It seems pretty obvious to me that talking about Bitcoin as the “biggest short of all times” is only going to end up as one way – the biggest short squeeze ever known in the history of mankind before finally busting down on a slow journey to nearly zero.
I think the last time this happened was when the Hunt brothers were partially successful in cornering the silver futures market, before they lost control and it all collapsed underneath.
Another great example was when Porsche nailed short sellers of Volkswagen stock in 2008 by accumulating a hidden option to acquire 75% of the company, with the German state owning 20% – leaving precious little for short sellers to cover with.
The real issue here is marginability of Bitcoin futures – it doesn’t even matter if margin rates are 35% or 100%, if Bitcoins trade from $10k to $100k in a three-day period, we will start to see FXCM-type action in the brokerage sector and derivative clearing, just as the chairman of Interactive Brokers promised.
Once the short interest in bitcoin futures starts to rise, it is like adding gasoline to a six tonne pile of gunpowder and expecting everything to be all right while lighting up a cigarette next to it. Good luck.
This is starting to make gold look increasingly like a good bet.
Just for full disclosure, I’ve known about Bitcoin since it was under a dollar a coin, and clearly I was taken aback at how it has morphed into present day. I’ve been outright incorrect regarding pricing predictions.
Further disclosure: Have not owned, nor do I intend to take any positions on bitcoins, which is the closest thing one can get to legalized gambling.
I have a lot of respect of your financial analysis – my only comment would be to keep an open mind. We had been on the opposite side on this trade. I think we will soon hit the moment of truth – and I’ll be frank, I’m not sure if bitcoin will proven all naysayers wrong again or will meet its ultimate demise; I’ll be taking significant amount of money off the table to hedge myself.
My bitcoin story when the first halving of block reward is imminent and all old timers’ getting out. As a IT guy – I immediate catches on to the technology and who can resists the allure of running a bunch of computers printing money? I used my existing computer parts and build a bunch of miners. Get equipment at fire-sale prices on Kijiji and eBay; mined a number of bitcoins. At the time, this Chinese guy by handle of Friedcat design the ASIC chips to mind bitcoin, he’s raising money online to produce the chips using 130 nm process (very old technology) in China. I made a leap of faith, bought a few coins using $ enough to go a couple of cruises, plus the the coins I mined. It turned out to be a huge success story and I got out near the top. Back then, making $ in bitcoin is easy and involves ‘limited’ risk – there were casinos where you’re betting against other players on outcome of events (election / sports, etc.) where you can still place wagers after outcome is known (the house doesn’t care as you’re betting against others and they take a cut); you can lend money to other people to long bitcoin or lend bitcoin to others to short and interest rate is utter USURY – talking about 1000+%. There’s also the cross exchange arbitrage trade with China (I’m glad to have mainland connections). I made what most would consider a ‘sensible’ decision, sold my bitcoins to make a down payment in 2013 and it turned out to be the biggest mistake in my life. The opportunity to make huge money is there even if you think bitcoin is fad.
Anyway, it is a ride of a lifetime regardless how it will turn out.
Uh, even if Bitcoin failed, an alt currency will displace it.
It’s like technology. One version will eventually supersede the former because everyone prefers the latter version due to ease-of-use, inter-convertibility, ubiquity or some other desirable property.
Bitcoin itself is unlikely to fail unless all exchanges were seized by governments, even then, cryptocurrencies would just go underground.
Whether banks choosing to add another zero digit to accounts through loaning or ‘money printing’ and making money worthless, or bitcoin being adopted and invested into use by more and more people and thus gains value as a ‘fiat’ currency; neither are wrong. It cannot drop to $0 because it transcends all government backing. If your economy is garbage, then no one will want your currency and you will have to trade more of your currency for a foreign currency, causing a huge deficit.
On the other hand, the volatility of bitcoin will only decrease as the number of users increases in proportion to the total quantity of humans on the web. The adoption phase is always an exponential one; look what people said about Amazon or Google or Netflix. The fact is, it can keep its transient value as long as it has liquidity. And since it has liquidity and there is no effective force of ‘exchanges’ or ‘wallets’ being shut down, then it will continue to have value until humans stop using the underlying technology that supplants it; i.e. computers, micro-processors, networks.
I think cryptocurrencies have value as a transactional currency. Microtransactions have value. Cross border decentralized banking has value. But none of these things require the currency to be a *store of value*. What makes the Bitcoin story so bizarre is how it has utterly failed as a transactional microcurrency and instead has morphed into a gold-substitute store of value in which 98% of all of the buys and sells appear to be speculators whose only goal is to see Bitcoin rise in value. It is very sad to see how greed completely distorted the original ambitions of this virtual currency, and now it is taking on dimensions of a financial mania rivaling the tulip bulb frenzy.
This is indeed alarming. What happens if the clearing organization fails? Are there procedures for bailing these out? How much cushion is there?
People losing faith in the security clearing system would be disastrous. At least it would only be the commodity clearing system that fails. Thank goodness commodity and equity clearing are separate and separately regulated. I’m not touching any commodity products if they are going to clear on the same system as bitcoin futures.
@Will: I’m not against you on the trade, and some evidence to show the open mind is that I haven’t shorted bitcoin. I simply haven’t taken any positions on bitcoin to date. The days where you could slap a bunch of i7’s and Nvidia cards together and be able to get those 50 bitcoin blocks are long, long, long gone… I’d be happy you got anything tangible out of the venture!
@P One: Bitcoin transaction fees are not trivial, and likely to get higher over time. The blockchain size is also getting to a point where you’re going to run into the paradox of having less and less full nodes.
Just looking at the bitcoin market cap, I really think someone from nVidia or AMD should seriously look at bitcoin. With their design and production expertise, they should easily crush the ‘armatures’ like Bitmain and whatever out there right now. If they can control 25% of bitcoin network’s hashrate, that would be like $2+ billion / year in revenue from mining at current prices – which is big number in terms vs what they are currently making in terms of revenue. They can also sell equipment to make even more.
@Will: I think they have already have some sort of business dealing with selling chips to professional cryptocurrency hashers. I could be mistaken.
A nice complimentary business is to sell nuclear power generation for both the ASICs and the air conditioners that you need in order to cool them down…