One of the more important economic activities in Bitcoin is of course mining, so either a hash rate based or difficulty based financial instrument is absolutely needed.
MPEx had for a timei a hash-based option, but that didn't work so well for the marketmaker and was discontinued. The experience has convinced me that designating marketmakers for hash-based derivatives is not functional, as the financial and technical knowledge required to successfully run such a market for long intervals is not available to humankind (currently, if at all). Still, because BTC can not be without a mining future, here's a novel attempt in the form of a cash-settled difficulty index set of futures :
They all settle on IMM datesii as the value of difficulty pure and simple. For instance X.IDIFF.DEC will most likely settle for 0.03370182 BTC exactly, seeing how difficulty only changes in ~1600 blocks, which is about 11 days, which is past the 19th.
Other than the settlement dates there are two major differences from other MPEx futuresiii, specifically :
- No insurance fee. This has the obvious disadvantage that contracts may be forcibly liquidated if the difficulty of contracts sold exceeds the seller's posted collateral, but there's no practical alternative. It is however possible that as the mining market matures some reasonable insurance scheme may be introduced.
- 2.9x capital per quarter. Other futures require 1.8x of last settlement value posted as collateral, X.IDIFF.* require 2.9x for each quarter out. Thus currently X.IDIFF.DEC requires 0.097735278 BTC per contract whereas X.IDIFF.SEP 2.38366569 BTC per contract.
Note that because of the forced liquidation explained above it is not advisable to pay more for a contract than its collateral value. Thus paying 3 BTC per X.IDIFF.SEP contract today will result in a guaranteed loss of at least 0.61633431 BTC per contract, because should difficulty indeed exceed 23.8mn those contracts will be liquidated for that value.
I hope these will prove useful for miners, their investors, and the BTC public in general. Good luck.———
- First trade on Sun, 22 Apr 2012 22:08:01 GMT, last trade on Sat, 25 Aug 2012 08:09:37 GMT. [↩]
- That is the third Wednesday of March, June, September and December, before midnight GMT. If anyone is curious why the other futures do not settle on a sane date (such as the IMM dates) the explanation is quite simply that it did not seem desirable to have MPEx settlement dates coincide with IRL settlement date for IRL-referenced futures, but it seemed preferable to always use the close on a future which is still at least a few weeks out. Hence the 4th Friday rule (which also conveniently matches MPEx option expirations). [↩]
- Three! Three major differences! [↩]