about whether price and value are actually equivalent.
https://news.ycombinator.com/item?id=33321321
The value of cryptocurrencies, in spite of a collapse in value, is stopped from falling to their natural value, i.e. zero, by a combination of market manipulation, investor ignorance and a tsunami of lies on social media from those paid to promote these worthless frauds.
Which isn't how the US government backing the USD works at all.
Also note that I intend these as descriptive and not proscriptive statements. I'm not trying to say the government isn't wasteful (though 90-98% waste is an overstatement) or that it's the best way to do things, I'm just trying to illustrate why seemingly ponzi-like systems like national currencies can be economically productive and stable over long periods of time while truly ponzi-like systems rarely have longevity (Herbalife and Amway being exceptions to this rule, in my opinion) because they don't actually produce anything.
So yes, paper bill currency is just as speculative as cryptocurrency. The difference is that nowadays most money is created with a contractual obligation to get rid of it eventually, which means its value is stable(=opposite of volatile) over time.
If the contract price is above the price of the physical good, holders of the contract ("longs") pay the sellers of the contract ("shorts") a small fee every few hours.
This makes it less valuable to hold the contract, and pushes the price of the contract down, until its on par with the price of the physical good.
Wasn’t expecting that promo at the end, but who am I kidding, no one writes seriously about crypto without promoting something.
https://rns.id/
Ice floes were always a risk to policy fulfilment, so Boomers invented Global Warming to remove them.
That worth 300k? Opinions differ. I don't have an enormous farm filled with livestock for tiny hands to help with, so I'm going with "no".
Some people think I am immoral for thinking this, but they do not have farms either, so I'm not confident in their judgement. On the other hand, urbanites seem to think children can be replaced by kittens. This is more or less the core of the Culture Wars, so probably starting a huge Internet Fight here.
Anyway, I’ll bite: one of humanity’s instincts is to have a family. It’s not amoral, it’s at the core of our being.
Humans have a complicated relationship with their "instincts". Why is that? We have culture, which can (theoretically) adapt very rapidly compared to information exchange via sex / virus / "some other mystery horizontal genetic transfer". How much more rapidly? It's faster, but how much faster is a hugely debated topic in anthropology and genetics. Same net effect: humans, probably since before they were humans, have felt almost constantly at war with their "instincts", since culture is always faster to adapt.
Here's another trick: how do you differentiate between an "instinct" and a general want? You kind of don't, and this opens up a rhetorical relationship with the whole concept of "instinct" that has a heavy history and lives into the present day. But do we know what our instincts are? We could jump deep into the fMRI rabbit hole here, saying this "pathway" this, and "horrible abuse of stats" that, but I think that's a waste of effort. It doesn't matter - not in this context, I DO think it's needed science - because both instinct and culture have the same desired end state: human - and American, if possible - survival. Why not just break it down old fashioned utilitarian style? Which is why I bring up farms. Post-agricultural, an industrial state NEEDS to support birth rates via direct subsidies, as in paychecks.
This never happens, so kids don't happen either, and we start talking about three hundred grand and instincts and trolls and all the rest.
We love blaming those at our same socio-economic level for the ills that we perceive in the world, but often it's our masters who gain the most from pointing us at each other's throats. The loss of traditional values, the shattering of the working class, the collapse of masculinity, the dehumanization of the black and of the woman, the ever-shrinking family, the escalating violence of state security, the complete loss of any sense of privacy or decency - it's the same force making these things happen. HAS BEEN MAKING them happen, for years, decades or even centuries.
How this country responds to that fact decides everything, including how we respond in a peer conflict. Would the Democrats necessarily mind a losing ground war that drains the countryside? Would the Republicans necessarily retaliate after a few dozen megatons land on NYC, LAX, SFO, PDX, and SEA? That's why I worry about this shit. Because as much as we might hate <INSERT AMERICAN YOU DISAGREE WITH>, I guarantee we really need to hate the PLAAF more.
Know thyself and all that.
That being said regular futures do make sense for stuff like commodities.
I can understand why CME might not. But why wouldn’t a new entrant like robinhood launch perpetual futures?
There are futures for other financial instruments or indexes where it might make more sense, but there the use of futures is more about hedging than owning the underlying, since it's not as complicated as owning your own crypto and keeping it safe.
* pricing is well understood
* shares similar risks across all products
If you add an ES perp, that might be a fine instrument in isolation, but it behaves totally differently than most other rates instruments so might be hard to fit into a portfolio than dated futures that you roll.
I ran a trading desk in the past that did both dated and perpetual products and this was a major point of focus.
But what if the loser doesn't want to pay? The winner is screwed.
To prevent this scenario, but both sides are required to post collateral with the exchange, which gets used to settle the bets. The collateral is required to be a certain percentage of the size of price of Bitcoin. If, due to losing your bet, your collateral dips below the minimum amount required, it is repossessed by the exchange and your bets are terminated.
This is considered leverage because it magnifies the risk of speculating on Bitcoin.
One way to bet on Bitcoin is to simply buy it. If the price of Bitcoin goes from $10,000 to $11,000, that's a 10% reform return.
But if there's an exchange that allows 100x leverage perpetual futures, what they're saying is that I can buy a perpetual future by only posting 1% of the price of the underlying as collateral. So if I buy a perpetual future on Bitcoin while the price is at $10,000 and it goes to $11,000, my return is way higher. I only need to put up $100 for collateral but I just made $1000. That's a 1000% return.
The problem, as you might guess, is that if the price falls, the exchange takes my $100, whereas if I had bought Bitcoin, I'd still own the Bitcoin.
There's also a problem that the exchange can easily blow up if the market moves too fast for them to liquidate the losers and make the winners whole. The greater the amount of leverage the exchange allows, the greater the chance of this happening.
Perps are extremely fun, and not great for your financial health in general. Very addictive PvP game though.
For a future with a fixed expiration date, you can easily compute the implied rate by looking at the basis and time to expiry. Back around 5 years ago, you could lock in 80% or so interest p.a. risk free [1] by buying Bitcoin and shorting the future (eg on BitMEX). Everyone else that was yoloing long the future paid that (somewhat hidden) rate.
With a perpetual, you can’t lock in the rate (until the expiry, as you can on an ordinary future), but it depends on the funding paid (every 8 hours) over that period. It might well be the same, but would basically depend on the long or short sentiment of the crowd, integrated over that period.
At any rate, seems like most people ignore that substantial cost (which was and presumably is arb’ed and exploited by more sophisticated players fleecing the plebs).
[1] “risk free” modulo exchange/ops risk, which is substantial as FTX and others demonstrated.
This is either an Ad or the writer has no experience trading these instruments. As someone who traded these instruments, I'd take the defined future which has a fixed contango/backwardation over the "risky" perpetual which charges daily "funding/interest" that is more volatile than crypto itself.
If Basis risk is annoying, interest rate risk is a real and dangerous risk.