Bitcoin Fever Might Be Contagious
This month commodity regulators allowed two different US exchanges to launch bitcoin futures contracts. This enables investors to buy and sell bitcoins at different prices in the future. On the surface this seems good. Now people can exert a calming, dampening effect on bitcoins by selling them at a lower price in the future market if they think the price will drop.
But there is more here that is less good.
A regulated futures exchange has some guarantees; one is not making a private bet. The distinction is that the exchange takes on what is called "counterparty risk," that is the two parties have the exchange stand behind the trade. Payment is guaranteed by the exchange, even if one of the parties defaults.
The clearinghouse consists of the exchange’s member brokerage firms. They all pledge their own capital as a backstop to keep the exchange running.A regulated futures exchange has some guarantees; one is not making a private bet. The distinction is that the exchange takes on what is called "counterparty risk," that is the two parties have the exchange stand behind the trade. Payment is guaranteed by the exchange, even if one of the parties defaults.
As of now that very same capital also backs up stock index, Treasury bond, and foreign currency futures. So a crisis--which is possible in the bitcoin mania--could conceivably spread to the other markets because they are underwritten by the same people in a common pool.
That is a bad idea.
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