Why are bitcoins in december better than bitcoins today? (ICBIT)

[picobit]

Hi,

On icbit.se, you can trade futures contracts in bitcoin, to be settled December 15.  Currently, the price at MtGox is 12.3$, but futures contracts at icbit are 13.7$.  Essentially, you are buying bitcoins for delivery in december, why are people willing to pay 1.5$ more for that?

Of course you can use leverage to buy more bitcoins in the future, but in an efficient market both the futures price and the current price should be good indicators of what the market thinks the price should be later.  Only if there are costs of storage should the futures price be above the spot market price (contango).  Are bitcoiners not rational?

And why is the site not swarmed with arbitrageurs?  Buy 100 BTC at an exchange, pay 1230$.  Transfer a fraction of these to icbit as margin, and sell 100 BTC in december.  Then no matter what happens to the bitcoin price, you will have 1370$ worth of bitcoins in mid december.  If the price has gone up, you loose on the icbit account, but that is compensated by the rise in value of the rest of your coins - and reversely if price drops.  An (almost *) risk-free investment returning 11% in three month (or 55% per year).  Pretty good, for a risk-free investment in dollars!

Of course it is only risk-free if you are American.  Us Europeans expose ourselves to fluctuations in the dollar versus euro when doing this.

(*) Only almost risk free.  Your bitcoins could be hacked.  Bitcoin could totally collapse.  The world could end....

[dust]

"Almost risk free" is right, if not an underestimate of the risk involved.  There is counterparty risk and security risks when dealing with a bitcoin website.

[kangasbros]

I'm pretty sure the reason is the UI of icbit.se. It could be much simpler. People like simple things.

[BkkCoins]

Probably people are expecting the price to go up after the block reward halves in Nov/Dec sometime. Since half as many BTC will be created each block if you expect demand to be the same then price should rise.

S v + D - => P ^ 

[picobit]

http://en.wikipedia.org/wiki/Contango
In short -- players on ICBIT are thinking that BTC will go north ATM.

But why do they then buy the expensive futures instead of the cheap bitcoins :-)

I'm pretty sure the reason is the UI of icbit.se. It could be much simpler. People like simple things.

So people pay more for the confusing UI

Joking aside, I could see the UI keeping arbitrageurs away

[Piper67]

I'll wait to see what JoelKatz has to say about it 

[picobit]

Futures on ICBIT are levered up.
So profit made from futures trading ( if you guess direction of the price moves right ) are BIGGER, than from plain BTCes.

So is the loss if they go down.  The current value should in both cases be the same as the expected value in december.  If the general expectation is that prices are higher in december, then both markets should go north.

Of course if optimists are more likely to seek out icbit than pessimists ...

[Stephen Gornick]

Essentially, you are buying bitcoins for delivery in december, why are people willing to pay 1.5$ more for that?
[...]
If the price has gone up, you loose on the icbit account, but that is compensated by the rise in value of the rest of your coins - and reversely if price drops.  An (almost *) risk-free investment returning 11% in three month (or 55% per year).  Pretty good, for a risk-free investment in dollars!

You can still lose.

Your gains from the margin variance adjustment paid daily max out at 5% [Update: 10% ...   "Maximum price change within one trading session: 10% in each direction relative to the close price of the last trading session.":
 - https://icbit.se/BUZ2 ]

So let's say the price rises to $13.80 (where the futures are at about right now), but then drops quickly, 15% in a single day.  The clearing price might have moved close to that 15% but your margin variance on your short position will only give you a gain of 5% [Update: 10%] for that day.  

[Edit: I may be mistaken on that.  I don't know if there is just a 10% limit, and it just takes additional day(s) to earn the remaining margin variance adjustment or if anything exceeding 10% is lost.    I give a specific example here:
 - http://bitcointalk.org/index.php?topic=50817.msg1246688#msg1246688
but haven't seen an official response to it yet, and there hasn't been a a day with more than a 10% move to see the actual handling.]

[picobit]

Essentially, you are buying bitcoins for delivery in december, why are people willing to pay 1.5$ more for that?
[...]
If the price has gone up, you loose on the icbit account, but that is compensated by the rise in value of the rest of your coins - and reversely if price drops.  An (almost *) risk-free investment returning 11% in three month (or 55% per year).  Pretty good, for a risk-free investment in dollars!

