Okay, I'm not an economist, so I can't give you chapter and verse about why this does not bode well, but it seems to me that packaging derivatives to protect bitcoin investors just can't end well:
Coinbase now handles bitcoin transactions for more than 19,000 businesses and 750,000 individuals.
The tiny San Francisco startup offers various online services that help move the digital currency from place to place. At online retailer Overstock.com, for instance, Coinbase helps people buy stuff like patio furniture and smartphone cases using bitcoin. It lets online advertising outfit eZanga pay its partners in bitcoins. And it provides a service that lets people and businesses buy and sell the digital currency.
As a result, Coinbase holds an awful lot of bitcoin in its own digital wallets. That’s just part of efficiently moving the currency to and fro — and at this point, it’s a rather risky thing. As the world struggles to come to terms with this very new creation, the value of the digital currency is extremely volatile, with prices shifting as much as 25 percent in a matter of minutes.
Founders Brian Armstrong and Fred Ehrsam say the company runs complex software that monitors price fluctuations and responds almost instantly in an effort to avoid serious losses. But they also say Coinbase could benefit from something else, something that businesses so often use to protect themselves when they handle foreign currencies like euros and yen. They could use a derivatives market.
…
Derivatives markets have long played a role in the traditional economy. If you, say, sell a bunch of stuff to Germany and are paid in euros, you run the risk of the euro suddenly dropping in value relative to the dollar. In other words, when it comes time to spend them, your euros could be worth far less than when you received them. But you can protect yourself by purchasing something called a futures derivative — a financial instrument that pays you money if the value of the euro goes down. “It’s basically an insurance policy against fluctuations in exchange rates,” Posner says.
via Wired
Gee, what could possibly go wrong? I'm not sure what, in this context, the difference between derivatives and swaps might be, but if derivatives are basically insurance policies against fluctuations in rates, then, when it comes to bitcoins, there doesn't seem to be much difference. Basically, you are insuring against the collapse of a bubble, and we all know how well that worked for AIG, et. al. This is not, as the article implies, analagous to derivatives designed to protect against currency fluctuations. The dollar, for instance, is legal tender, and will have value as long as the United States exists,. It may go up or down against other currencies, but it must, by definition, always have value here. Bitcoins can, and probably will, lose every cent of their “value”.
At least at the moment, it appears that the too-big-to-fails aren't getting into the market, but if there's a dime to be made they will, since they know our dollars will be there if things go South.
The article doesn't say, so I'm left curious. If the bitcoin value does goes South, will these derivitaves pay off in dollars, or bitcoins?
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