How to bet against the bitcoin megabubble
finance.fortune.cnn.com
finance.fortune.cnn.com
Consider many of the antecedent events which might cause bitcoin to implode. How many of them leave unregulated derivatives exchanges up and capable of receiving your "Assign 10,000 BTC puts at $100 to those people who are short them" notice then rounding up a million dollars of actual money to send to you?
I've unfortunately wasted non-trivial time thinking about this, since if it were as reliable as shorting Zynga, I'd be as long puts as my risk tolerance can take.
My apologies if you meant your statement as sarcasm.
Unfortunately any position you buy is going to have counterparty risk, that's why I suggested selling. Well, it's not a real suggestion, just a thought.
Disclaimer: I am long and think that the asymmetrical nature of the possible payout makes bitcoin interesting as a "bet". I believe it is valuable because the use-cases it can deliver on make it a unique animal, so I would relate the it to the concept of going long on cars vs. horses.
I ask because it would not surprise me if 90% of all transactions go to people buying/selling against other currencies, which just makes it a zero-sum speculative tool, and with immature market dynamics at that. Zero-sum because it does not pin itself to anything of external value - ie, consumers thinking the economy is going to do well, so they take a significant loan out (increasing demand for USD) to buy a house. Without a fundamental externality like that, I think bitcoin will always just be a novel gambling mechanism, and if we cannot figure out how to make it a legit market then a bad one at that.
Anyone who holds bitcoins (you, merchant, or bitpay) is a speculative investor. Everyone has different time preference. Someone holds for short time, someone for long. But what ultimately gives Bitcoin any value is all hands willing to hold it right now, this very moment. Only "speculative investment" creates value which you can then transfer in a "real transaction". If you don't want to hold you BTC, you need a merchant, or someone else willing to hold it (yes, speculatively), so you can transfer it. Transfer only happens as a result of speculative desire to hold asset.
Same with dollars. You don't buy cars and houses, but keep some cash balance in a speculation that it'd be more useful this way some day in the future. It's called "reservation demand", and only it gives money value. Otherwise money is worthless pieces of paper (or bits).
Here's the logical flaw. I don't blame you, modern economics are witchcraft and many people are being lied to all the time.
Price of Bitcoin, or Dollar, or Euro does not and never will depend on some transactions out there. Easy proof: I can shuffle coins with 5 of my friends with an incredible speed and it won't matter for you or anyone else. Why? Because transactions are effect, not cause of the value.
Why transaction happens in the first place? Why do you give $2K for a macbook and owner of a macbook gives you a macbook in return? Money by itself is pretty worthless. "You must pay taxes with it" is not a reason. You are taxed with money only because it already has value established via other means.
So here we go: money gives you freedom to buy stuff any time you want. Just by sitting in your account for a day, or a year, or 10 years, it always provides you with ability to buy things any moment. And it's equally true for everyone else in the economy: you have this freedom to buy stuff only because other people believe in the same freedom to buy stuff. That's why they accept money from you in exchange for their product. Everyone wants to have some cash to use it when they like. That's the only value and function of cash. The more hands want to believe in this money and hold it, the bigger liquidity of it. If the supply is fixed, it means the price must grow as number of holders grows.
Whether you actually make these transactions is irrelevant. Of course, if no one is making transactions, then there's probably little value in money, but that's not because of transactions. If no one is making transactions it's either money is hugely valuable like a long-term "store of wealth" (e.g. gold), or because it's shitty money that no one wants (e.g. soviet ruble in 2013). And on contrary, if everyone is making transactions, it's either because money is useful and liquid (e.g. dollar bills or bitcoin), or it's depreciating very quickly (e.g. argentinian peso). In all of these cases transactions are effect of value, not the cause.
Strictly speaking, every holder of money is a speculator. Whether he sold his product, other money, or his kidney is irrelevant. If he is willing to hold this money versus some other money or other forms of property, that's his speculation. That means this money is more useful for him than else at this moment.
Maybe this quote from Murray Rothbard will be helpful (his books are really-really eye-opening, highly recommend): http://blog.oleganza.com/post/43378777734/on-circulation-of-...
I think besides much bigger volume and liquidity (still the main reasons for stability), this is probably one of the reasons why other currencies are so stable, because there's a lot of back and forth between traders - rather than everyone buying and buying and buying, until it comes crashing down hard.
Even on the frontpage of http://bitcoin.org/en/ it's defined as an "innovative payment network and a new kind of money" and the word currency doesn't appear anywhere.
Do you also consider a cellphone to be a "phone" in the traditional sense. Could phones browse the web, edit documents, take photos, check email, etc. 20 years ago?
