Contango, Volatility, and the Bitcoin Primary Market
The counter-intuition of a forward contract hedging future delivery risks in a non-physical “commodity” — if indeed bitcoin is a commodity — highlights a point around economic insurance.
Opening bitcoin into an economic event means speaking about it [in] such a way as to coin certain phrases, if only for the reason they’re already placed before us.
For example, Keynes remarked backwardation is the natural state of a commodity, but with a bitcoin — which was brought into the world as an electronic peer to peer cash system — contango appears equally fitting: rudimentary portfolio theory suggests cash be readily available.
The non-bivalence of trusted and trustless money
It may seem also counter-intuitive to criticise the cypherpunk ideal of disintermediation while also postulating Satoshi’s prime monetary innovation was to disintermediate settlement.
So too describing bitcoin mining as a primary market, where there is a fundamental difference between the mediations, regulations, and formalities compared to other primary markets such as initial public offerings or government bond auctions.
Yet the mining is where the bitcoin is “realised” and the risk to these operations from price fluctuations in secondary markets when covering overheads, can be offset by a bitcoin futures contract being in contango.
The interplay between volatility and a lack of formally regulated conditioning in bitcoin — Satoshi described it as a simplistic network working on a best effort basis, with miners free to come and go— mean the function of discovery is still unravelling a bitcoin to a co-opted scale, in the way inflation targeting communicates trust in sovereign issuance or how respected institutions may note on trading conditions.
By comparison, the trustless nature of Satoshi’s game means the only rule is a math based conundrum contained in a hashing algorithm called proof of work: so while absent of trusted oversight, bitcoin is not subject to limits of traditional contracts known as incompleteness; and as non-sovereign money, not subject to limits of unilateral agency.
If the cash system is the non-bivalent game (equilibria) between trusted and trustless issuance, stability can theoretically only be achieved when money demand on a global basis is sated.
In considering how this is affecting of our memory of bargaining habits in shortening expectations of the future by bringing it forward, ask why would demand for cash be for tomorrow?
