Can you please truly explain like I’m five? Like with bubblegum or cookies as an example? Because I have tried understanding how this works several times and I just do not get it.
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I think bubble gum is going out of style. It was popular because baseball cards used to all have it included. But now no one wants baseball cards anymore, so bubble gum will be less valuable soon. That’s my thought.
I go to a candy store and I promise them no matter what happens, I will buy 100 packs of bubble gum from them in the future, at whatever the going rate is at that time. I will pay them a tiny monthly fee to lend me the gum. And all they have to do is give me the gum now, before I pay. Again, I will 100% need to pay them eventually for the gum. Just not now. They do this because they believe gum will always be valuable, and because I will pay a tiny fee for the privilege.
So now I have 100 packs of gum that I paid nothing for. But eventually I will need to pay for them. When I do pay for them, remember I just need to pay whatever the value of gum is at that time.
So I take my 100 packs of gum and I sell them for 1 dollar each. I have 100 dollars! A month later, just like I thought, less people want gum. In the store and everywhere, gum just costs 50 cents these days. So, I decide now is a good time to pay the candy store. I walk in, pay them 50 cents for each gum I promised to buy. I spent $50 (plus a small fee, so let’s say $52). Now I’m standing there with no gum, and I don’t owe anyone anything anymore. In my pocket is $48 that I didn’t have before.
That’s the basic idea. I started with no money, just a promise. Then I borrowed something, sold it, then waited until the value was lower, and paid back my loan.
Note that if the value of gum went up and up and up and up, eventually I would end up losing money (because ongoing small fee to delay the payment). Eventually I would need to buy back the gum at let’s say $200, plus the fees I had already paid. So that’s where the risk comes.
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