What's wrong with DLCFDs?

[d5000]

is about the economic mentality/sentiment of assessing costs/profit even before mining or buying or spending or selling

So to summarize you say that mining cost determines or at least has a big influence on the Bitcoin price, because people compare mining cost all the time with the current market price and buy when the market cost is lower than the mining cost, right?

The thing is that this view ignores that the main influence is actually the other way around. Bitcoin price determines the plans of miners: will I scale up? Or will I divest or diversify my business into AI and cloud because scaling up currently makes no sense? In another discussion I concluded that the mining market currently is bloated, i.e. the cost/profit relation is quite high and it's likely that miners will scale down / divest in the next months. However most of the time it's the other way around: due to other market forces (see below) the price goes up (in the mid/long term) and miners actually scale up due to that.

And really ... how many people think about buying mining hardware (or some kinds of shares from mining businesses) nowadays when they think about how to profit from Bitcoin? While some wealthy individuals and companies  probably do that, I would wildly guess that at least 95% of the market doesn't.

also the whole "supply/demand" silly notion many were taught in kindergarden is bad math bad business education..
lack of supply does not = demand and abundance of supply does not mean less demand or less in price

Nobody wrote that actually in this discussion

The demand is driven by a lot of different factors. Currently I think it's mainly mid-term price expectations, i.e. "will I profit in 6 months or 1 year if I buy Bitcoin now?" -> if the answer is yes, then the demand is increased by one buyer. Or at the contrary "will I be better off if I sell now than holding?" or even "did I reach the goals of my investment in BTC, e.g. because now I can buy a house with my $1000 investment 5 years ago?" -> these two persons go to the supply side.

But underlying to these questions are different assumptions how the market will behave in this timeframe. And here we could cite, for example:

- fundamental assumptions about continued adoption (as digital gold or currency or for which usecase, doesn't matter here)
- technical analysis
- awareness / fads: "are we in an euphoria/FOMO phase or in a fear/bearish phase? Can I ride this wave (up or down)?"

And also what you write yourself:

there is also a matter about even if there was just 1m coins deposited on a market. the order amounts per price, the increments between orders and many other aspects affect the price

So market depth is also part of the equation. It's extremely complex, and that is also why we have such a high volatility: because nobody has created a magic formula giving each of these assumptions a value and a weight, to know if Bitcoin currently is "fairly priced", overvalued or undervalued.

Mining cost is a factor which can perhaps, for a very small group of people interested into a Bitcoin-related investment, trigger the decision "mining or buying". But my assumption is that the group of people, even whales, taking other things into account like those I listed above is much larger. In addition, this is only a group which could add slightly more demand (via mining or buying) but never to the market supply, because the miner supply as we all know is static, so it doesn't matter how many miners are mining.

[franky1]

the whole silly "supply demand" buzzword of the market and d5000/highschoolers notions are about the market sets the market and nothing outside of the market is a factor(supply demand of the market sets the market)

for instance the notion that d5000 says the market sets peoples sentiments of if they should mine or buy on market
for instance the notion that the market supply today sets the notion of the markets demand today

none of which is true at all for bitcoin.. but is more so true for the altcoins/tokens that have no underlying creation costs

before people even make a order, they make decisions. and the GLOBAL sentiment is not based on todays market price but on different peoples different factors.. people set their own notion of value premium (not the market price) before even deciding what PRICE to buy/sell

value is not price. value is a separate number outside the market. the market simply at some point periodically tests the latest value sentiment where no one on the globe wants to sell coin for

again before people even make an order on the market. or buy hardware.. they make decisions
such as peoples knowledge of mining cost sets the most they intend to invest to either buy hardware and mine or just invest via the market

because people think ahead EG knowing mining is like a 2 year cycle of running hardware to get ROI they are not thinking about the temporary market price today. they are looking at many aspects of bitcoin such as periodic and long term growth of difficulty, hashrate and also what half of the market 4 year cycle the economy is in

there is alot more into the economics due to global variances that are involved. bitcoins market is not judged purely on bitcoins market

in short its not a sentiment of the markets supply demand sets the price of the market which then sets the premium value sentiment of the global economics

its the other way round

...

point being and why i mention it in this topic.
due to bitcoins economics outside of the market due to global value premium sentiment differences.. trying to 'contract' a price to stabilise the global market price wont ever happen due to factors outside of the market price that then affect the market  due to real world costs before the market even sets a price

again contracts would only work if there were geolocation walls to have contracts only function in certain area's where their market price then sets at one level. but in another area they would then have a market at another level and it would only work if there was the wall to not allow cross over so that the markets can stabilise within their locked geolocations.. in short a contracted thing cant work to stabilise the global single market price.

