Futures trading often gets compared to gambling. While it may be volatile and fortunes made (and lost) in mere moments, the futures market is not a casino. Futures price risk that exists. Gamblers create risk where there is none.
Futures are financial contracts for things ranging from a bushel of corn to a barrel of oil to a U.S. Treasury bond. Producers like farmers and financial institutions trade them in a market that prices risk. The risk for a bad harvest for a corn farmer exists with or without the corn futures market. A futures contract merely prices that risk allowing the farmer to sell corn at an agreed upon price while it’s still in the ground.
That has been the principle behind futures for more than a century. It has expanded well beyond agriculture products to include government bonds, stock indices and currencies. And in the week ahead the futures market will make the jump to cryptocurrencies when the Chicago Board Options Exchange opens trading for the first futures contract on Bitcoin. Such a move further legitimizes cryptocurrencies as an asset class, though one not for the faint-hearted.
Last week, in a matter of 36 hours, Bitcoin jumped 25 percent to over $15,000. It is up 1,000 percent this year. And there’s nothing of intrinsic value behind Bitcoin — no bushel of corn, no barrel of oil, no central bank, no government. Bitcoin is a currency generated by a computer algorithm with no trade policy, no tax laws, no job market or real estate behind it.
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The anonymity is part, maybe most, of the perceived value. It’s the price of risk and trust. And the market is willing to pay a high price and take a lot of risk for something that rests solely on trust.
Tom Hudson hosts ‘The Sunshine Economy’ on WLRN-FM; @HudsonsView.