Something I’ve noticed various folk refer to in terms of derivatives markets is what underlying asset the derivatives / futures market based on. The problem is that many many derivatives have underlyings that are not really “assets” … for example:
- the average rainfall over a month
- the number of beers sold at a festival
- peaks in network traffic
- a count of data breaches in an industry
- population growth for a country
- the song length of UK’s Christmas #1 hit
This list is as long as your imagination…. (and in fact, this is the kind of thing we’ll be talking / daydreaming about in our soon to launch market creation club - DM me if you’re interested in participating).
It’s worth noting that some derivatives markets are based on the price of an asset at a particular date/time in the future. For example, the price of BTC (in terms of USD) on 31 Dec 23:59. The source of the price of the asset is really what is important because one source may differ to another (e.g. Coinbase vs Binance) and so many futures markets will settle off an aggregated view (e.g. average or some other method) of what that price is. In fact, a market could use a BTC/Euro market to get a price and then a conversion rate for Euro to USD.The important thing to understand is that derivatives are about future data readings - it is the future data reading that is the underlying.