[d5000]

due to bitcoins economics outside of the market due to global value premium sentiment differences.. trying to 'contract' a price to stabilise the global market price wont ever happen due to factors outside of the market price that then affect the market

I agree with this part of the post, because yes that's exactly the point: the supply can't be elastic enough to really contract in case of a significant demand decrease. And of course you are also correct that the "coins in circulation" is not the same than the "market supply".

That's of course also a problem for algorithmic stablecoins like Dai: they can only modify the "coins in circulation" variable, never the "market supply", and thus they rely on a complex (and probably gameable) safety net of incentives and counter-incentives. A simpler CFD-like stablecoin concept called BitShares can be considered "failed" at this point, even if the price of BitUSD still tends to return to dollar parity but the swings are too large for it to really work.

But I continue to believe that the factor you mentioned of the mining cost is really tiny in comparison to other factors. And my opinion is that Bitcoin's difficulty mechanism would affect this equation too strongly: imagine Satoshi dumped his coins or due to a bug Bitcoin falls to 1% of its current value, 90% of all miners go bankrupt, and "production cost" due to difficulty changes crashes to 10% too. We can thus never rely on the production cost "backing" the Bitcoin price in any meaningful way.

In addition, your "local mining cost theory" only affects the demand side, not the supply side. The supply side is equally important. What's about those who invested or mined early and now are searching for the best moment to either sell or buy something expensive with their Bitcoins? I think in your theory also reflects a particular maximalist view I don't agree with: that Bitcoin will grow eternally and demand is always the dominant factor.

again contracts would only work if there were geolocation walls to have contracts only function in certain area's where their market price then sets at one level. but in another area they would then have a market at another level and it would only work if there was the wall to not allow cross over so that the markets can stabilise within their locked geolocations.

I would argue that such a "contract" affecting the BTC unity price would not even work if there was a geolocation limit to a single city (with a monopolized energy distributor, i.e. that "all cost of mining would be the same"). The other factors I mentioned are too strong to counter-balance supply and demand fluctuations.

But private CFD contracts like DLCFDs of course work, because they are only agreements between two parties how to re-distribute a sum of Bitcoins.

The only problem I see with DLCFDs is that they can never hedge against an extremely drastic crash. For example, to be able to hedge against a 75% crash before the deadline, the "long" side of the contract ("Bob" in the example I gave before) would have to contribute three times the Bitcoins of the "short" side ("Alice", i.e. the party needing a stable price). If the price crashes 75%, then in this contract all BTC would go to the "short" side, but if it crashes 80%, the short party will already suffer a loss even if it gets all the Bitcoins, and if it crashes 100% (e.g. due to a bug in Bitcoin's code), a DLCFD would not help at all.

As we still have 75% swings like the FTX crash showed, thus DLCFDs should never have a market for timeframes of more than 1-2 months. If I wanted a DLCFD to hedge against a 75% crash in a year, being myself the short side, then I would have to pay a premium so high that I would already lose a significant part of the value, and the DLCFD becomes pointless.

[franky1]

We can thus never rely on the production cost "backing" the Bitcoin price in any meaningful way.

again the production cost DOES NOT BACK THE PRICE

the price is temporary... its volatile

the production cost sets a wider window of where the low and highs could be tested over a period..
the window of value/premium is not a number of "price"

ok so even if we totally locked the mining hashrate and difficulty to never change ever again fixing the cost per region. the window would be still wide and the price inbetween will still change and wiggle and test the boundaries of the value/premium edges.
so again the price cannot be stabilised even if we stabilised other factors outside of the market

even if we fixed the market deposit supply of both coins being sold(supply) and fiat deposits to buy(demand) the price can still change because even if there was a numeric limit on deposits.. the human sentiment of whom deposited would still affect the price
so again even before coin or cash hits the market people have a notion of what they want to set
so again the market does not set the market. many factors outside of the market impact the market before the market even sets a price

the production cost of value/premium window is about global cost differences.. if you took all world potential acquisition costs and sentiments the very last top price someone is willing to pay is the top potential ATH premium
if you took all world potential acquisition costs and sentiments the very last bottom price someone is willing to sell is the lowest potential bottom value

which in pacific islands would have high costs so people in that region WONT be miners and are not miners right now. the cost to mine is too high so they are the buyers. the pacific island regions are happy to buy at any price up to a point of many hundreds of thousands because compared to mining any price right now is cheaper
the pacific islands do not set the PRICE.. they set the premium ATH the price COULD reach IF tested.

the production cost of value/premium is about global cost differences.. which in icelandic/slavic region would have low costs so people in that region would be miners and are not buyers right now. the cost to mine is low so they are the sellers. the regions are happy to mine and then sell down to the value/cost amount
the icelandic/slavic regions do not set the PRICE.. they set the VALUE (periodic new bottom) the price could reach IF tested.

there is no way to control the price unless you segregate the world into regions and close off international trade. then different exchanges using "contracts" allocated and locked to only perform in a certain region where each region would set regional prices to be more stable(creating multiple different price points across the planet that cant cross over).. but thats the big IF that i cannot see ever happening.

