Back To The Bitcoin Futures

How many people that own a Bitcoin can actually explain what it is?

Reminds me of an interview I saw with this hedge fund guy, reliving the early days of the internet,

“No we weren’t worried, how can you regulate something you can’t define? In those days, any guy that came into our building and could actually tell you what a derivative was, we hired him.”

Understand it or not, a group of people out there are cashing up. And hats off to you, congrats.

Many others are reading the headlines and looking for reasons to join.

And partners to parade.

Microsoft,, and Expedia just to name a few already accept Bitcoin as payment; it’s a good start and more will come for sure.

And now, add to that list the CME group & the Cboe Futures Exchange, with more sure to follow: a huge victory—milestone even—for bitcoin owners and advocates.

Or is it?

Huge platforms like the CME group and the Chicago Board Options Exchange, recognizing Bitcoin officially…..Is that not the ultimate badge of legitimacy, a big step towards the mainstream?

Aren’t we finally being noticed?!?!

Yes. Yes. Yes you are.

But…I’d say being recognized by the futures market is less like your father in law giving you his blessing, more like the Death Star descending upon your planet after noticing your existence out of the corner of its Death Vision.

But Why?

To tell the difference between heaven and hell, first define the difference between angels and demons.

Think Bitcoin was cerebrally challenging? Try Futures.

If I designed a marketing campaign for the futures market I’d do the whole thing with slogans:

“Futures! Sell Shit You Don’t Have!”

“Futures! Buy Shit You Don’t Want!”

In a week or two we will publish a more formal overview of futures contracts and their superpowers, but for now a simple analogy will suffice:

My buddy Anthony builds aluminum silos. Turns out it takes quite a bit of aluminum to make a silo, so whether aluminum is a dollar a pound or two dollars a pound makes quite the difference.

Anthony wants to bid on a contract to build 42 silo’s across the midwest, a project that could take a couple of years.

Anthony can’t calculate his bid without calculating his costs. If his number one cost is Aluminum, and the price of that changes daily, what are his options?

A simple solution is Anthony can use a future’s contract here: he can enter a contract to buy 42 silo’s worth of aluminum, to be delivered at a future date and paid for at a future date. He can see the “going rate” and how many aluminum suppliers are offering those contracts and terms.

This allows Anthony to zero in a price, and provides him an instrument to take physical delivery of the raw material he needs at a future date.

On the other side, there’s an Aluminum supplier with 42 silo’s worth of metal that’s happy to sell, and they depend on futures contracts to lock in profits, manage inventory, and anticipate demand.

Well that was the original idea anyways.

Now imagine…there is no aluminum.

Imagine part of Anthony’s contract stipulates that on delivery day, if for some reason the supplier doesn’t have any aluminum, they can just pay Anthony cash—42 silo’s worth of aluminum in cash, at today’s prices.

Doesn’t sound all that unreasonable, but everything just changed.

Because as long as everything can be settled with just cash, I can sell that contract even if I’m not an aluminum supplier, even if I have no aluminum, even if I had no intention of delivering any metal to anyone.

Selling that contract has become a bet—a bet the price will fall between now and delivery date. If it does I pocket the difference.

And on Anthony’s side—buying that contract now has also become a bet—a bet that the price will rise between now and delivery date.

And, eventually we get to the point where 99% of all futures transactions never see aluminum itself change hands.

Not that they had it to begin with, because in the futures market, you don’t have to show that you have X amount of aluminum, you just have to show you have a small percentage of it, and that percentage…. can be in cash instead of aluminum.

This situation exists today. Just look at the silver market. Demand is roughly 1060 million oz. per year. Supply is ~880 million ounces per year.

And yet in a normal day, nearly 950 million ounces will be traded on the futures market. More is traded there every day than is mined in an entire year. The actual physical market accounts for only .0055% of the market.

Why does this matter?

When there are more buyers than sellers, the price goes up.

When there are more sellers than buyers, the price goes down.

And when 99% of the buying and selling isn’t related to the underlying commodity…. then

Whoever runs the futures markets runs the price and movement of the commodity being traded.

With enough money or margin they can create a near infinite amount of demand or supply…which should be quite concerning to Bitcoin advocates that rally behind “a limited number of bitcoins.” Once you introduce futures with cash settlements, limited bitcoin supply becomes unlimited bitcoin supply overnight—because I can sell Bitcoin without owning any.

Poof, just like that. As many or as few coins to buy or sale as you like…if you’re one of the big boys pulling the levers.

This has been the case for years in the Silver market, and those major, sophisticated institutions that run the futures markets make money on the way up, and they make money on the way down.

They can orchestrate a rise and a crash and anything in between, and they will annihilate you.

These are the most powerful and profitable institutions on earth.

They are the biggest banks, the smartest money. They are they Death Star.

How dark is the dark side?

Depends who you ask, but at worst they’re a super race from Alpha Centari bent on enslaving you. At best, they’re absolute sharks who will shred your flesh for profit.

In either case, they aren’t your friends (hopefully), and they’re no friend of Bitcoin either.

Not to crush your parade with a wall of blood, but this isn’t the kind of recognition you want.

If the goal was to get away from centralized banking, now might be a good time to consider pushing back the groups circling the wagons, not celebrating them.


Christoph Grizzard, The Fat Cat Investor





k.450 © 2017 FatCat Consulting Limited. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from the publisher.

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