Case Study: Using Bitcoin Derivatives in Global Trade(blog.bitmex.com)
blog.bitmex.com
Case Study: Using Bitcoin Derivatives in Global Trade
https://blog.bitmex.com/case-study-using-bitcoin-derivatives-in-global-trade/
5 comments
> The biggest issue with using Bitcoin is the price volatility. In the time between when Robin sends Joseph payment for goods in Bitcoin and they arrive in Kenya, the price can fluctuate wildly and cause losses for Joseph. To eliminate the price risk, Joseph hedges Bitcoin payments by selling BitMEX futures contracts that lock in the USD value.
Someone shorting Bitcoin will buy the contract, while someone going long will just buy Bitcoin directly. How do they guarantee that enough people will be shorting Bitcoin to cover all transactions? And how do they convince others to buy Bitcoin through their site?
This is very important, because if the volume of merchant transactions exceeds the contracts, then they really won't have reduced volatility
Finally, how do they enforce/verify contracts?
Someone shorting Bitcoin will buy the contract, while someone going long will just buy Bitcoin directly. How do they guarantee that enough people will be shorting Bitcoin to cover all transactions? And how do they convince others to buy Bitcoin through their site?
This is very important, because if the volume of merchant transactions exceeds the contracts, then they really won't have reduced volatility
Finally, how do they enforce/verify contracts?
Hey - Sam here, CTO of BitMEX.
We aren't a spot market, we are derivatives only. So if you are shorting Bitcoin futures, someone else is going long on Bitcoin futures; you never take a position against the exchange itself.
Therefore all contracts are verified by the central counterparty; us. There is risk involved for the exchange when you offer leverage, which is why we offer sane leverage (3.3x to 5x, not 10-20x like our Chinese competitors).
There are a few schools of thought for managing this risk. Our competitors simply do their best to liquidate users when their equity gets too low. This is tough to do without loss; on 20x leverage, a 5% move will wipe out all value in an account. Bitcoin moves by more than 5% in a day very regularly. These exchanges simply take the loss and spread it out among all their customers. The customers that have made money on a given (weekly,monthly,quarterly) settlement simply have their winnings deducted by the amount of money the exchange has lost.
This method is great for gamblers and unscrupulous investors, but in the end it is not much more than a slot machine. It is utterly useless for businesses; you can't properly hedge if your profits can be docked at any time because other users have gone bankrupt.
Our view at BitMEX is that Bitcoin needs a proper derivatives market so businesses can hedge. Most Bitcoin companies simply sell at spot exchanges to hedge risk, but this has significant downsides. We manage our risk through limited leverage, limits on price movement, and with an advanced liquidation engine that can incrementally liquidate positions in a safe way to prevent major price movements. Our competitors simply place a market order for the full position's value, which leads to the dreaded "margin call cascade" (of course, "margin call" is the wrong word here, but on most Bitcoin exchanges there is no distinction between "margin call" and "liquidation").
These and other unique buffers give us the ability to guarantee settlements.
We aren't a spot market, we are derivatives only. So if you are shorting Bitcoin futures, someone else is going long on Bitcoin futures; you never take a position against the exchange itself.
Therefore all contracts are verified by the central counterparty; us. There is risk involved for the exchange when you offer leverage, which is why we offer sane leverage (3.3x to 5x, not 10-20x like our Chinese competitors).
There are a few schools of thought for managing this risk. Our competitors simply do their best to liquidate users when their equity gets too low. This is tough to do without loss; on 20x leverage, a 5% move will wipe out all value in an account. Bitcoin moves by more than 5% in a day very regularly. These exchanges simply take the loss and spread it out among all their customers. The customers that have made money on a given (weekly,monthly,quarterly) settlement simply have their winnings deducted by the amount of money the exchange has lost.
This method is great for gamblers and unscrupulous investors, but in the end it is not much more than a slot machine. It is utterly useless for businesses; you can't properly hedge if your profits can be docked at any time because other users have gone bankrupt.
Our view at BitMEX is that Bitcoin needs a proper derivatives market so businesses can hedge. Most Bitcoin companies simply sell at spot exchanges to hedge risk, but this has significant downsides. We manage our risk through limited leverage, limits on price movement, and with an advanced liquidation engine that can incrementally liquidate positions in a safe way to prevent major price movements. Our competitors simply place a market order for the full position's value, which leads to the dreaded "margin call cascade" (of course, "margin call" is the wrong word here, but on most Bitcoin exchanges there is no distinction between "margin call" and "liquidation").
These and other unique buffers give us the ability to guarantee settlements.
Bitcoin futures is the fastest growing segment of bitcoin trading at the moment. Mostly it's traders wanting the high (10x-50x) leverage that's available with the futures products that are out there now. And it's mostly on the Chinese exchanges, though it might well be westerners making most of the volume.
