Can you explain how this futures trading would operate?
So these are futures and not options, right?
Yes, futures indeed, and they are very much like futures contracts (http://en.wikipedia.org/wiki/Futures_contract
) traded on every major exchange which are settled in cash.
But we are not actually going to pay the final delivery amount, and are only speculating on what the future contract will be priced at the point the contract settles for delivery? What leverage will there be? (e.g., at 10:1 leverage for instance, my 1 BTC at a BTC/USD of $5.18 would buy me a future contract valued somewhere in the $51.80 range? Would I be forced out if the price of the commodity drops in value below certain threshold?
The delivery happens by transferring the final variation margin between parties according to the exchange rate at the biggest spot market (Mt.Gox so far).
In very simple words: buying futures will get you enough Bitcoins to buy the specified amount of the underlying item at the delivery date.Example:
Let's use a sample contract specification here: https://icbit.se/node/3
It has a lot of 100 USD, so that if you buy this futures, you're guaranteed (with certain restrictions) to get as much Bitcoins as it would be needed to buy $100 at the delivery date.
This amount is called Variation Margin
. Generally, it's marked to market all the time by using the formula below, and that's what allows traders to hedge and speculate right away, without waiting for futures settlement date.VariationMargin = (LastPrice - PreviousClearingPrice) * LotSize;LastPrice
is the current price, and PreviousClearingPrice
is the price of the previous clearance or price at which this position was opened.
In order to better understand, let's make a real world example, what today's trading might look like (for simplicity, assuming futures trades without contango or backwardation) along with all calculations.
24 hours ago, 1 BTC min price was $5.125 USD
. Hence to buy $100 USD one needs 19.5122 BTC
1 hour ago, 1 BTC max price was $5.25 USD
. Hence to buy $100 USD one needs 19.0476 BTC
If one would buy 10 contracts (totalling to amount of $1000) yesterday at price 19.04, and close the position now at 19.51, the variation margin would be:(19.51 - 19.04) * 10 = 4.7 BTC
The underlying math may seem complex, however for a trader it opens bigger abilities than just playing casino at what Bitcoinica was (I really like gmaxwell's explanation: https://bitcointalk.org/index.php?topic=82581.msg911141#msg911141
). However, if people want to speculate, it's as easy as it was in Bitcoinica, just more transparent and safer.