Commodity Exchange with ChainTrade
Contemporary Exchanges and Chain Trade
The world of trading can be complicated but ChainTrade is here to break it down into easy blocks. The first thing to understand are commodity exchanges. These entities determine and enforce rules for trading commodities and investments like commodity futures and options. Contemporary exchanges can be either physical in location such as the Chicago Board of Trade (CME) and Eurex or can be digital like ChainTrade. Currently the market controlled by big exchanges like CME and Eurex taxing new entrants a high cost of entry.
Getting Raw with Food and Raw Materials
Most commodity exchanges deal in food and raw materials, the basis on which ChainTrade’s exchange is based. These items are used in the primary production of manufacturing goods. These basic ingredients are so important because as they are used the inventory is decreased while the work in progress item is increased. For example, a trader could buy some corn on ChainTrade. The corn is then used to create corn flakes. The value of the corn is increased as it is transferred into a finished good- a lovely breakfast cereal. Raw materials are the building blocks for greater value products.
Hoping for a better future
One type of transactions that happens often in an exchange is the buying and selling of futures. Futures are forward contracts that have one party sell something at a predetermined price at a specified time in the future. The time could be weeks, months or years in the future. Both parties agree to buy and sell the commodity at a certain price, the forward price. Most of the time futures are based on food and raw materials like grains, metals, oil and gases. Stocks and bonds are also traded in future contracts though.
For example, a farmer might predict his crop of corn for the year will be 1,000 ears and harvest will come in 12 months. If the farmer sees that the current price for 1,000 ears of corn is $15 and he would break even with $10 per ear of corn he will buy enough future contracts at $15 to make sure that he will make a profit no matter what happens to the price of corn when the harvest comes.
The cereal producer will pay $15 for the corn because they will not want the price of corn to increase. If the price of corn goes up they will have to increase the price of their cereal which means less customers and less profits. Buying the future for $15 ensures price and profit for both parties.
This dynamic was first introduced in 1972 but has become an increasingly important function in the market. Future contracts help standardize the price of items and specifications are built into the future to ensure quality and quantity of the good.
So, who buys futures? Market makers will often buy futures hoping to make money off the small difference between buying and selling prices. Speculators gamble more and will bet on the way that commodities will go. For example, a speculator will buy a future based on the failure or success of an entire country’s harvest of corn.
Choices, Choices, Choices — the case for Options
Options are another dynamic in the world of exchange. An option is a contract that gives the buyer the ability to, but not obligation, to buy or sell a commodity at an agreed price during a certain period of time. Options are a way for people on the market to speculate the rising and falling price of certain commodities and raw materials.
If a buyer buys an option on corn for a $10 premium that means that when the corn harvest is ready the buyer will pay the agreed upon price written into the option of $200. If when the corn harvest comes the value of the corn shoots up to $400 the buyer will still be able to buy the corn at $200 having spent a total of $210. If when the harvest comes the value of the corn plummets to $100 the buyer will not be obligated to take on the corn and will only have paid for the premium of the option — $10.
ChainTrade reinventing the market
The consolidation of the market over the years has seen exchanges such as Eurex and the CME control the landscape. This monopoly in the market prevents liquidity making it difficult for traders to work across different continents. This is no accident as futures are very profitable. In 2016, the CME had revenues of $3.6 billion and a net profit of 43% with most of the profit coming by way of transaction and clearing fees paid by buyers and sellers of future contracts. ChainTrade would abolish these fees and would return that much valued money back to the buyers and sellers.
In addition, exchanges practice discrimination with prices. Exchanges such as Eurex and CME charge different participants different rates based on relationships and trading volumes. This uneven landscape further inhibits new entrants. ChainTrade levels the playing field by allowing anyone including institutional investors, food producers, and other traders access to the exchange.