
Call options used to bet that Bitcoin will go over $50K next year - nvk
https://www.wsj.com/articles/a-million-dollar-bet-that-bitcoin-will-hit-50-000-1513809578
======
d--b
People writing those article should know better, it's the wall street journal
for god's sake. Buying a call option doesn't mean you're bullish that the
future is going to trade up to that point. It could be a hedge for a short
position or a way to go gamma-long or a way to make a structure cost-less, or
really some other trading idea.

The point is that if the price goes up, the call option price goes up faster,
and then the trader can sell it before it reaches 50k. Liquidity though may be
an issue.

EDIT: what matters is that it is _possible_ that bitcoin goes to 50k next
year. And since it is possible, people need to take that possibility into
account in their strategies. It's like S&P option strike range for dec18, it
goes from 1700 to 3100. Is it likely that SP price goes down to 1700 in the
next year? no, but it's certainly possible.

~~~
hxta98596
A call option also means someones else took the other side of this trade. Who
sold $1 million dollars worth of December 2018 Bitcoin $50K call options?

Also there's a back of the envelope implied volatility for Bitcoin here: on a
$3k call option premium 12 months out (so breakeven on this "bet" is actually
$53,000) Bitcoin implied volatility of around 120%? Not that equity option
pricing model theories apply to Bitcoin, or even work as expected on equities
for that matter, but it's interesting to see an implied volatility number
regardless. Looks like Delta less than 10. With Futures already 3 months out
at $17,000 it would seem like whoever sold this call option for $1 million
could hedge (not perfectly hedge) the trade for less than $1 million. Oddly
enough, both the buyer and the seller could end up profiting on this option
trade.

I agree this article is very bad, it feels like a paid PR article advertising
for the trading company not actual news.

~~~
totalZero
Someone who's already long a ton of bitcoin could write those calls without
adding any risk, collecting a little bit of yield and sacrificing only the
extremely-far-out-of-the-money potential upside of $50k+ on his long bitcoin.

The implied volatility at which this option traded is pretty irrelevant for
helping us understand the option market as a whole, since it's so far out of
the money. We don't have much information about what the upside skew would
look like. And due to vanna, that delta calculated off that implied volatility
is irrelevant too.

~~~
hxta98596
You're right. And I agree, the missing info about the contracts and the
overall derivatives market here plus the expiration and strike being so far
away makes calculating IV or delta or vega or convexity or well calculating
anything pretty irrelevant and has little to zero practical use.

Plus we are talking about Bitcoin! so none of this is relevant. The old option
theory bullshit has even less rigor beyond fun mental exercise. I still think
it's interesting and gota start somewhere, and we'll see how things develop in
this market. I did try to qualify in my comment writing something how
calculation not really applicable to Bitcoin and doesn't even work on equities
properly. But again you're right and I should have worded my comment
differently, probably a bad lazy old habit to even use weird finance terms on
non-finance forum like HackNews, so maybe could have said something like 'wow
interesting to see someone paid 20% of the current price for an option with a
strike that has bitcoin gaining +200% in the next 12 months'?

I would guess this is some sort of covered call as you suggest. It's only 275
bitcoins and a 20% premium on the spot price seems like a decent yield for so
far out the money. I'm not a bitcoin trader but it's my understanding from
what I've read there was no short side price discovery until very recently
when derivatives started trading so volatility has no historical nor frame of
reference. Bitcoin options could be super inexpensive deal right now or way
overpriced there's no basis to say either way but there does seem to be enough
inefficiency across various markets for arbitrage if someone wants to make the
effort.

~~~
FabHK
> The old option theory bullshit has even less rigor beyond fun mental
> exercise.

Well, it actually tells you how to hedge and thus replicate the option. That's
quite valuable in practice (even if it needs modification from pure theory),
despite Taleb's rants.

~~~
totalZero
The problem is that the volatility of BTC should be priced off tail risk more
than gaussian drift, and that's not a rigorous part of the theory. Black-
Scholes certainly doesn't characterize the tails very well.

~~~
hxta98596
Nice comment, you seem like you know your stuff. My opinion is without
fundamentals or historical or correlated assets here you can't price tail risk
beyond throwing a dart. Look at the Futures margin reqs, it's like 40%. A
ridiculously high number and that's probably still a compromise because they
halt trading for the day around 20%, otherwise I imagine there would be almost
no margin given. Price of tail risk is not being priced.

------
geezerjay
A single call creates yet another far-fetched mass media piece to convince
unsuspecting fools to spend their money pumping up the bubble. And so the
pumping continues. The more far-fetched the story, the closer the burst is.

~~~
zeep
$50k is not really that far fetched... Bitcoin tripled in value so many times
already, what's one more time?

~~~
geezerjay
> $50k is not really that far fetched...

No, it actually is a ludicrous bet. No rational investor would ever make this
investment. The absolute max value stands at less than a third of that. This
sort of call only makes sense if it's designed to manipulate fools into a buy
spree to supply liquidity to mask a massive cashout.

