The problem is that iCBIT is calling this a futures contract.. when in fact its more of an exotic derivative.
When someone buys a futures contract, and has 100% of the value in cash, he would expect never to get a margin call. If he buys a 100 oz Gold future contract at $1000 an oz, the contract value is $100k. If he has $100k in his account, he can sleep knowing that he can never get a margin call.
When a hedger shorts a commodity futures contract to eliminate the risk of his physical holding going down, he should be able to sleep, knowing that no matter how high the price goes, come settlement the price of his short contract and his physical commodity will converge.
If a trader has $5000 in cash and 100 shares of AAPL stock worth $400, and then he shorts an 100 lot AAPL future contract at $500 . He knows that even if AAPL goes up 100% to $1000 and wipes out all his cash, he can always sell the the 100 shares at $800 or even more. He knows that if he owns the stock and shorts the future, his risk is very small, and barring an extreme move, the prices will converge at expiration.However these iCBIT "Exotic Derivatives" do not act anything like a futures contract. Long Case: 1.
Trader has 1 BTC in his account2.
He buys 1 BTCUSD futures contract at $10
The iCBIT screen shows him that his contract equates to 1 BTC. The equation is 1/10 * 10 = 1 BTC .
He has 1BTC in his account, and has a futures contract worth 1BTC. Naturally he assumes that his 1 BTC would cover his loses all the way down to BTC price of 0.0.3.
Price of BTC drops to $5. he would expect his account balance to be .5 BTCs. Instead he learns that he is wiped out and now has 0BTCs.
PnL = -(1/5 - 1/10) *10 = -1/10 * 10 = -1 BTC
How can he lose 100% of his BTCs when the price only dropped 50% and he had enough BTCs to cover 100% of the contract when he opened it?
Answer: "EXOTIC DERIVATIVES"
As the price drops the size of the contract in BTC is getting larger!
By the time price hits $5, he is now long 2 BTCs! The equation is 1/5 * 10 = 2 BTCs Short Case: 1.
Merchant has 100 BTCs coming in next month and wants to lock in the current price, to eliminate the risk of a drop in price.
The formula for getting short exactly 100 BTCs is 10*Price = size. So if price is 20 size is 200, if Price is 4 size is 40.2.
At expiration time, the BTC price is up 50%. The Merchant is not worried, because he has already locked in his price.
Whatever he loses in the futures contract he makes up from the gains in his 100 coins. This the classic case for futures, to hedge against falling prices.
Not so fast... our Exotic Derivatives have a special feature. It is price dependent!
For all BTC prices above $10 the hedge will work perfectly, however for all BTC prices below $10 he would lose more on the shorts then was gained in the price!
If it looks like a Duck, but doesn't act or smell like duck.. its a Penguin!
- iCBIT can call it a "Futures contract on the Bitcoin - US dollar exchange rate".
- iCBIT can claim their "Futures contract".. is like other "standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today"
- iCBIT can say that they " are similar to any major futures exchange."
- iCBIT can list the "Typical use cases" on, who, how, and , why uses futures contracts to hedge.
- iCBIT can flat out deceive its traders by saying "Traders who want to arbitrage and make the market.
Trading futures contracts provides perfect possibility to arbitrage between spot market and futures market"
It doesn't change the fact: there are no BTC futures contracts traded on their exchange!
. Rather, they offer toxic exotic derivative time-bombs that are erratic, unpredictable and impossible for any of us mere mortals comprehend
maybe you can start with changing this page to the truth: https://icbit.se/futures