'money' is the more complicated concept. If bitcoin is 'money', then whether it's 'currency' or not mostly just depends, I think, on whether you want the definition of currency to include digital certificates or only physical objects. Not a very interesting question, just a matter of definitions. Now, what 'money' is, that's an interesting question.
Uh-oh don't get us started on that one, that's a can of worms!
Used to be, way back in the past, "money" was "coin or bullion in your bank's vaults" and banks' receipts for "money" starting circulating -- hence, we have the separate word currency.
Nowadays, I suppose the distinction is largely lost, other than "currency" now implicating different jurisdictions -- EUR and USD are considered different "currencies" but both are considered "money" by and large.
Money is spent or lent or hoarded, currency circulates. One necessitates the other.
Whether "hard" or "soft", in all history and today both are certainly always "credit" -- a (rightly or wrongly) trusted claim to some future consumption of some future production. Whether the "money" is paper or metal or digital. If we swap a banana for an apple, a trade is completed and settled, no money was needed. But since most of apple sellers are not also banana buyers "right here and now", this purely mental value-association, regardless the medium it's recorded on, is needed and used and traded in-place with ease and the world mostly works! Money hence is always a debt for future trade settlement -- completion of exchange.. (Whether banks should create new money for all their lending is another question, whether all savings of people should be in ambiguous claims on future production is another question. Doesn't change this most fundamental nature of "money".)
Bitcoin is a very young currency / commodity and needs to find some form of equilibrium first. This will be reached once all people who potentially want to use Bitcoin do. Until then, each influx of new users will require a price correction as the supply is fixed.
So the situation is exactly reversed wrt Bitcoin.
Two nitpicks:
1. Money is created by normal and central banks, which are somewhat different types of organizations. Central banks can directly "print" money while banks can buy IOU's for future money (loans).
2. Now the difference that is created with the loans is indeed payed back and increases the money supply. It's not destroyed.
Here is a chart of money supply of USD [1]. As you can see, the amount of money in existence is increasing continuously. It's one of the core elements that influence inflation.
[1]: http://en.wikipedia.org/wiki/Money_supply#United_States
MZM from St. Louis FRED: research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=MZMNS&log_scales=Left
When a loan is written off, the loan is destroyed without money being destroyed at the same time. That is, writing off a loan leads to what is effectively (in hindsight) net money creation.
That actually makes a lot of sense when you think about it: Writing off a loan means that the bank gives out money without the money being paid back. Of course there's going to be a net plus of money in circulation afterwards, because the "paying back" part is missing.
When a bank creates a loan, it adds an asset and a liability to its balance sheet. The asset is the loan (that is, the bank's customer's promise to pay back the loan), while the liability is newly created money in the customer's bank account.
The money supply is defined as the sum of all money in existence, and this includes money in bank accounts. That is, when a loan is made, the money supply grows.
When the loan is paid back, the reverse happens and the money supply shrinks again.
And yes, the amount of money in existence is increasing continuously, but so is the amount of outstanding bank loans. In other words, the evidence you present is perfectly compatible with what I'm saying.
Until they aren't
1. Bitcoins already underwent several corrections (last one only a few days ago). These small "crashes" later resulted in longer, more stable phases. These substantial downturns flush out most bubble activity. (Bubbles usually go up until they burst. Bitcoin is generally all over the place. Very un-bubble like. When a bubble crashes, it's pretty much done for. When Bitcoin crashes, it's two weeks of wild swings and then soften on a new baseline.)
2. Bitcoin is an erratically growing commodity / currency. If Bitcoin succeeds long-term, then it's hopelessly undervalued currently (just because of the limited supply). If not, it's not worth anything. Basically it has a high risk associated with it and no safety net or more traditional baseline measure you could work with. This inevitably results in erratic price swings no matter what you do. For instance, the current price is mostly due to China getting into the game. There are still many other countries that are not even on the playing field. No financial instrument could prepare you if the demand rises because another big interest wave comes (like India) and the price needs to find a new equilibrium a magnitude higher.
Considering that Bitcoin got a value increase of 24543% in the past 2 Years, it's course corrections are outright tame.
I don't remember the dot com crash being quite as dramatic as that - the NASDAQ peaked in March 2000 dropped down in May and regained about 50% of the losses by July before dropping and climbing to the July level again in October before really dropping.
Edit: Graphs of Bitcoin/USD remind me of the description of start-up business plans from Cryptonomicon "conveniently summarized by graphs that all seem to be exponential curves screaming heavenward". :-)
Slower rises, and no (big) crashes.
