It’s not about high or low to lock in profits, they sell futures well in advance to eliminate uncertainty and hedge their naturally positive position. The speculator buying the future takes on that risk.
the article says the futures are still trading high, meaning you probably couldn't make a lot of money buying them right now, likely because traders know the prices are going to come up too.
Without trying to fall too hard into a potential late-stage-capitalism hole, what is the advantages on trading like this? Beyond the advantages of making money on futures.
I guess the buy/sell in advance lets generators etc fund projects ahead of time (maint, expansion, etc) instead of always living hand to mouth on "real time sold" and without having to land "huge multi-year contracts", so the market can be a bit more fluidly priced? (Maybe too fluidly in this case!)
Nice idea. At the same time, I wonder how this could help me make money. Your claim is buy low, sell high. But how can publicly available futures help me doing that?
There is absolutely no more reason to keep prices low if you've made a profit independently on futures than if you haven't.
Your marginal cost goes up in both cases. If you're optimising profits, you should make the same decision in both cases regardless of if you bought futures.
Wasn't the original purpose of futures to let farmers and others lock in prices early so they can mitigate risk? Speculation on futures seems dumb if you have no intention of taking delivery.
Note: I am not a finance person, so please correct me if I'm misunderstanding something.
My understanding is that in futures markets, you make money by predicting what the price of something will be at a time in the future.
Let's say you know of a new battery technology that is much more efficient than anything we have today. Let's further say that this type of battery uses a lot of copper. You think that this will massively increase the amount of copper needed.
In this case, you buy a future (enter a contract) saying you will buy 250,000 tons of copper in January 2020 for $3.20 / lb (which is considerably higher than the price of copper today). Someone with a copper mine can take the other side of that contract and expand their operation (buy equipment, hire workers), knowing that in January of 2020 they will be able to sell that copper at a higher price, and expand their operations.
If the price of copper goes up, in 2020 you buy all of that copper from the mine, resell it, and make a ton of money. The owner of the mine makes a modest profit.
If the price of copper goes down, in 2020 _you still have to buy all of that copper from the mine_, and you lose a ton of money. The owner of the mine makes a modest profit.
You will only enter into such a contract if you have (or think you have) information that the person you are making a contract with does not have, thus allowing them to act on that information sooner and without risk. If your information is wrong, you are the person who loses out, not the person you contracted with, so you're taking on all of the risk for some of the possible benefits.
> A simple granary (sized to community) and enough cash to resow next year is usually enough. No virtual, hedged, liquid or funny stuff needed. It's as old as the hills as well, failing crops have been dealt with by humanity successfully in many civilizations through out history. Without a financial system that requires the farmer to bet on the price of grain next year, I might add.
If you know that the crops are likely to fail, you can buy futures in grain. It's the ultimate "put your money where your mouth is". If you buy grain futures, you are saying "There will be a crop failure. Plant more grain. I will cover the downside if I'm wrong." Thus you make the crop failure less impactful by prompting action earlier.
I agree that a simple granary is _usually_ enough. But a simple granary plus a futures market will be enough even more often.
There's a difference between buying futures (which may or may not pay off) and reliably predicting the price of oil.
Also: Southwest buys fuel futures to hedge its exposure, which is different from speculation. People hedge because they don't know what the price will do, and want to be OK regardless of price movements.
But wouldn't they want the futures market to have perfect information? So that the futures could be priced exactly right, which would mean the lowest possible price that counterbalances a down market perfectly?
I assume the farmers aren't trying to make money from the futures, they're just trying to not lose money. Their profits come from actually growing food. The futures are just there in case something bad happens. Right?
It’s a way for people who need water for processes to lock in prices. If you’re genuinely curious about why futures are useful, look into “commercial hedging”. It’s used by both suppliers and consumers to reduce price uncertainty (think of a farmer being able to buy water for the whole year).
Sure corporations use futures to ensure stable prices but there are also traders that specifically just trade futures without any hope for receiving the underlying commodity.
Isn't futures designed specifically to allow for this kind of hedging? eg. everybody thinks that food prices are going to the moon next harvest, but farmers don't want to pay the risk, so futures allow farmers to lock in prices now and not have to worry about a price crash come harvest time.
It's for hedging exposure to reduce uncertainty. Futures markets historically reduce volatility and allow hedgers to plan ahead in their businesses. Speculators are there to provide liquidity and aid in price discovery. Yes, lots of caveats, but generally it seems to work. While initial bouts of increased volatility have sometimes come just before ("pre-hedging") and after the introduction of futures, their effect after an initial period has been to markedly reduce volatility. I can't see how BTC could survive without futures, tbh, though I'm actually a pessimist who thinks the blockchain will find other uses.
OK, think of bitcoin as a means of exchange. Thing is, it's so volatile and potentially slow that who knows what value you're going to actually get on the other side of a transaction. You transfer one BTC but by the time it arrives at the other side it could be worth $2,000 less, so you're in the hole $2,000? Good grief. Likewise if you accept payment in BTC, you must wait for it to arrive. In an active, healthy futures market, you can dip in and out with extreme speed and ease
Futures allow me to hedge transaction, mining and other uncertain time (assuming the futures contracts are actually popular) by hedging. However, because the few people who actually use BTC for something other than speculation probably don't typically send and receive whole bitcoins, or in the CME futures case, five BTC at a time, the futures markets might in fact be useful for... intermediaries?
Anyway, BTC is even too wild a ride for futures! Clearing houses (who accept responsibility if losing traders go broke and can't pay what they owe) aren't all so eager to jump in, because, you know, danger. Also, futures markets have price limits that act like circuit breakers to calm things down when the trading gets too insane -- "limit up" and "limit down" -- when trading is halted, and you can neither buy nor sell. This is a dangerous time, and if you've traded on these markets you'll know that you can feel like you're going to have a heart attack when the market is flying dramatically, suddenly trading stops, and you have no idea at what price it will reopen. But BTC has been reaching this kind of limit range with increasing frequency.
The various exchanges are constantly trying out new products, and most of them never catch on. So, who knows about BTC.
Anyway, if you don't think that Bitcoin should be connected to the rest of the world, including the financial world, then why use them?
That is the point I was trying to make. Basically if you're in the business of producing or buying and selling the commodity the futures are for you. If you're just speculating how does that help anybody? I guess you could make the argument that having more eyes on the market means there is more information so the price is a better reflection of the true value.
The last sentence is not true. The whole point of a futures contract is to hedge risk and allow price discovery. It is true the companies consuming commodities will buy at almost any price but more active trading results in a price more closer to fair market value over time. It’s the same reason why prices for rarely sold items fluctuate widely between sales. There’s no activity to visibly show the change in demand or supply in between.
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