11 thoughts on “Always two sides to a trade”

  1. I am playing devil’s advocate because I don’t believe in either of these reasons:

    1) The more sophisticated traders – like hedge funds – see this as a trade where the interest overwhelms the supply. This is analogous to Internet stocks in the 1990s, where there was not enough stock to satisfy demand. Most of the “HODLers” of Bitcoin act like political activists who will not release their Bitcoins until it ascends to become a world currency. So hedge funds buy with the completely cynical understanding that the price must go up because of the demand exceeding the small available supply of coins for sale.

    2) The less sophisticated traders simply buy and sell on a technical basis and never had any understanding – or caring about – fundamental values.

  2. the future prices opened higher than spot price at the time (15460 open vs approx 14900) and caused about a minor run up.

  3. Despite limited volume, it looks like the spot market moves after futures after market. BFX BTC shot up immediately after the XBT/F8 opens at 15460. so I guess wall street is taking over and the techno-geek ceded control.

    Any future forks of BTC will now be a rather interesting events

  4. What is even more hysterical is that Bitcoin price has been moving *after* changes in mining difficulty. It appears that the BTC market is pricing BTC according to how much money is spent to mine new coins. That’s a totally specious way to derive a value for Bitcoin. And what happens when the mining rewards no longer support a high price? The whole network will unwind value as soon as mining rewards sufficiently diminish because then mining difficulty will need to adjust down.

  5. I nearly completed The Socionomic Theory of Finance by Robert Prechter. While I don’t agree with all tenets, it explains pretty clearly how markets function and bubbles form. It was an eye-opener for me.

    In economic markets (bread, tools) the price itself is important to both seller (producer) and buyer (consumer). Think of yourself in the supermarket. Think of a farmer who decides which crop to plant. In financial markets however, speculators are both buyer and seller of the same item and thus only focus on price changes. So to a speculator, it doesn’t really matter whether a bitcoin costs $ 18 or $ 18K if (s)he thinks there is “not enough supply” or “huge demand”. Prechter also posits that speculators lose money, exactly because they’re behaving like this.

    I would say this doesn’t hold true for value investors in financial markets, but I agree with Prechter that fundamental analysts also make projections/assumptions which are influenced by social optimism/pessimism. Prechter also rightly shows there are indeed some absurd swings in value metrics over time and it’s very hard to play mean reversion.

    Socionomics says that social mood determines social actions. Stock indices are the closest proxy for social mood, while the economy itself lags because economic decisions take more time. News is also not important, because events also happen due to social mood and therefore lag the stock market. This explains why markets drop before a recession hits and bear markets end when things still look gloomy. There are some great chapters in the book that show that even if you knew some events in advance, it would have been pretty tough to make money (more recently f.e. the Trump election comes to mind).

    To me, the book gives 1) a better incentive to disregard news of the day (certainly macro) and 2) some stoic confirmation that markets have always been and will always be like this, with crazy things happening all the time (and I don’t have to get cracked up about it). 3D printing, anyone?

  6. I’d just like to clarify here that I am not long or short on anything Bitcoin-related. I’m just observing this frenzy from a distance and just because other people are making huge amounts of money on this doesn’t mean that I have to do so (or lose it!) in the same manner! The fact that I’m mystified about all of this is a good sign I shouldn’t be trading the product.

    I’m thinking it will take a bit of time for open interest to accumulate before we’ll start to see this “mother of short squeezes” I’m speculating will happen.

    I think @Thijs is also on the right track. I’m reading the nobel laureate’s book (Thaler) right now as well about behavioural economics. Soros (reflexitivity) also seems relevant to this case. If you can make a case for $10k for BTC, you can also make the case for $100k and $1,000k – since there’s no natural “sink” for BTC (i.e. not like a gold producer wants to hedge by selling), the sky is the limit. Indeed, with the amount of BTC removing itself from the gene pool (e.g. people losing crypto credentials to their wallets), one can make the argument it makes the other existing BTC more valuable!

    I also wonder when Satoshi’s initial blocks will hit the market… if I designed this thing to be fiat currency vacuuming mechanism from the ground up, one has to be considering the liquidation option about now…

  7. Most of the long-term Bitcoiners seem to think that around $100K/Bitcoin is the right time to start selling off part of their holdings. As you say, since you cannot value Bitcoin, a per coin price of $1 is just as valid as $1M. It all looks like a fantastic mess.

    The current price escalation spiral appears to be tied at the hip to the increases in mining difficulty that spur the increased electrical expenditures. In a real-world commodity like gold, it is the price of the commodity that increases in value *first*, and *then* commodity producers are willing to invest more money in mining the commodity. That’s common sense. In the reality-distortion shield that is Bitcoin, it is the mining cost that rises first, and the “value” of Bitcoin then catches up to that production cost in hindsight. (You can’t make this stuff up; it’s hysterical to watch such nonsensical pricing behavior.)

    Since less than 1% of Bitcoin holders own 88% of the coins, we are creating the largest wealth gap in the history of mankind by blowing up this balloon.

  8. Reflexivity definitely applies. It feeds on itself, i.e. price increases provide more legitimacy (“if it’s worth hundreds of billion, so it must be real”), which draws more buyers, etc.

    What makes bitcoin the ultimate bubble is that there’s no valuation possible whatsoever. It’s not like the South Sea bubble or marihuana stocks, where you can observe which growth/profit assumptions the market prices in. It’s also different from other non-yielding assets in that there are no comparables to anchor it.

    P One – interesting point on mining. There is no reason the mining cost vs price correlation needs to continue. Gold mining also only adds 1 to 2% to existing above-ground reserves annually. This mining/new supply is basically irrelevant for pricing. And all the companies repurchasing stock (negative supply) have also not seen their share prices rise to infinity (yet).

    If the 1980 gold blowoff provides any guide, we might not see a fast collapse in bitcoin, but an excruciating long decline in real terms with people slowly losing interest. But with this unprecedented spectacular bubble, anything is possible (f.e. huge hack causing total confidence loss, concerns over incredibly wasteful electricity use and CO2-emissions prompting actions, etc). Think of it: Bulgary confisquated ~1% of all bitcoins from one organized crime gang last May. How much more crypto just facilitates crime? (Or: do criminals no longer need to steal now they encountered bitcoin, the eternal money tree? 🙂 )

  9. @Thijs in some respects the lack of any legitimate valuation technique makes Bitcoin incredibly more dangerous than most bubbles. That is because Bitcoin is becoming a religion to its long-term holders, and zealots can act against reason for a very long time.

    The pricing of Bitcoin now operates in an inverted fashion due to the mining difficulty continually rising. As long as Bitcoin mining continues to get more expensive, Bitcoin value will continue to follow it, and that non-sensical behavior could continue for decades, until the mining reward for mining new blocks no longer covers increases in difficulty level. It all looks really pathological, and all the more so because it looks sustainable for a long time.

  10. Not sure how updated are CBOE’s open interest data, in quotes from the website, Open Interest is 0 – which looks like a bunch of day traders

  11. @Will: Considering I’m seeing odd-numbered trade volumes it would infer that open interest must be at least 1. 🙂

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