The Starting Of The "Bitcoin Derivative" - What side are you on?

[Rampion]

Once the financial capitalists start messing around heavily with Bitcoin, Bitcoin will be doomed.

[cbeast]

With commodities you have a paper trail that can be manipulated, counterfeited, and estimated with rehypothecations of assets. Traditional derivative bets cannot be made with Bitcoin because you will be forced to prove ownership by signing your addresses. Good luck loaning bitcoins you don't have. Someday you may even be required to use triple-entry accounting. Better enjoy the wine while you can.

[mindtomatter]

Once the financial capitalists start messing around heavily with Bitcoin, Bitcoin will be doomed.

The potential to manipulate bitcoin is actually really limited to those who don't want to profit.  Anything else is a really short-term phenomenon because after dumping all shares at the peak of a bubble to cause a cascading market crash, you have to buy them back right away or risk missing the dip.     Options trading might change this, but again somebody has to offer their bitcoins on the other side of the contract so the bitcoins have to come from somewhere.

Wallstreet getting into this in a larger way than they already are (look at tradehill) means the price goes up, alot.   They can profit from that rise and they can try to shake out weak hands so they can accumulate more bitcoin for cheaper, but ultimately unless you don't want to own bitcoins at the end of the manipulation, it's of limited effect.

[Stephen Gornick]

ultimately unless you don't want to own bitcoins at the end of the manipulation

When you sell PUT options on MPOE, or sell BTC/USD futures contracts on ICBIT, as two examples, the gains are earned in bitcoins.  So a favorable move (relative to the position) causes you to earn more bitcoins than you would have had simply holding a long position.   

It doesn't necessarily mean you don't want to hold bitcoins for the long term and instead could just mean that you believe the current exchange rate might be too high (or in the case of BUM3 futures contracts on ICBIT, you can earn profit from the current contango where the future sells at a price significantly higher than the spot price.)

[mindtomatter]

ultimately unless you don't want to own bitcoins at the end of the manipulation

When you sell PUT options on MPOE, or sell BTC/USD futures contracts on ICBIT, as two examples, the gains are earned in bitcoins.  So a favorable move (relative to the position) causes you to earn more bitcoins than you would have had simply holding a long position.   

It doesn't necessarily mean you don't want to hold bitcoins for the long term and instead could just mean that you believe the current exchange rate might be too high (or in the case of BUM3 futures contracts on ICBIT, you can earn profit from the current contango where the future sells at a price significantly higher than the spot price.)

So long as all holders must back their contracts with actual assets, not the supposed promise to buy said assets, I don't see a problem.

[sgbett]

As I understand it options are (as the name might suggest) optional, once the contract expires the potential profit/loss can be calculated and the parties involved are credited/debited accordingly. Without ant BTC necessarily changing hands.

The 'option' part is that with the gains or losses, you can optionally trade the underlying equity involved with the gain (buy) or less (sell).

So BTC options are likely to happen whether you like it or not.

[alexeft]

Please, drive bitcoin to a million each!!!  

And please, short it! 

[BurtW]

As I understand it options are (as the name might suggest) optional, once the contract expires the potential profit/loss can be calculated and the parties involved are credited/debited accordingly. Without ant BTC necessarily changing hands.

The 'option' part is that with the gains or losses, you can optionally trade the underlying equity involved with the gain (buy) or less (sell).

So BTC options are likely to happen whether you like it or not.

Of couse they will.  Great!  As stated before if these options can be exersised then we can use them as just another way to obtain or sell actual BTC.  If they are not backed by actual BTC then they are just side bets on the price and we can just ignore them (or use if you like to gamble).

[mindtomatter]

As I understand it options are (as the name might suggest) optional, once the contract expires the potential profit/loss can be calculated and the parties involved are credited/debited accordingly. Without ant BTC necessarily changing hands.

The 'option' part is that with the gains or losses, you can optionally trade the underlying equity involved with the gain (buy) or less (sell).

So BTC options are likely to happen whether you like it or not.

But what if the holder of the option wants to take delivery, not cash settlement?   With physical objects it makes sense to settle to cash so as not to incur transport costs, but with Bitcoin there is no advantage. 

So again, what happens if most options buyers use them as a way to buy "cheaper" bitcoins further out instead of trying to guess the price differential for paper profits?

[Melbustus]

For one thing, OP, your emphasis on "intrinsic value" is pretty cute. In a world where humans don't need to transact quickly over distance, maybe (and this is debatable) Aristotle's definition of money makes sense. But not anymore. Both tangibility and alternate-industrial-use are bugs, not features, of a money that's ideal for modern times.

[IggySe7ven]

I got a question and who said that this Al guy is really who he says he is and owns all these bitcoins.

