Derivatives are a subject that I have both simultaneously struggled to understand while not really caring to understand. All I know is that lots of people out there often claim that derivatives are used to suppress the trading value of precious metals. How the value of the underlying asset can somehow be judged from its derivative is beyond me, but here we are.
A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index).
Derivatives are financial instruments whose value is derived from other underlying assets. There are mainly four types of derivative contracts such as futures, forwards, options & swaps.
Theoretically, if there were enough big players out there trading say silver on the futures market, this derivative market would then become bigger than the actual market.
OOPS!
That's exactly what we see in the world economy today. Everything is smoke and mirrors. Everything is debt. From this perspective, it's easy to see how a commodity like silver could be controlled through the futures market.
If you know that silver is going to be traded in mass at $20 an ounce a year from now... guess what! Silver can no longer gain value over $20 for an entire year because if it does everyone knows the people who bought those futures are going to dump on the market for a profit back down to the $20 level.
Does anyone learn these very important lessons when they go to school? Hell no. I wonder why.
Thanks for nothing, ECON 101.
Are we worried about this happening to crypto?
Somewhat, but also not really.
There are several reasons for this mindset.
Crypto is superior to physical assets.
A big reason derivatives have so much value is that they can be traded much easier than a physical commodity. Much more importantly is the fact that crypto can be traded relatively instantly and without permission. The market doesn't need regulation because consensus regulates itself internally. There are many more examples but you get the idea.Volatility
The volatility and low market cap of crypto is kryptonite to the establishment. Nobody wants to agree to trade Bitcoin for $10k a year from now when the price could easily spike up to $100k. Combine this with the superiority of crypto and things get really intense. Futures markets like Bakkt physically back the Bitcoin, making the power of derivatives on the market even more nullified.Not a store of value.
I've said it before and I'll say it again: crypto is not a store of value. It is a generator of value via network effect and development put into the network. We can't develop gold. Gold is gold is gold. We can develop Bitcoin indefinitely. Bitcoin is the next Bitcoin. Holding Bitcoin is like owning a phone that you never have to upgrade; it upgrades itself for free. Compared to physical commodities, stocks, and derivatives, there is no contest; crypto wins.Generator of value.
This is a combination of 2. and 3. We see that crypto is both volatile and gaining mass value over time. Bitcoin has gone x2 every year since 2013 insanely consistently. The legacy system is designed to fleece the poor by dumping stores of value during economic crisis and allowing the economy to correct itself by further enslaving humanity via debt/tax/wage/scarcity slavery. This can't happen with crypto because it is gaining value so quickly. The tide is rising with crypto. They can pump and dump the market but the tide keeps going up and up. This is not the case with gold/silver/real-estate which are much more easily controlled.
The legacy system can't buy out crypto by design, and they are having a hard time controlling it. The nice part about all of this is that crypto is the definition of abundance, so even though it's hard for the people at the top to control, they are making money hand over foot so they're pretty stoked and have little reason to attack the network once they've entered the space. This is the beauty of consensus and network effect.
So we don't really have to worry about derivatives controlling this new economy, but we actually have a lot to gain from using derivatives to our advantage. We can think of the S&P 500 as an index derivative.
The S&P 500 Index or the Standard & Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.
So what's stopping us from making a crypto index? Imagine a derivative coin that was actually just a combination of 10 or 20 other networks. This would be very good for people who want to invest but have no idea which projects they want to support. With index derivative coins it makes it a lot easier to simplify the market for some people and consolidate multiple networks into a single asset. Imagine being able to buy Bitcoin, Ethereum, Litecoin, Monero, etc. all at the same time.
To be fair, I don't see a huge point in doing this yet. It would make more sense to wait for the market cap to rise a lot more and it would be nice if more projects started approaching the market cap of Bitcoin in order to make the spread a lot more even. Still, it's something to think about in the future.
Tokens
The ironic thing about crypto derivatives is that they will be created using crypto. No longer will we have to worry about a permissioned paper market based on hopes and dreams. If someone wants to create a derivative for one of these valuable assets, all they have to do is create another token to represent that derivative, and it gains all the advantages and superiority of crypto. With enough interoperability, these derivatives will also be 'physically' backed by the assets they derive value from; removing the unstable debt-based aspect from the system.
Conclusion
Derivatives are a tool of the establishment to control the world and propagate this broken debt-based economy. However, we here in the cryptosphere can use this tool to our advantage and these tools in the best way we see fit. The old economy will be transposed onto this new economy until we find a better path forward.