Block Chain Based BTC Hedging - something like a Put Option.

[bluemeanie1]

Greetings Bitcoin People.

 There has been much talk in the threads about Bitcoin based financial instruments lately.  Especially ways to hedge the future price of bitcoin.  For non-Finance types, this means ways to place a bet(hedge) on the projected future price of Bitcoin.  Once you have established the basic mechanism of DEBT and it's enforcement, you can then hedge against either appreciation or depreciation in an asset.

 How to do it?

 The first naive approach to this problem is simply create two transactions sending the BTC one way, and another returning the BTC sometime afterwards.  There is one key problem with this: you can't spend the bitcoins while you borrowed them(creates a double spend).  In order to profit from this scenario, you need to be able to exchange those BTC for USD, and then later buy back the BTC(at a lower price) and then return them(the basic put option).  Thus you might think, why not use other BTC in your account?  sounds clever, but in reality you haven't increased your leverage in this case.

 What is the easiest simplest way to create a loan mechanism in Bitcoin?

 

 -bm

[Qwedcxza1]

Greetings Bitcoin People.

 There has been much talk in the threads about Bitcoin  Especially ways to hedge the future price of bitcoin.  For non-Finance types, this means ways to place a bet(hedge) on the projected future price of Bitcoin. 

On the projected future price of bitcoin against what?
Hedges, puts, calls, traded options are all relative to something, it is difficult to see how you could use the blockchain for this type of financial speculation
I might want to place a bet on the future price of bitcoin against the US dollar, the blockchain gives me very little information on the current exchange rate with the US dollar
 
 OK I pay a $5 fee to have the option to buy $100 for 1 BTC at anytime in the next two months.
 If the exchange rate stays at about $100 for 1BTC  it isn't worth using my option. I lose $5.
 If the exchange rate drops to $50 for 1BTC then I can use my option and buy $100 for 1BTC and then, immediately, I exchange the $100 for 2BTC. Welcome to the wonderful world of financial speculation (gambling).
 
 The hypocrisy of bitcoin is that it decries the centralised banking systems then emulates the worst facets of those systems. I see that most of the bitcoin exchanges are mostly concerned with introducing leverage and derivatives that have no benefit to anybody except those who wish to exploit gamblers (i.e. it benefits the exchanges)

 There used to be a benefit to futures and commodity trading to farmers who might wish to insure against bad weather or crop failure. This system has become corrupted. The people who should be taking options on exchange rate as insurance  might be exporters who are actually manufacturing something. Not just gamblers who will continue to be exploited by the exchanges (trading platforms) in the same way that casinos make their money.

[bluemeanie1]

Greetings Bitcoin People.

 There has been much talk in the threads about Bitcoin  Especially ways to hedge the future price of bitcoin.  For non-Finance types, this means ways to place a bet(hedge) on the projected future price of Bitcoin.

On the projected future price of bitcoin against what?

it's just hedging on the future DEMAND for bitcoin.  So as long as I have the ability to temporarily trade the coins that I borrow, then I can profit from depreciation.

ex.  

MONDAY:  1 BTC is trading for 100 USD.   I BORROW 20 BTC and agree to PAY BACK 21 BTC on FRIDAY.  I then SELL the BTC for 2000 USD.

TUES: 1 BTC is trading for 90 USD.

WED: 1 BTC is trading for 80 USD.

THUR: 1 BTC is trading for 70 USD.

FRI: LOAN DUE!  I buy 21 BTC for 1470 USD.  pay back my creditors.  530 USD PROFIT.

it's not possible to implement a credit system directly in the block chain.

the only reason why no one is doing this is because there are no good credit systems for BTC.  I think though that you could use the ones that are out there if you're really good at math and economics.  To my knowledge they are not set against the current market rates.

[grue]

What is the easiest simplest way to create a loan mechanism in Bitcoin?

it's impossible for the very reason you posted. There's no way to "force" others to pay you in case their loans go south. With systems like bitfinex or bitcoinica(defunct), it was possible to liquidate the debtor's assets in case losses were sustained. This is not possible with bitcoin. You still need to rely on the traditional system of risk assessment, collateral, and repossession.

[Qwedcxza1]

There are a lot of different ways of utilising leverage. They do not necessarily involve the use of credit.
Puts and calls are terms used in traded options which was what I described. Options can be traded as separate entities. Have a look at the liffe market for stock options.
 If I open an account at a stockbrokers, a forex account or a spread betting account I can use leverage but it is unlikely that I will be extended credit and I will only be allowed to lose what I have in my account at which point any open position will be automatically closed.
 
 There is often confusion about whether money is actually being loaned in a futures contract. Elsewhere in this forum you can read statements such as
"Alternatively, you could open a $1000 long position in the BTC/USD pair on margin. This is an open trading position only and no profit/loss is realized until it is closed. There is no currency conversion and you don't own any BTC that you can withdraw"
 But later they say
"To give a rough idea, the margin fee will work something like this. Suppose you open a $1000 long position in BTC/USD using margin. In doing so, you are borrowing the $1000 from us and we will charge an APR for this, but the fees will be assessed at least on a daily basis"
 So I'm borrowing the money and being charged interest but can't withdraw it. The exchange wins every time.

 If the blockchain did contain information on other currency transactions then it might be possible to operate a derivatives market. Imagine if the Litecoin and bitcoin blockchains were combined and the proof of work was applied to both combined blockchains. We could then build an exchange and a derivatives market between litecoin and bitcoin. If fiat currencies became available in digital format we could just have one big blockchain for all financial transactions in whatever currency.

[bluemeanie1]

note that I titled this 'something LIKE a Put Option'.

[bluemeanie1]

If the blockchain did contain information on other currency transactions then it might be possible to operate a derivatives market. Imagine if the Litecoin and bitcoin blockchains were combined and the proof of work was applied to both combined blockchains. We could then build an exchange and a derivatives market between litecoin and bitcoin. If fiat currencies became available in digital format we could just have one big blockchain for all financial transactions in whatever currency.

there is 'Merged Mining'  http://mining.bitcoin.cz/what-is-namecoin

also, according to this- it is possible to trade across chains: https://en.bitcoin.it/wiki/Contracts#Example_5:_Trading_across_chains

the big blockchain clearing house is basically what Confidence Chains is all about: https://docs.google.com/file/d/0BwUFHE6KYsM0ZkxLVmFwbXQ3ck0/edit?usp=sharing