## Saturday, November 18, 2017

### Margining Bitcoin futures is possible

I sold all my cryptocurrencies two days ago – the second SEPA transfer arrived to my bank from AnyCoinDirect.EU just 5 hours after my Ethereum payment which is rather incredible – and the time I waste by watching movements in the cryptocurrencies has dropped significantly. In fact, I believe that the mankind wastes an insane amount of time by watching the events and wiggles of the Bitcoin and this time multiplied by a minimum salary could easily trump the whole Bitcoin capitalization every year by itself.

CME should start the Bitcoin futures in the second week of December. As Coin Telegraph informed its readers, big investment VIP Thomas Peterffy wrote a letter saying that "it's impossible to margin such a [Bitcoin futures] product" and the unlimited swings, especially the upside swings threaten the broker and all of its clients who hold safe products, too. So these things should be isolated.

I agree with him that aside from some continuity, the Bitcoin prices are a sequence of basically random numbers where no reasonable limits may be placed on the day-to-day price changes etc. And I agree with him that this "asset" is immature and its advocates are financially illiterate imbeciles. But I don't quite agree that it's impossible to offer a safe product based on such flimsy foundations.

CME has instituted the limit on the daily price movement – you can't open new positions that are further than 20% from the last settling price, if I understand it well – and Peterffy says that this cannot solve the problem because the positions that already exist could imply unlimited duties to pay. If someone shorts the Bitcoin and the Bitcoin goes up 100 times overnight, he may be obliged to pay one vigintillion dollars and he would have to go bust, probably along with CME, as the winner would demand her vigintillion. ;-)

Right. I agree. Shorting may lead to unlimited losses and there's indeed no guaranteed and even no semi-guaranteed limitation on the Bitcoin price swings. However, that doesn't mean that this problem cannot be solved. It may be solved easily – simply by adjusting the settlement so that it cannot exceed X times the original value of the contracts or something like that. The potential for the daily profit may get bounded, but so does the potential for the daily losses and the risk for the system. Instead of a sharp bound, one may also redefine the settlement to be a smooth nonlinear function of the price change so that the maximum losses become limited.

CME has a web page dedicated to the futures and they're not sold yet. However, there are already "smaller places" where the trading of the futures already occurs. And the Swiss Vontobel and Leonteq AG (Reuters, Swiss web) are also preparing their futures where the loss is limited, as I suggested.

I believe that Bitmex.com is the largest exchange where cryptocurrency futures are already being traded. Two billion dollars are traded there every day. You can see the incredibly speedy blinking in their trading of the XBTUSD futures and even those for the Bitcoin Cash denominated in the Bitcoin. And check the Twitter account announcing Bitmex fresh margin calls.

But I think that Bitmex still belongs to the "cryptocurrency culture" so most of the people over there are either Bitcoin bulls or Bitcoin agnostics (who believe that they may profit from the short-term random walk). However, CME and the Swiss company may address their products to the conventional financial world where bears dominate. And here a favorite song of my kindergarten years from the 1970s, "The Bears Do Not Know" (by Mr Jan Bošina and Ivan Mládek's Banjo Band), becomes relevant because it may describe both the passivity of the bears so far as well as what happens when the real bears enter the Bitcoin market! ;-)

The bears... do not know...
that the tourists don't have weapons.
When they suddenly wake up,
they will ambush them somewhere...
In front of an excursion group in the oakwood,
a little grizzly shows up...
Tourists will undoubtedly be
scattered all over the forest.

Everyone: on the pathway, the tourists will leave
and girls' clogs [baree baree baree]
and expensive cameras [baree baree baree]...
The bears will exchange those
for gold coins in the city.
They'll spend them for raspberries,
honey, and salt peanuts.

The lyrics is repeated in a way you may discover yourself.

As I suggested, if I were a big fish, I would short the Bitcoin in the medium run but in the short run, I would try to tame its fluctuations. So I would define e.g. an exponentially decreasing function for the Bitcoin price and bought whenever the price is cheaper than the target, and sold when it's higher. At some moment, a part of the market would become "trained" to this curve and would start to cooperate, which would increase the probability that things don't get out of control and I don't need to spend an infinite amount of money to push the markets.

CME futures are limited to BTC 5,000 per participant. The limit may be saturated by many players and this fact may prevent each of them from cornering the market. But I suspect this limitation will be irrelevant because some financial houses will either communicate behind the scenes, or they will end up cooperating "spontaneously" on a plan like that.

So dear financial houses, if you don't communicate with each other, you can all take instructions from The Reference Frame. When the trading begins, try to target the Bitcoin price that is continuously dropping by 10% every trading day, starting from the first moment when the futures can be traded. With billions of dollars that you and your collaborators may insert into this game, it's a game that you should profit from – it may be pretty much guaranteed. If and when the Bitcoin price drops to a tiny fraction of the current price, i.e. to \$100, the buying pressure may be increased, but the total capitalization of the Bitcoin will be so small that the market won't be too interesting for the world as a whole.