First part of a series.
By @Sellputs, this post first appeard on the Hedge Accordingly.com
All the world is a stage—for
the Bitcoin Bubble.
Never mind that stocks have
soared up 30% in the full year since Donald Trump stunned even himself by
winning the presidential election—everybody would rather talk about bitcoin and
its brethren. The other day I got this
text from a friend:
“What’s up bud
long time , u know anything about litecoin”?
This, from my gardener.
JPMorgan Chase’s CEO, Jamie
Dimon, calls bitcoin a “fraud” used mostly by “murderers, drug dealers and
other miscreants,” as the FT put it. Fed Chairwoman Janet Yellen just called
out bitcoin as a “highly speculative asset” that “doesn’t constitute legal
tender,” nor is it “a stable store of value.”
After which the price of
bitcoin (BTC) rose another $3,000 or 18% in the next four days, to approach the
$20,000 mark. Nobody puts Bitcoin Baby
in the corner.
The boldest risk-loving
investors out there view bitcoin as a panacea for the digital millennium: a
soaring store of value propped up by insanely great encryption, untraceable
origins and the urgent need for a post-dollar currency that can survive global
catastrophe. Similar enthusiasm adorns
“altcoins” that came in bitcoin’s wake: Litecoin (LTC), Ethereum (ETH), Zcash
(ZEC), Dash (DASH), Ripple (XRP), Monero (XMR) and some 800 more rival forms of
digital currency.
A soaring store of value:
yes, indeed. If you were ballsy enough to buy a bit of bitcoin at the end of
2013, investing, say, $1,000, you got in at a low of $600 per coin; today that
$1,000 stake would be worth roughly $15,000. That is up 24-fold—2,400%!—in four
years.
And if you were ballsy enough to bet on bitcoin, it
may be time to get out now, because other people view the cryptocurrency as the
Next Great Meltdown, a malignant mash-up of P.T. Barnum (“There’s a sucker born
every minute”) and Charles Ponzi, the circa-1920 swindler who popularized the
kind of scheme that made Bernie Madoff famous.
The truth may lie somewhere
in-between—and, either way, it’s good to know a few things about bitcoin and
all that it entails. This is the first
part of a series on my Bitcoin Breakdown—read
it and reap! First, some breaking
thoughts:
·
Bitcoin just
got more real. The legitimate, old-guard world of Wall
Street and finance now figures this crypto-currency is worth betting on (that’s
high praise from these guys.) On the
Chicago Board Options Exchange, futures for betting on bitcoin price swings
began trading on December 10. A week later, TD Ameritrade began letting holders
of its 11 million accounts trade those futures, just as Cboe’s crosstown rival,
the Chicago Mercantile Exchange, launched its own bitcoin futures exchange
(although with no TD Ameritrade support, as yet).
·
Bitcoin
futures contracts, essentially, are
electronic bets on the future prices of bitcoin (just as other futures let you
bet on and hedge prices in pork bellies, soy beans, orange juice, ad
to-infinity-and-beyond). You buy or sell
a futures contract based on whether you think bitcoin prices are headed up or
down. Eventually, I expect the CME to create options on futures contracts: traders will be able to buy and sell
“puts and calls,” the right to buy (a “call” option) or sell (a “put” option) a
bitcoin futures contract at a
particular price by a particular date.
·
So when a
pro someday will trade options on bitcoin futures, he’s using a kind of triple-synthetic. Bitcoin
itself doesn’t exist the way, say, bacon from pork bellies exists, so that is
one synthetic layer; a Cboe option is a second synthetic layer; and on the CME traders
may one day bet on the future-price-of-bitcoin-futures, not just on the price
of bitcoin—a third synthetic layer. A triple-synthetic.
Bitcoin’s fans are anything but fazed by this.
·
Coming soon:
Bitcoin ETFs. ProShares and VanEck have filed applications for new
ETFs (Exchange Traded Funds) based on bitcoin futures. (Come to think of it, that’s a
triple-synthetic, too.) Look for SEC
approval by the end of the first quarter of next year, some reports say. New
ETFs would push bitcoin even more into the mainstream for mom-and-pop
investors. All of this increases already
manic investor demand for an “asset” that no one even can see.
·
A bitcoin
supply-squeeze could fuel more price gains. Supposedly, only 21 million bitcoins are
in existence (however invisible, digital and intangible that may be). It is said that a thousand early buyers of the
digital coin own fully 40% of the world’s supply. (And I bet ya dozens of these
bitcoin billionaires are drug smugglers, given that’s how bitcoin got its
start.)
·
Typically,
ETFs are required to own the underlying assets on which the ETFs are based—an ETF representing a
“basket” of energy stocks requires the ETF’s issuer to go out and buy those stocks and keep them on
hand. Given the short supply, if enough
bitcoin-based ETFs enter the market, each one required to hold a store of
bitcoins commensurate with its total value, the law of supply and demand
dictates what happens next: the price of bitcoin could rise higher still.
Though, I mean, who knows,
right? Bitcoins are, in truth, little
more than a contrivance, a non-existent thing derived from some horribly
complex, secret formula cum algorithm invented by some guy (or gal or people) whose
authenticity remains masked and uncertain.
What’s to stop him (or her or them) from tapping a few buttons on the
keyboard to make 21 million more bitcoins?
Suddenly, supply doubles, each coin is
worth only half what it was just days before. Or what’s to stop the same anonymous forces
from inventing a “New! Improved!” version of bitcoin that obviates the
original?
If you do get involved in the
bitcoin rush-to-riches, you would do well to discard any notion of yourself as
an investor; view yourself as an
ice-in-the-veins speculator, a gambler with gonads (or ovaries) the size of
boulders.
Next up: Should you buy into the bitcoin bubble?
Normal
0
false
false
false
EN-US
JA
X-NONE
Normal
0
false
false
false
EN-US
JA
X-NONE
Evan McDaniel, aka @sellputs, is a
derivatives trader, algorithm wizard and advisor to hedge funds. You can reach
him at [email protected].