#CryptoGetRichSeries
Let's first look at the first episode of the story.
Suppose you are the owner of a bakery, and the main ingredient for bread is wheat; everyone knows that, right...
In other words, you are extremely anxious about the fluctuations in wheat prices, and you happen to notice that there are particularly many people opening bakeries around you this year. You think demand is increasing, and wheat prices might go up. Once wheat prices rise, your costs increase, making business difficult; hence, you are very worried about wheat price increases.
So what can you do? Wheat doesn’t listen to you. Ah, the farmers seem to have a different perspective. The farmer, being in the wheat-growing circle, knows that this year's wheat production is surplus, and the likelihood of price drops is higher, so he is very worried about price drops affecting his income.
Now there is a disagreement between you, the bakery owner, and the farmer. You are afraid of wheat price increases, while the farmer is afraid of wheat price decreases.
Hehe, it's simple to address both of your concerns. You can immediately sign a contract to fix the wheat price at this moment, which would satisfy both parties' needs.
What does it mean? For instance, if wheat is now 5 yuan per pound (just a random figure, I don't know the real price...), you and the farmer sign a contract stipulating that at any time this year, you can purchase wheat from him at 5 yuan per pound. This way, you avoid the risk of rising wheat prices. Even if it rises to 10 yuan per pound, you still buy it at 5 yuan. The question is, is the farmer willing? Of course, he is! Because he believes the wheat price will drop. He signs this agreement, and even if the price drops to 1 yuan per pound, you still have to pay 5 yuan per pound.
Alright, now you understand the principles of futures. Different viewpoints on a matter create long positions (buyers) and short positions (sellers). Whether you will make money or lose money in the future essentially tests the correctness of your viewpoint, and all financial instruments are just to help you express your viewpoint more accurately. For instance, if you think it will rain tomorrow, you can buy weather futures to test your viewpoint and make a profit in the process (I’m not joking, weather futures can be found at the largest futures exchanges globally...)
This understanding is very fundamental and important. Of course, it’s okay if you don’t grasp it now; take your time, after all, the journey has just begun…
Alright, let's continue from the previous story.
You and the farmer reached an agreement to lock in the wheat price, but you both immediately realized a problem: if the wheat price drops too sharply or rises too quickly, will you continue to adhere to the agreement...? For example, if wheat is now 5 yuan per pound and drops to 1 yuan per pound, according to the contract, you still have to pay the farmer 5 yuan per pound to procure it. For 1,000 pounds of wheat, you would only spend 1,000 yuan on the market, but now you have to spend 5,000 yuan! You might naturally think... just run away, or simply breach the contract. Similarly, if the wheat price rises, the farmer would also want to run away. When facing significant losses, everyone would choose to breach the contract.
So what to do? At this moment, both of you thought of Old Wang next door. You approached Old Wang and said you both would put money in his hands as a deposit. What does the deposit guarantee? It guarantees that both of you will be honest and adhere to the contract, ensuring the other party won't run away. How much deposit is appropriate? If you give too much, it ties up funds, which nobody wants; if you give too little, it's useless. When price fluctuations exceed your deposit amount, you will still run away; whether you lose 5 yuan or 10 yuan, a normal person would choose to lose 5 yuan instead.
At this moment, Old Wang slapped his thigh and said he had a solution. You each give a deposit of 10% of the total price according to the agreement. You locked in 5 yuan per pound for a total of 100,000 pounds of wheat, which means a total price of 500,000 yuan, so each of you puts down 50,000 yuan as a deposit with me. However, this only covers losses within 50,000 yuan. This means that if the wheat price drops more than 10%, for instance, from 5 yuan to 4 yuan, the total contract value drops to 400,000 yuan. You wouldn't care about the 50,000 yuan deposit anymore; you would choose to run away because fulfilling the contract would mean a loss of 100,000 yuan... So, Old Wang's idea is to not let you have the chance to lose more than 10%. Once you lose the 50,000 yuan deposit, you either put in more as a deposit or forfeit the deposit to the other party. For example, if wheat drops by 10% and you lose your 50,000 yuan deposit, Old Wang will notify you to put in more, like increasing the deposit to 100,000 yuan, so you can bear more of the price drop. After all, what if the price goes up again? But if you refuse to supplement the deposit, unfortunately, Old Wang will give your previous 50,000 yuan deposit entirely to the farmer to secure the farmer's contract interests. Conversely, if the price rises, the same applies; when the margin guarantee exceeds the 50,000 yuan deposit, if the farmer does not add more, Old Wang will give the farmer's 50,000 yuan deposit to you to ensure your contract interests.
At this point, you have already understood how the margin and liquidation mechanisms of futures contracts work. Congratulations, you have surpassed 60% of the contract gamblers in the market. I’m not kidding; the vast majority of people playing contracts do not understand these principles at all. Next, let’s look at one of the true inventions of the crypto world: perpetual contracts.
In the previous story, we discussed predicting this year's wheat prices. In the real futures market, there are various contract durations, but they all have a deadline. This means that the contracts we sign to lock in future prices always have a cut-off time; it cannot be said to be eternal. I cannot always buy wheat from you at 5 yuan per pound, or always sell it to me at that price. This is impossible.
(We won't discuss rolling over contracts here)
In cryptocurrency, the impossible becomes possible. Both parties can hold contracts indefinitely without the need for delivery. The only viewpoint you need to consider is the future rise and fall, without needing to worry about this complex dimension of time.
However, how can this contract, which can be called eternal, ensure it does not diverge from the spot price? The crypto market invented a very important mechanism called: funding rate. Its rules are extremely simple; when there are more long positions (buyers) in the market, a certain percentage of funding fees is paid to all short positions (sellers), and vice versa. The funding rate is dynamic and settled every 8 hours.
Alright, let's emphasize this! This mechanism is extremely important. The advanced gameplay of crypto trading and high-level risk-free arbitrage are concrete applications of this mechanism; just remember it for now.
~~Huh, deep breath, this brainstorming session ends here^^
This episode only discusses the principles; in the next episode, we will talk about how contracts actually generate profit and what makes countless people unable to resist.
Congratulations! All of you who can see this far, your learning ability is sufficient to strike gold in the new world!
If you can understand over 90% of this article, you have already surpassed over 80% of current contract users (whether they are losing or making money). The financial derivatives market (including traditional finance) is a zero-sum game; if you make one yuan, it means someone else loses one yuan. Therefore, always striving to enhance your understanding and knowledge is the secret to surviving longer and earning more in this market.
Fortunately, the vast majority of people in the market do not think this way. They prefer to follow blindly and guess tomorrow's price fluctuations based on feelings. Congratulations to you and me; most of our opponents are just such characters, not the PhDs from finance or mathematics on Wall Street.
In the end, well...
I had prepared a welcome gift for you new friends in the crypto world, but my assistant reminded me that some content needs to be updated to the 2024 version, so I can't send it out for now. I will update it as soon as possible (I've been digging too many holes lately TT).
Currently in a bull market, opportunities arise every day with shared insights.
Still, the same old saying, if you don't know what to do in a bull market, click on my avatar to follow, plan for bull market spot trading, contract insights, and share for free.
I need fans; you need references. Guessing blindly is not as good as following.
#特朗普国会演讲 #CZ新代币模型设想