It's still a very immature segment of a relatively immature market, but the price for contracts generally stays within a dollar or two of the spot price (well, an index of several spot prices). There are several problems using it as a valid hedge at the moment, but the main one is liquidity. Anything over a couple hundred BTC (leveraged value) becomes a challenge to move in and out of the market. And that's for futures that are weekly in nature. The longer term products are even less liquid.
Still, it's a relatively young market, and it's already growing quickly. It'll probably get there.
As far as using cryptocurrency for international trade, there was (is?) a coin trying the interesting experiment of a hard peg in value. Urocoin was created by an international trade company to be pegged at 1 URO = 1 metric tonne of urea. In other words, they were guaranteeing that whatever the market price, they'd deliver 1 tonne for one coin.
They claimed a few deliveries and held a conference in Hong Kong explaining their plans for the future, but they seem to have faded out. There were a lot of claims they were a scam, but that seemed unlikely. A lot of work for a scam when you can do much much less and scam successfully with an altcoin. More than likely they just failed.
But the idea of pegging a coin to a commodity to reduce the overhead of international trade was an interesting one, and one that will likely see more experiments down the road.
It's still a very immature segment of a relatively immature market, but the price for contracts generally stays within a dollar or two of the spot price (well, an index of several spot prices). There are several problems using it as a valid hedge at the moment, but the main one is liquidity. Anything over a couple hundred BTC (leveraged value) becomes a challenge to move in and out of the market. And that's for futures that are weekly in nature. The longer term products are even less liquid.
Still, it's a relatively young market, and it's already growing quickly. It'll probably get there.
As far as using cryptocurrency for international trade, there was (is?) a coin trying the interesting experiment of a hard peg in value. Urocoin was created by an international trade company to be pegged at 1 URO = 1 metric tonne of urea. In other words, they were guaranteeing that whatever the market price, they'd deliver 1 tonne for one coin.
They claimed a few deliveries and held a conference in Hong Kong explaining their plans for the future, but they seem to have faded out. There were a lot of claims they were a scam, but that seemed unlikely. A lot of work for a scam when you can do much much less and scam successfully with an altcoin. More than likely they just failed.
But the idea of pegging a coin to a commodity to reduce the overhead of international trade was an interesting one, and one that will likely see more experiments down the road.
The hardest thing with shorting Bitcoin is expecting the exchanges to actually cough up when it comes due ... because exchanges have been failing left, right and centre this year, if not just taking everyone's money. Statistically, trusting Bitcoin exchanges is a terrible idea.
Right. That's especially bad for a futures exchange. A cash Bitcoin exchange doesn't have any trading risk exposure. It can fail only through incompetence or criminality. A futures exchange/broker has trading risk - they have to be able to collect from losing traders.
They say "BitMEX stands behind all trades." That will probably break when someone suffers a big loss and doesn't pay up. The exchange is in the Seychelles, or at least claims to be. Collecting may be difficult.
There's no exchange control problem buying goods from China - that's both allowed and encouraged.
They say "BitMEX stands behind all trades." That will probably break when someone suffers a big loss and doesn't pay up. The exchange is in the Seychelles, or at least claims to be. Collecting may be difficult.
There's no exchange control problem buying goods from China - that's both allowed and encouraged.
Hey Animats - Sam here, CTO of BitMEX.
We don't assume that anyone suffering a big loss can or will pay up - instead we proactively take steps in real-time to liquidate traders in a controlled manner to ensure that no trader can reach bankruptcy. This way, traders are force-exited from their positions well before they are able to reach anywhere near negative equity.
We are indeed incorporated in the Seychelles, but we are open about who we are, unlike some others. Arthur Hayes (our CEO) and I are very proactive about risk, and we use our team's significant experience in finance to ensure that our exchange is constantly minimizing its risk.
This is a gain for our customers as well. If BitMEX does not sustain any systematic loss, it can guarantee settlements. And since it guarantees settlements, it is finally an exchange where businesses and traders can actually hedge risk in Bitcoin, without having to simply sell coins.
We don't assume that anyone suffering a big loss can or will pay up - instead we proactively take steps in real-time to liquidate traders in a controlled manner to ensure that no trader can reach bankruptcy. This way, traders are force-exited from their positions well before they are able to reach anywhere near negative equity.
We are indeed incorporated in the Seychelles, but we are open about who we are, unlike some others. Arthur Hayes (our CEO) and I are very proactive about risk, and we use our team's significant experience in finance to ensure that our exchange is constantly minimizing its risk.
This is a gain for our customers as well. If BitMEX does not sustain any systematic loss, it can guarantee settlements. And since it guarantees settlements, it is finally an exchange where businesses and traders can actually hedge risk in Bitcoin, without having to simply sell coins.