[d5000]

again the production cost DOES NOT BACK THE PRICE [...]
the production cost sets a wider window of where the low and highs could be tested over a period..

That's a contradiction. The "low" in your case would be clearly a "minimum", and thus this would be the same concept as a "backing". If you don't like the word "backing", then ok, I don't oppose the concept of a "window", but the "low" is the same as a backing, because you argument that it cannot fall below the "minimal mining cost in the world".
My opinion is that there is no "low", nor a "window", not for "a period", not even if we say that this period is a single block interval. Given the conditions, the price could instantly crash below the "low".

We had such deep crashes (50%) in a very short time (few hours) in 2013. The reason why we don't see this anymore has imo nothing to do with mining (e.g. due to mining professionalization) but with increased liquidity, i.e. "more people willing to buy" even in dips.

And you continue to ignore the supply side.

But anyway, we're coming to the same conclusion, that the price cannot be stabilized, at least not algorithmically, and here I fully agree. So let's not longer derail the discussion about DLCFDs. If you want you can create a thread about your price theory based on mining cost differences, and I would probably participate, but I think not many would agree.

Just a small addition:

so again the market does not set the market. many factors outside of the market impact the market before the market even sets a price

Of course "the market" are these aggregated factors and/or sentiments of people. I think you got triggered by words like "market", "supply" and "demand", when they are only descriptions of aggregated decisions and sentiments, as you wrote correctly. Market isn't an automatism. It's always about social phenomenons.

[franky1]

it doesnt back the price

it backs the value.. a number that always sits below the price which when the price crashes the price comes down to value and stops at value and wont go below value

value is not the price. the price is volatile and moves above value and below premium
value moves more steadily but you wont find it measured/displayed on any exchange market chart

emphasis: it does not back the price.. so no contradiction

so no the cheapest mining cost on planet does not back the price it backs the value
if you were to measure the difference between the price and the value and represent it as a % its called the store of value
right now value is at ~$48k, and market price is ~$67k meaning store of value is 71%

individuals however have a different sentiment of acquisition cost evaluation based on many factors including their local electric costs. and yes many do decide if they think bitcoin is worth mining or just buying. i do laugh how you feel no one makes any determinations on if its worth mining or buying and just thinks the market just affects the market and its then the market that affects peoples sentiment afterwards

you keep trying to circle the discussion back to the demand and supply of the market determines everything.. heck you even stated how you think that its the market price now that determines if people mine...
.. no one just decides to mines one day based on that days market price... they instead plan the next 2 years worth of investment. and their main decision is not the market. its actually their local electric costs.. so no the market does not decide mining or buying. their electric costs calculate a ROI expectation of if they should they get miners(many geolocations just say no continuously) and/or then decide if its actually cheaper to then buy on the market based on their electric cost differences dependant on geolocation and such

as for supply
the market supply yet again is not based on the near 20m coins ever created. heck its not even based on the couple million coins deposited in exchanges. nor based on how many coins are mined that day.. its actually based on the small micro orders of an exchange market orderbook. which is where sometimes whales put in medium* size order WALLS to control the sentiment to display a thick wall order where people think the MARKET wont eat through to move in a certain direction

heck it doesnt need a large order wall these days nor large supply of coin to change a sentiment that the price wont go up.. even sellers know this. they can sell coin for fiat. buy altcoin with that fiat, sell altcoin to get btc again(its called arbitrage) and then put that same amount that they just arbitraged back into the btc sell orders to fight the buyers from pumping
*we no longer even need whale orders of 1k coin to create walls..

so even the supply arguments are irrelevant due to things like arbitraging

.. anyways we are diverging into too many economic category discussions..

but all in all due to many factors outside of the "supply demand" highschool dropout math dummy understanding.. a CFD will never be able to stabilise bitcoins price

CFD design is to work between 2 parties or in geo-locked locations of mutual agreement. however globally they dont work well and would have too many different contracts of different rates that it wont stabilise the price