The Importance Of Bitcoin Futures For Bitcoin Mining
On December 10th and December 17th, CBOE and CME (respectively) launched their Bitcoin Futures Contracts. There were a lot of discussion to what will this amount. In this article I will not discuss the possible outcome from this, rather the more practical application of the futures.
In this post you can find the following information
- What is a Futures Contract
- What is a Hedge
- What is Futures Hedging
- What are Miners
- The link between Bitcoin Futures and Bitcoin Miners
Futures Contract
According to Investopedia
Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset, such as a physical commodity or a financial instrument, at a predetermined future date and price.
Futures Conracts are used mainly for speculating and hedging. For example when a cryptocurrency trader buys bitcoin, in order to sell higher and pocket the profit from the trade - he is essentially speculating.
Note: Speculation and Investing are very different things - speculators are in the game for a short-term profits, no matter buy or sell. Also the time frame used by speculators is often very limited to few days/weeks. On the other hand an investor might hold a position for decades, also please note that an investor doesn't bet against an underlying product - he does not short sell (to bet against something)
What is a Hedge
According to Investopedia
A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
Futures Hedging
Imagine John is a farmer and he expects to harvest 50 tons of wheat this year. John wants to be sure that he will get a fair price for his production, he wants to remove the uncertainty and possible price fluctuation. In order to do this, he has to hedge the price.
John goes to an investor and shares his worries with him. The investor offers him to SELL (Short) Wheat at the furures market at the current price of 10$/ton, so basically if the price goes down - he will profit from the futures contract and he will be hurt from the market prices - he will be hedged. There is not going to be uncertainty for his production.
Remember - hedging is often made for removing uncertainty and not making additional profit.
Example:
John has a harvest of 50 tons of wheat. The current market prices are 10$/ton, so John shorts (sells) 50 contracts at the current price of 10$/ton. Eddie ( A wheat buyer) buys John's 50 tons of wheat at a price of 8$/ton, because there has been too much supply of wheat this year and the prices has go down. John is aware of he knows that this is a fair price for his production.
After selling 50 tons of wheat at 8$ - John loses 2$ a ton from the price change. Later that day he goes to his broker and covers his futures contracts at 8$/ton - makes profit of 2$ a contract.
So he loses 2$ a ton x 50 tons = 100$ loss, but he has hedged so...
He makes 2$ profit per contract x 50 = 100$ profit
So in the end John ends up with no loss, even though the price did fall. This is the beauty of the futures hedging.
Let's translate this to the Bitcoin case
Bitcoin Miners
Bitcoin mining is the process by which transactions are verified and added to the public ledger, known as the block chain, and also the means through which new bitcoin are released. The mining process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle. The rewards, which incentivize mining, are both the transaction fees associated with the transactions compiled in the block as well as newly released bitcoin
Essentially you exploit your computer to solve puzzles and when the puzzle is solved - you get rewarded with bitcoin.
Note: There are lots of other "minable" currencies.
The link between mining and futures contract
By now I think most of you know where I am heading. Mining cryptocurrency has been proven extremely profitable for early adopters, lately there has been a lot of discussions about the profitability of mining.
Mining becomes more and more difficult with each mined block ( this is how the algorithm is set) and also big players are joining the game. There has been a boom of tech companies (and not only tech companies) which have shown great interest in joining the mining cryptoccurencies field. These companies have vast resources, which I think will make mining very difficult for the ordinary miner - most likely totally unprofitable.
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Those large companies might try to manipulate the price, but they will most likely not be able to do so to any great extent. They can throw all their resources at bitcoin and other cryptos, but they will never complete control of these decentralized assets.
At the same time, there is reason to be cautious. For miners and even for all holders of cryptos.
Absolutely ! We should be very careful, because big players are not sleeping. The bottom line from this article is that miners should be careful, because more and more tech companies want to mine - which will make mining even less profitable.
Thank you for your comment !
I see, and agree. When I first got into cryptos, the only risk was the cyrptos themselves, cuz nobody really knew if and when they would become accepted and valuable. Now, they've become rather valuable, so of course there are various malevolent forces trying to game them and profit from cryptos.
I'm not very tech savvy, so I can't say much about it. But I hope cryptos help to overcome the evil titans of finance who control the fiat money and who make money by extracting wealth from our economy.
I placed a lot of faith in Bitcoin, but now I'm wondering if Bitcoin Cash might replace Bitcoin Core.
And, recently, I've realized that Steem might be like a little seed that is now germinating and will grow into one of the massive trees.
Would you like me to write an article about btc vs btc cash. I will enrich myself and therefore you. What do you think
That could be good. I've read certain articles about the differences, but none of them have presented the differences in a simple, clear way that non-tech people like me can understand.
When I write my "Chaos Monitaur" posts, I do lots of research, then distill it all into easy-to-understand articles that almost anyone can understand.
If you write such an article for Steemit, try to do the same. Take something complex and confusing, and make it simple and interesting. That way, people will read it and appreciate it and learn from it.
I will do my best ! Thank you for your feedback. It really means something to me :)
Another productive post, always worth my time.
Nice one, well done.
Hi bro, thanks for the clear description about..
Futures Contract
Hedge
Futures Hedging
Miners
The link between Bitcoin Futures and Bitcoin Mining
That points are quite anonymous to me before.
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