Do Bitcoin moving average (EMA/SMA) derivatives exist? Would they make sense?

[d5000]

I was thinking about a financial product which could appeal to people who like the idea that Bitcoin could be worth in the future much more than today, but are afraid of the wild price swings.

Many traders know so-called "moving averages" like the EMA or SMA, which take an average of the price of a specific timespan. These moving averages are mostly known as a tool for technical analysis.

But wouldn't it make sense to create a derivative of a moving average? Defining it like an asset which follows the price of a specific EMA or SMA.

A simple form, modeled after future contracts, could be:

- A trader sets up a contract, promising to pay the outcome of the BTC/USD EMA-50 on Bitstamp in 30 days.
- He can freely set the price for the contract. For example, if the market is bullish and the EMA-50 is growing, then he can charge more than the current EMA-50 value, being thus able to earn a premium. Instead if the market is bearish, the price will be probably close to the EMA-50 value.
- For better security of the buyer, the trading platform can require a collateral from the seller, just like with futures and options. If the collateral's value approaches the value of the contract it is automatically liquidated, either in BTC or in a fiat currency.

This would of course be even more interesting if it was modeled as a "perpetual" contract, like the perpetual futures on Binance or Bitmex.

What could be the advantage of this type of contract? I believe buying it could be very attractive for people who want to benefit from a possible long term price increase of Bitcoin without so much volatility risk. For example, take the EMA-200. It never really fell sharply, so it can be attractive even for very conservative investors, while shorter moving averages like the EMA-50 would be more attractive for traders willing to take a bit more of a risk but without running in an extreme crash.

And if Bitcoin in a couple of decades, like some predict, becomes a major world currency and the price stabilizes at a much higher price than now, then the moving averages would eventually also "settle" at this price.

Who would sell this kind of contract? Of course, those who believe Bitcoin is overvalued. If they're able to get a premium it could even be attractive for those who believe that bitcoin is evolving bullishly, but not as bullish as some permabulls think.

So I ask: Does this kind of "moving average derivative" exist, and if yes, how is it called? I have searched the web a bit but didn't find anything interesting, but I'm not a derivatives expert, so I may have not searched with the correct wording.

And, even if it doesn't exist: Would you invest in such a kind of contract? Or maybe would you like to trade with them?

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[jackg]

Who would sell this kind of contract? Of course, those who believe Bitcoin is overvalued.

Smugly, I don't think these people actually exist...

In comparison, I really want to open a short on automation etfs at the moment but I'm holding off because I expect them to drop and then grow more and don't expect them to stop growing (overall) so I'll wait for a sell off to come or not.

You find someone who expects innovation to crash and you've found someone throwing coins into a fountain hoping a genie pops out.

I'm much more confident longing something that has made good consecutive gains than I am shorting something that has and I feel most with the ability to make something like this would feel the same.

The ema is also much more of a "takes time to move system" if bitcoin crashed to zero and you opened a 50d ema the day before, you're selling your 50d ema contract for ~49% of what you bought it for - all of the risk if put on the exchange unless you make it so you can't end your contract early (and set your expiration date when you buy it).

[d5000]

I think you spotted the main problem of such an hypothetic contract: that in phases where the moving average is higher than the spot price you will probably not find a buyer for the moving average price, so you will make an additional loss. It hasn't to go to zero, only significantly lower. So the "naive" version of it would probably not work.

It would however be interesting, if the price of these contracts would follow exactly the spot price (then they of course wouldn't make any sense) or if there could be any advantage on buying the moving average if it's higher than the spot price which could result in a premium, making it less volatile. For example there could be people valuing inertia, and if there are enough of them, they could move the price in the direction of the moving average.

One idea could be to try to replicate an asset which works a bit similar with options. A trader could sell the right to sell Bitcoin for the price of a moving average, which would be similar to a put option, only with a changing price. Maybe this could even work with call options, have to think about that a bit if it can behave different enough than normal, static put/call options.

The "nobody would short bitcoin" question instead, I think, is not the main problem - take Michael Burry some weeks ago.

