The rising prices of risk, trust

Futures trading often is compared to gambling. While it may be volatile and fortunes can be made (and lost) in mere moments, the futures market is not a casino. Futures price risk that exists. Gamblers create risk where there is none.

Futures are financial contracts for such things as a bushel of corn, a barrel of oil or a U.S. Treasury bond. Financial institutions and producers like farmers trade them in a market that prices risk. The risk for a bad harvest for a corn farmer exists with or without the corn futures market. A futures contract merely prices that risk allowing the farmer to sell corn at an agreed upon price while it’s still in the ground.

That’s been the principle behind futures for more than a century. It’s expanded well beyond agricultural products to include government bonds, stock indexes and currencies. And in the week ahead the futures market will make the jump to cryptocurrencies when the Chicago Board Options Exchange opens trading for the first futures contract on bitcoin. Such a move further legitimizes cryptocurrencies as an asset class, though one not for the fainthearted.

Last week, in only 36 hours, bitcoin jumped 25 percent to over $15,000. It is up 1,000 percent this year. And there’s nothing of intrinsic value behind bitcoin: no bushel of corn, no barrel of oil, no central bank, no government. Bitcoin is a currency generated by a computer algorithm with no trade policy, no tax laws, no job market and no real estate behind it.

The anonymity is part, maybe most, of the perceived value. It’s the price of risk and trust. And the market is willing to pay a high price and take a lot of risk for something that rests solely on trust.

ABOUT THE WRITER

Financial journalist Tom Hudson hosts “The Sunshine Economy” on WLRN-FM in Miami, where he is the vice president of news.