Bitcoin is unregulated, rife with exchange fraud, unappreciated by most governments, and practically impossible to tax. Arguably this is the "LimeWire" of currency, it's not going to survive if it does not make compromises and become regulated, traceable, and taxable.
Bitcoin is unregulated
http://en.wikipedia.org/wiki/Legality_of_bitcoin_by_country
http://en.wikipedia.org/wiki/Legality_of_bitcoin_by_country
What exactly does it mean for Bitcoin to "not survive"? Like, there are no more exchanges and of the billions of people on the planet exactly zero will exchange goods, services, or currency for bitcoins? Like someone will offer 500 BTC on HN for $1 and no one will care?
Your assessment fails to understand Bitcoin's core value proposition, which is that it's highly resistant to centralized control and thus is guaranteed to remain a permissionless (open) network and a fungible currency. If a centralized Bitcoin did somehow manage to gain worldwide adoption, it would be indistinguishable from the current international banking system. In practice, a distributed blockchain that is centrally controlled is no different than a centralized data center like those that run VisaNet. It would have all of the same shortcomings and vulnerabilities, owing to its centralization.
What you propose is totally impractical in any case. For example, who's going to regulate Kenyans' use of Bitcoin? Every country has its own regulatory regime and no country is going to embrace regulations imposed by a different jurisdiction.
What you propose is totally impractical in any case. For example, who's going to regulate Kenyans' use of Bitcoin? Every country has its own regulatory regime and no country is going to embrace regulations imposed by a different jurisdiction.
No. Bitcoin will survive because it invented a system you can trust without having to trust anyone else using the system. This literally had not been done before. All your arguments are irrelevant because they are missing this central point.
As long as people who trust the system also trust untrustworthy others using the system, that perk is not going to be particularly relevant.
The technology is brilliant, perhaps I should have used "Napster" as an analogy which was eventually replaced with iTunes, Spotify and others.
I do not believe the digital currency known as Bitcoin will survive unless governments and government regulation is installed. I do believe digital currency is the future.
I do not believe the digital currency known as Bitcoin will survive unless governments and government regulation is installed. I do believe digital currency is the future.
The simpler possibility is that Bitcoin will get suffocated due to market disappointment. Digital currencies that don't have the memory of November 2013 carved into the psyche would be able to succeed purely on technical and market merits.
>Bitcoin is unregulated.
So are cash transactions.
>practically impossible to tax
So are cash transactions.
>unappreciated by most governments
So are cash transactions [0].
>it's not going to survive if it does not make compromises and become regulated, traceable, and taxable.
Bitcoin is a protocol, that can not "make compromises". Can Http make compromises?
[0] http://globaleconomicanalysis.blogspot.ca/2015/03/cash-dinos...
So are cash transactions.
>practically impossible to tax
So are cash transactions.
>unappreciated by most governments
So are cash transactions [0].
>it's not going to survive if it does not make compromises and become regulated, traceable, and taxable.
Bitcoin is a protocol, that can not "make compromises". Can Http make compromises?
[0] http://globaleconomicanalysis.blogspot.ca/2015/03/cash-dinos...
Cash is somewhat traced and regulated. A note has serial numbers and $10,000 withdrawals from a bank triggers the Bank Secrecy Act whereas you have to produce an ID and the withdrawal is reported. Crossing a border with large sums of cash has applicable laws as well.
http://finance.zacks.com/federal-banking-rules-withdrawing-l...
Cash transactions are taxed at the local level (read as gas stations, sales taxes) and reported or maintained as running record when deposited or withdrawn for the IRS to see.
Yes, cash is unappreciated by most governments.
The Bitcoin protocol or a variation will remain but changes will be made to it that the governments will agree too.
Cash transactions are taxed at the local level (read as gas stations, sales taxes) and reported or maintained as running record when deposited or withdrawn for the IRS to see.
Yes, cash is unappreciated by most governments.
The Bitcoin protocol or a variation will remain but changes will be made to it that the governments will agree too.
> Cash is somewhat traced and regulated.
So is Bitcoin. https://blockchain.info/
http://www.irs.gov/pub/irs-drop/n-14-21.pdf
Enjoy.
So is Bitcoin. https://blockchain.info/
http://www.irs.gov/pub/irs-drop/n-14-21.pdf
Enjoy.
>$10,000 withdrawals from a bank triggers the Bank Secrecy Act whereas you have to produce an ID and the withdrawal is reported
that's not because of cash itself, it's because of storing money in a bank account
that's not because of cash itself, it's because of storing money in a bank account
Yay technology + markets in action!
This is pretty exciting stuff.
Why? Let's solve that problem. Not complicate it with bitcoin futures/derivatives to hedge volatility (which should not be a factor in small international trade to begin with).
I think there exists more established markets/exchanges/escrow accounts for currency exchange than there exists for bitcoin futures/derivatives.
What about just trading in USD over paypal?