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Bitcoin Breakdown: Bigtime Bubble-time

Courtesy of ZeroHedge. View original post here.

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?

Evan McDaniel, aka @sellputs, is a derivatives trader, algorithm wizard and advisor to hedge funds. You can reach him at evan@hedgeaccording.ly.


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