You can still lose.

Your gains from the margin variance adjustment paid daily max out at 5%.  

So let's say the price rises to $13.80 (where the futures are at about right now), but then drops quickly, 15% in a single day.  The clearing price might have moved close to that 15% but your margin variance on your short position will only give you a gain of 5% for that day. 

It is now 10% - but that is of course besides the point.

I don't think this limitation is relevant for the settlement on the final day.  It is implemented as a limitation on how low or high bids you can place every day, effectively limiting the change in price of the futures.  But on settlement day, the official 24h average from "the largest exchange" will be used.

[Shermo]

Personally I plan to invest in BTC as much as I can afford/risk because I think the price will increase once the block value halves, also the general trend is up anyway. Of course like any investment, it has the potential to flop. BTC's volatility is probably closer to shares than major fiat currencies at the moment, but then again over the medium term even fiat currencies vary wildly. I quite enjoy when the GBP/USD exchange moves back into my favour and its beneficial to import from USA again, I'd really love to see >$2 / £ again!

[BkkCoins]

Personally I plan to invest in BTC as much as I can afford/risk because I think the price will increase once the block value halves, also the general trend is up anyway. Of course like any investment, it has the potential to flop. BTC's volatility is probably closer to shares than major fiat currencies at the moment, but then again over the medium term even fiat currencies vary wildly. I quite enjoy when the GBP/USD exchange moves back into my favour and its beneficial to import from USA again, I'd really love to see >$2 / £ again!

Yes. Not so very long ago the US dollar was worth 1.60 Canadian dollars.

Now it's worth 0.97. That's a 39% loss of value if you held US dollars.

Or roughly the same as if you bought bItcoins at near it's peak last summer with crazy bad timing.

[Elwar]

Hmm, I was going to buy some december Bitcoins for my family members for Christmas. May as well buy them now since they are only $13.70.

Who knows what the price may be by then.

If I bought them september Bitcoins they would be like "oh...how long have these things been sitting around?".

[TTBit]

I suggest that the premium is due to the real interest rate for bitcoins. There is no Federal Reserve keeping rates artificially low, and the cheapest people can 'borrow' today for bitcoins is 50%/year.

[zveda2000]

IMO it is because of counterparty risk. Counterparty risk is the biggest risk!

Between now and December the site could go down. How can you be sure your contract will be honored? If this was a very big site with a number of years of reputation, large amount of liquidity etc etc then this condition would be very unusual. As it stands this is all normal. You can often get really good deals from new sites/businesses trying to establish reputation and a user base.

[picobit]

Thanks for all your comments.

I guess the real reason is: All of the above

[smoothie]

Hi,

On icbit.se, you can trade futures contracts in bitcoin, to be settled December 15.  Currently, the price at MtGox is 12.3$, but futures contracts at icbit are 13.7$.  Essentially, you are buying bitcoins for delivery in december, why are people willing to pay 1.5$ more for that?

Of course you can use leverage to buy more bitcoins in the future, but in an efficient market both the futures price and the current price should be good indicators of what the market thinks the price should be later.  Only if there are costs of storage should the futures price be above the spot market price (contango).  Are bitcoiners not rational?

And why is the site not swarmed with arbitrageurs?  Buy 100 BTC at an exchange, pay 1230$.  Transfer a fraction of these to icbit as margin, and sell 100 BTC in december.  Then no matter what happens to the bitcoin price, you will have 1370$ worth of bitcoins in mid december.  If the price has gone up, you loose on the icbit account, but that is compensated by the rise in value of the rest of your coins - and reversely if price drops.  An (almost *) risk-free investment returning 11% in three month (or 55% per year).  Pretty good, for a risk-free investment in dollars!

Of course it is only risk-free if you are American.  Us Europeans expose ourselves to fluctuations in the dollar versus euro when doing this.

(*) Only almost risk free.  Your bitcoins could be hacked.  Bitcoin could totally collapse.  The world could end....

I'm already going this. Deal was made in July for 50 bitcoins at $11 on October 31st 2012.

This would add more interesting price fluctuations to the market if there were bigger orders of it.