[mobodick]

For one thing, OP, your emphasis on "intrinsic value" is pretty cute. In a world where humans don't need to transact quickly over distance, maybe (and this is debatable) Aristotle's definition of money makes sense. But not anymore. Both tangibility and alternate-industrial-use are bugs, not features, of a money that's ideal for modern times.

Agreed.

[sgbett]

As I understand it options are (as the name might suggest) optional, once the contract expires the potential profit/loss can be calculated and the parties involved are credited/debited accordingly. Without ant BTC necessarily changing hands.

The 'option' part is that with the gains or losses, you can optionally trade the underlying equity involved with the gain (buy) or less (sell).

So BTC options are likely to happen whether you like it or not.

But what if the holder of the option wants to take delivery, not cash settlement?   With physical objects it makes sense to settle to cash so as not to incur transport costs, but with Bitcoin there is no advantage. 

So again, what happens if most options buyers use them as a way to buy "cheaper" bitcoins further out instead of trying to guess the price differential for paper profits?

Then they can take delivery. Every option has a buyer/seller. When an option is excercised there is a winner and a loser. The loser's account is debited, instead of the dollars being delivered to the winner, they are used to buy BTC. It's really just a matter of timing as to whether the dollars are converted to BTC at the point of option exercise, or later (or indeed as is likely the case in the real world,  at the point the option was written by the broker facilitating the option, who then profits from the spread and is hedged).

[mindtomatter]

So if every trade is backed by the goods to perform the trade, it can't control the market price.  In order for the market price to be controlled by futures, they must dwarf the overall market in value by several orders of magnitude - Can't do that when all your trades require actual backing because most people choose to take delivery rather than convert to USD.

That's the trick to manipulating markets, you've got to be big BIG or have a group of medium-big players all acting as one.

[BurtW]

As I understand it options are (as the name might suggest) optional, once the contract expires the potential profit/loss can be calculated and the parties involved are credited/debited accordingly. Without ant BTC necessarily changing hands.

The 'option' part is that with the gains or losses, you can optionally trade the underlying equity involved with the gain (buy) or less (sell).

So BTC options are likely to happen whether you like it or not.

But what if the holder of the option wants to take delivery, not cash settlement?   With physical objects it makes sense to settle to cash so as not to incur transport costs, but with Bitcoin there is no advantage. 

So again, what happens if most options buyers use them as a way to buy "cheaper" bitcoins further out instead of trying to guess the price differential for paper profits?

Then they can take delivery. Every option has a buyer/seller. When an option is excercised there is a winner and a loser. The loser's account is debited, instead of the dollars being delivered to the winner, they are used to buy BTC. It's really just a matter of timing as to whether the dollars are converted to BTC at the point of option exercise, or later (or indeed as is likely the case in the real world,  at the point the option was written by the broker facilitating the option, who then profits from the spread and is hedged).

Not true for all options, pork, orange juice, oil, indexes, etc. you cannot really take delivery of 1000 barrels of oil.  BUT with Bitcoin you can always easily take delivery.  So the real question is will these options be like options on stock (you can take delivery) or more like options on stock indexes (cant really take delivery of the entire dow, it is just a side bet).

[benjamindees]

For one thing, OP, your emphasis on "intrinsic value" is pretty cute. In a world where humans don't need to transact quickly over distance, maybe (and this is debatable) Aristotle's definition of money makes sense. But not anymore. Both tangibility and alternate-industrial-use are bugs, not features, of a money that's ideal for modern times.

Agreed.

Bah.  That is intrinsic value.  It is intrinsic to information that it can be easily transmitted over long distances.  It's intrinsic to strong encryption that it can ensure the privacy and integrity of transmitted information.

The problem isn't a lack of intrinsic value.  The problem is an archaic view of intrinsic value, and an archaic view of the function of money.  Currency transmits economic information over distance.  Money transmits economic information through time.  Gold is an excellent money, because gold today is the same as gold a thousand years from now.  Bitcoin is an excellent currency, because a Bitcoin in Siberia is the same as a Bitcoin in Miami.

The question is, is a Bitcoin today the same as a Bitcoin a hundred years in the future?  We don't know.  If it is, then they would be worth a million bucks each.

[mobodick]

For one thing, OP, your emphasis on "intrinsic value" is pretty cute. In a world where humans don't need to transact quickly over distance, maybe (and this is debatable) Aristotle's definition of money makes sense. But not anymore. Both tangibility and alternate-industrial-use are bugs, not features, of a money that's ideal for modern times.

Agreed.

Bah.  That is intrinsic value.  It is intrinsic to information that it can be easily transmitted over long distances. It's intrinsic to strong encryption that it can ensure the privacy and integrity of transmitted information.