So yes, in general, an increase in the ability to short a commodity will, ceteris paribus, result in an reduction in its propensity to form bubbles. On the other hand, bitcoins are a bit weird. The obvious uses for bitcoins are basically illegal drugs and evading currency controls, both of which open bitcoin up to significant legal and regulatory risks.
Well, yes. But in general, we as a society like banks. They're big, reputable entities. They're easy to sue if things go wrong, deposits are insured if they go missing, and they're subject to extensive regulation. I'm old enough to remember when ordering stuff online seeemd weird and strange; these days it's routine. And in large part that's because of standards like PCI.
> Setting up a website that accepts payments just became vastly easier without the need for PCI compliance
I know. But PCI isn't a wandering monster that ambushes parties of brave coders; it emerged to solve a very real problem, and it does a pretty good job of it. As a consumer, "look, no PCI compliance" isn't a feature, it's a nightmare. I only want to pay for something with Bitcoins if the process is easier, cheaper, and/or safer than doing so with my credit card. And right now, that's not the case; it's not enem close to the case. Paying for things with my credit card is very easy, quite cheap, and very safe. Today, in the real world, Bitcoin is none of these.
In short, you've identified what Bitcoin is good at, but what we need to do is identify what Bitcoin is better than existing payment systems at. And I don't think "startups too small or lazy to sign up for a Stripe or Paypal account" is an actual niche. Accepting Bitcoins isn't that easy.
TL;DR: You say the obvious use isn't evading currency controls, it's peer to peer exchanges of currency without banks. But evading currency controls is one of the only reasons why you'd want peer to peer exchanges of currency without banks. ;)
I'm old enough to have grown up pre-internet, so let's not play the age game, I'm no kid.
People tolerate banks, they don't generally like them, they don't like being fee'd to death, they don't generally have enough money to give two shits about FDIC insurance, and pretty much consider bankers the scum of the earth; car salesman are more popular.
Crypto currencies are better payment systems technically, they're distributed peer to peer banking for cheaper, but they aren't deployed enough to matter yet; that will change.
And 796.com offers a kind of bitcoin price futures that you can use to bet on falling prices - not outright shorting, but close enough.
I would love if one of the major european bookies (e.g. Betfair, Bet365, William Hill, Paddypower) would let you place bets on the price at a given time in the future, in your local currency like euros. Bet365 already let you do this in major currency pairs, as do other bookies:
I'd have thought the specialist financial spread betting firms would in theory be best-placed to be a trustworthy shorting option for Bitcoin bears.
It's a sign of immaturity of the bitcoin economy that there's no trustworthy effective bitcoin shorting options- even if you don't wish to speculate, but because you wish to hedge your exposure to bitcoin volatility (say you're a large ecommerce player, with significant bitcoin holdings- you're effectively long bitcoin - and you don't want those holdings to halve in value overnight).
[1] http://www.investopedia.com/terms/c/counterpartyrisk.asp
[2] http://www.amazon.com/The-Big-Short-Doomsday-Machine/dp/0393...
This leads to a curious selection bias where only the craziest are present in the market (the rabid masses I like to call them) and they bid up everything to insane levels, while the sane just sit it out. This leads to bubbles of much greater variance than if those who currently wait out bubbles could reasonably bet against global stupidity.
Instead, I'm sitting on tons of cash while equity is overvalued throughout the world, and blowhards are plowing their life savings into computational fiat (think about it).
We do live in quite the world, don't we?
To societal collapse and global failure.
I forget who said it, but it's a very accurate quote.
They introduce a total loss potential, but you also can't lose more money than you 'invest' into the put contract. They also obviously introduce a timing element, that is arguably the most difficult variable for amateurs - it not being enough to just be right that X will fall, but that it has to fall by enough by X date as well.
Yes it would be easier.
Also, it'd be much easier to grab a BTC ETF on e*trade than to deal with the BTC exchanges.
An excellent chapter about market making in here,however you would have to adjust it quite a bit for bitcoin.
I saw no reason to keep reading after "You bet. But it's an expensive trade. And even if you're right, you won't walk away with much, if anything."
I wish more articles would be more upfront so I wouldn't have to waste time reading them.
In betting against a bubble, you're not placing a bet that the underlying assets are over-valued. You're placing a bet that something will pop the bubble in the timeframe you can afford. Essentially, you're not betting against the bubble, you're betting on the pin.
With naked shorting, you're betting on it not getting above a certain level (the level at which you face margin calls you can't meet). It could go up 10x tomorrow and kill you.