The History of Futures Contracts and How It Relates to Bitcoin Mining
by Helga Danova | Mar 20, 2014 | Crypto News
The original futures markets originated in North America over 150 years ago, and the origins of this particular type of contract can only be described as practical. As the American agricultural industry was booming, farmers were increasingly trying to find the best price when they brought their crops to market. They would often meet in centralized hubs of commerce, such as Chicago, to get the best prices for their crops. Those buyers would then ship the crops to many different locations around the country. Eventually, the farmers and dealers were buying and selling contracts for the delivery of a certain amount of wheat, corn, and other crops at a spot price. Although these trades started out with contracts that involved immediate delivery, forward contracts were eventually created to allow for the delivery of crops at a certain date in the future. These forward contracts are the foundation of the futures contracts that traders know well today.
A Practical Option for Farmers
The main reason that farmers liked the idea of selling a forward contract for their crops was that it gave them a price guarantee. They no longer had to worry about the changes in supply and demand over time because they had a contract that said a certain person was going to buy their crops on a specific date. This concept was a huge help to many farmers who never knew how much money they were going to be able to make off their crops in the past. Being able to plan for the future is extremely vital to the success of any business, and the forward contracts created during the middle of the 19th century allowed farmers to rest easy knowing that they’ll get a good price for their crops.
Trading the Contracts
As you would expect in any free economy full of speculators, many people actually started to trade the contracts for the delivery of crops on a certain date as an asset in itself. This basically allowed speculators to place bets on the future price of anything from wheat to gold. If someone has a contract for receiving a delivery of ten ounces of gold in exchange for $10,000 at the end of the year, then they may decide to sell that contract to someone else when the spot price of ten ounces of gold goes well over $10,000. Someone else can basically pay for the right to receive the ten ounces of gold originally outlined in the contract. In reality, the speculative nature of these contracts helps many commodities find a stable price.
Introducing Futures Contracts for Bitcoin Mining
You can basically create a futures contract for any kind of commodity in existence, so why not create contracts for hashing power? On CEX.IO, users can now purchase contracts for the delivery of 1 PH/s of hashing power in either April or May. The two contracts for each month are FHA and FHM. Although most people think the idea of betting on the future value of 1 PH/s of hashing power would be complicated, it’s actually quite easy to comprehend after taking a look at the history of futures contracts as a whole. Anyone who purchases one of these futures contracts is basically purchasing the right to start mining with 1 PH/s of hashing power from Ghash.io at a specific point in the future. Much like the original forward contracts allowed farmers to hedge against future price fluctuations, these futures contracts allow Bitcoin miners to lock in a price for the sale of their future hashing power.
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