Not without a power station, power infra, EM antennas, EM modulation schemes, amplifiers, filters, routers, etc, etc, etc.
Information is pretty useless without a specific contruction to transfer it.
What you call intrinsic is pretty much defined by extrinsic factors.
With information you can even debate that information is almost fully defined by the environment.

But i think you are just using an arbitrary definition of intrinsic value.
Try this one: Intrinsic value of a thing is what you are left with when you subtract the economic value.
So think of all the things you can do with bitcoin information when you don't use it as a means of exchanging value.
This distinction is made to separate an objects usefullness in the market from its direct usefullness.

What you maybe refer to are intrinsic properties, which is a physical phenomenon and has nothing to do with the economic notion of intrinsic value altho some intrinsic properties of some things can give it intrinsic value.
A bread has the intrinsic property of energy storage.
When you sell the bread you exchanged it for its economic value (whatever the market is willing to give for it).
When you eat it you exchange it for its intrinsic value (it makes your hunger go away).

Same goes for an metal coin.
You can use it for its economic value (its face value).
Or you can use its intrinsic value (the value you give it for being able to use it for forging) and smelt it.

So if you were to find a way to use bitcoin in a way that has nothing to do with exchanging value then you would have found some intrinsic value.
Someone mentioned a few weeks ago that the blockchain could be used as a random number generator.
That could give some intrinsic value to the information in bitcoin.

But besides being used as a measure of value in the economy bitcoin has pretty little actual intrinsic value, which is good, as Melbustus mentions.

[mobodick]

Currency transmits economic information over distance.  Money transmits economic information through time.  

Altho in some very general sense you're right i would say that this is a pretty ugly oversimplification.
There are large overlaps between these notions as currency transfers value over time and money transfers value over distance.
So your way of defining the words is perfectly inadequate to separate the concepts.

[sgbett]

As I understand it options are (as the name might suggest) optional, once the contract expires the potential profit/loss can be calculated and the parties involved are credited/debited accordingly. Without ant BTC necessarily changing hands.

The 'option' part is that with the gains or losses, you can optionally trade the underlying equity involved with the gain (buy) or less (sell).

So BTC options are likely to happen whether you like it or not.

But what if the holder of the option wants to take delivery, not cash settlement?   With physical objects it makes sense to settle to cash so as not to incur transport costs, but with Bitcoin there is no advantage. 

So again, what happens if most options buyers use them as a way to buy "cheaper" bitcoins further out instead of trying to guess the price differential for paper profits?

Then they can take delivery. Every option has a buyer/seller. When an option is excercised there is a winner and a loser. The loser's account is debited, instead of the dollars being delivered to the winner, they are used to buy BTC. It's really just a matter of timing as to whether the dollars are converted to BTC at the point of option exercise, or later (or indeed as is likely the case in the real world,  at the point the option was written by the broker facilitating the option, who then profits from the spread and is hedged).

Not true for all options, pork, orange juice, oil, indexes, etc. you cannot really take delivery of 1000 barrels of oil.  BUT with Bitcoin you can always easily take delivery.  So the real question is will these options be like options on stock (you can take delivery) or more like options on stock indexes (cant really take delivery of the entire dow, it is just a side bet).

The big word that is being ignored here is option.

They got there name because delivery is optional.

The abstractions are so deeply ingrained though, that the options themselves have become what people trade.

So if every trade is backed by the goods to perform the trade, it can't control the market price.  In order for the market price to be controlled by futures, they must dwarf the overall market in value by several orders of magnitude - Can't do that when all your trades require actual backing because most people choose to take delivery rather than convert to USD.

That's the trick to manipulating markets, you've got to be big BIG or have a group of medium-big players all acting as one.

To address the point of *every* option being backed, it isn't.

Lets say the broker sells a call options. When it does so it becomes the counterparty, and must hedge its risk. (Whether they do is a different matter).

The perfect hedge is to trade the equity and collect the spread. (small guaranteed profit, you never go broke)

Another person comes along and wishes to sell a call, the broker will buy it. At this point the broker is no longer counterparty to anybody, as it can offset the one customer against the other. (and collects the spread doing so).

Now an option exists. It is not backed by goods. At option expiry the broker debits the loser and credits the winner. Delivery is just a case of whether the winner wants paying in dollars or to have his dollars converted to BTC.

[BurtW]

I think we all know how options work.  Here is how I would use them (once they exist):

Buy a call.  Assuming the price of BTC goes up before the option expires then I will exercise my option and take deliver of my BTC.

If the seller of the call actually had the BTC no problem, they ship me the BTC.

If the call was naked then the seller of the call will be forced to go the maket and buy BTC in order to cover the call.

Wala - a new way to buy BTC!