PS: I thought again a bit about this post and I think now I made a wrong assumption, so I'm more optimistic again about this kind of contract. Instead, if the settlement process is done right (i.e. the trading platform guarantees that the contract is settled at the EMA/SMA price point) then these contracts should work without problems. After all, you trade the EMA/SMA and not a "physical" Bitcoin, so even if Bitcoin goes to zero, the EMA/SMA value can still be worth something and the trading platform can enforce it if the collateral is enough. It would be a simple bet like on football games.

[paxmao]

I am not aware of these existing for bitcoin nor for any other asset to be honest. However, it is mostly a question of how much money would there be to be made, since you can potentially encapsulate any formula on a CDS contract and start playing with it. One of the keys to actually create a market is to have a use case that goes beyond speculation: example, the futures contract on oil are used by companies to stabilise their costs or income regardless of the price.

Would there be a use case for this derivative?

[jackg]

Would there be a use case for this derivative?

It's probably a good idea for reducing the volatility got those wanting to invest as the most it could drop in a day with the 50ema is 2%.

I don't think this sort of asset could be physically represented by something relevant so there probably isn't a use case as there is in goods extraction/production scenario.

I think you spotted the main problem of such an hypothetic contract: that in phases where the moving average is higher than the spot price you will probably not find a buyer for the moving average price, so you will make an additional loss. It hasn't to go to zero, only significantly lower. So the "naive" version of it would probably not work.

It would however be interesting, if the price of these contracts would follow exactly the spot price (then they of course wouldn't make any sense) or if there could be any advantage on buying the moving average if it's higher than the spot price which could result in a premium, making it less volatile. For example there could be people valuing inertia, and if there are enough of them, they could move the price in the direction of the moving average.

Yeah it can't go to zero but yeah you can't get people to buy it if btc is lower either as it won't recover as well as bitcoin - but it might act as a hedge in some cases (especially against volatility)?

One idea could be to try to replicate an asset which works a bit similar with options. A trader could sell the right to sell Bitcoin for the price of a moving average, which would be similar to a put option, only with a changing price. Maybe this could even work with call options, have to think about that a bit if it can behave different enough than normal, static put/call options.

I think this may work but it'd need something tight to control what the ema and price are being sold to the user as in the contract.

PS: I thought again a bit about this post and I think now I made a wrong assumption, so I'm more optimistic again about this kind of contract. Instead, if the settlement process is done right (i.e. the trading platform guarantees that the contract is settled at the EMA/SMA price point) then these contracts should work without problems. After all, you trade the EMA/SMA and not a "physical" Bitcoin, so even if Bitcoin goes to zero, the EMA/SMA value can still be worth something and the trading platform can enforce it if the collateral is enough. It would be a simple bet like on football games.

Yeah it is good for lower volatility and if its enforceable by the exchange then I see no reason there'd be a problem/breakdown (unless the pair was traded more on the exchange than bitcoin because of its lower volatility - idk if that'd happen or not.

[d5000]

One of the keys to actually create a market is to have a use case that goes beyond speculation: example, the futures contract on oil are used by companies to stabilise their costs or income regardless of the price.

Would there be a use case for this derivative?

This is indeed a crucial question. As I've already written the reason for "buyers" of such a contract is relatively clear: you have an asset that potentially can profit from Bitcoin gains, even gaining as much value as Bitcoin itself in the long term, but will not see the harsh swings.

This market is potentially (in a world with increased Bitcoin adoption) very big. One of the main applications I see is for people who get their salary in Bitcoin; which could then invest a big part of it for 30 days in a "moving average contract" to be sure the money wouldn't lose much in the course of the month until they get a new, "rebalanced" salary, but potentially profiting from a price increase. That would be a good alternative to change it to fiat or stablecoin, and it wouldn't leave the "bitcoin sphere" (potentially it even could be realized as a discreet log contract - see also this Spanish thread - with Bitcoin settlement so it doesn't even need to leave the blockchain, although this would not cover the case "Bitcoin goes to zero", which can only prevented with fiat settlement, but this cannot prevent that fiat goes to zero ).

The question is if the sellers side, i.e. the "shorters" (those guaranteeing the EMA price) have enough incentive to enter this market. If the market on the "long" side is big enough then they can compete for a potentially significant premium, although a too high premium will make the contract less attractive for the use case I described above (I think ~3-5% of the invested money is the most one would accept to pay for it, otherwise converting to fiat/stablecoin, or using a options collar, is much more attractive). I have to think about more use cases for them.