> Bitcoin tripled in value

Ah yes, and lightning will certainly hit the same person again and again.

Do you happen to have any money on bitcoin by any chance?

~~~
dustyleary
The great thing about having a real futures market available is that when
you’re 100% certain that you’re correct, as you seem to be, you can put your
money where your mouth is and reap a big reward.

How many of these call options have you sold? And if the number is zero, then
what are you waiting for? Why not take advantage of how much smarter you are
than all of these sheep and make some easy money?

~~~
ckastner
_The market can remain irrational longer than you can remain solvent._

(attributed to John M. Keynes)

~~~
dustyleary
Yes, but he said “ludicrous bet” that no rational investor would make.

As a rational investor/gambler, when I hear that someone is willing to make a
“ludicrous bet”, I’m happy to book their action.

------
tobiaswk
Bitcoin is currently not what Bitcoin was when it was created.

Slow peer-to-peer transactions High processing fees

Average fees are approaching 40 dollars. That's an average. Unconfirmed
transactions are at an ATH of 260k... has been at over 100k for weeks. The
mempool is also at an ATH. The Bitcoin is crippled and nothing more than a
"store of value". Sentences like "store of value" are now the term used to
describe Bitcoin. Very far from what the Bitcoin used to be.

I think there is a real possibility of a "death spiral of the blockchain".
Fees will increase and it will become impossible to move coins on the
blockchain besides the upper 10% of bitcoin holders.

The fork that occurred on 1st August created Bitcoin Cash. This fork is much
closer to what the Bitcoin was. Bitcoin Cash is this today. Removal of the
segwit code (which hasn't solved anything), disabling of RBF (replace-by-fees)
enabling 0-confirmation transactions again. A new DAA (difficulty adjustment
algorithm). Finally increase the block size to 8MiB.

The Bitcoin has been crippled on purpose by Blockstream deep in the pockets of
bankers and insurance companies. Blockstream is the main contributor to the
Bitcoin development. Look at the sponsors;
[https://www.blockstream.com/about/#investors](https://www.blockstream.com/about/#investors)

Before the bankers, and their followers, got indirectly involved in Bitcoin
development there never was any discussion about limiting the block size to
1MiB; in fact the opposite was discussed. See;
[https://twitter.com/adam3us/status/636410827969421312?lang=e...](https://twitter.com/adam3us/status/636410827969421312?lang=en)
[https://bitcointalk.org/index.php?topic=1314.msg15143#msg151...](https://bitcointalk.org/index.php?topic=1314.msg15143#msg15143)
[https://np.reddit.com/r/btc/comments/71h884/pieter_wuille_im...](https://np.reddit.com/r/btc/comments/71h884/pieter_wuille_im_in_favor_of_increasing_the_block/)

Now all of this has led to a complete divide and clusterfuck of the community.
It is an very ugly and toxic environment and is sad to look at. On top of that
we now have thousands of alternative coins and blockchains.

Just my 2 cents ;) Happy Christmas and new year to all!

~~~
liamzebedee
> Unconfirmed transactions are at an ATH of 260k... has been at over 100k for
> weeks.

Statistics like these should be more prominent in the argumentation.
Regardless of any technical discussion of the merits of SegWit vs. big blocks,
there isn't any doubt in the usability of the system as is compared to as
before.

------
Nursie
Honestly at this point nobody can really make predictions for the short or
medium term. There's not much in the way of underlying use of BTC as anything
but a gamble here, and the tech enthusiasts/crypto-libertarians have been
massively outnumbered by the bandwagoneers and FOMO.

The Bitcoin bubble could explode tomorrow or next year or just possibly it
could find a way to become self sustaining (seems unlikely). It could repeat
the crash-peak-crash pattern. It could do anything and analysis seems
essentially pointless.

------
thisisit
This looks like an uninformed ad for LedgerX.

For god's sake, no one in their right mind trades naked options - neither the
seller nor the buyer. Given the historical volaitity of bitcoin rising from
1000 to 16000, it shouldn't be surprising at all that someone wants to _hedge_
(a concept which seems alien to the writers) their positions.

The missing information is - what premium did it cost to secure the trade?
Well, as per the data ~ $3600, which at current price is nearly 20% of the
current price. Very costly premium for a very volatile product.

~~~
plc
uh -- who does naked options at ledgerx?

and yes, the data says 3600 for the call, which is the definition of a
premium. nothing missing, guys. seriously. do more thinking before you post.

seriously no joke, I am the CEO there, former trader at Goldman so I sort of
know what I am talking about with this type of stuff. You guys do not. It's
hilarious to watch this conversation.

~~~
sctb
It's not in your interest to be dismissive and insulting with others here, and
it breaks the guidelines by being uncivil and unsubstantive. Could you please
stop?

[https://news.ycombinator.com/newsguidelines.html](https://news.ycombinator.com/newsguidelines.html)

~~~
plc
in general, you are telling me to stop but I am telling you guys to stop. you
do so much damage to companies with completely uninformed comments than you
can possibly realize. if you don't know what you're talking about, don't talk.
and yes, there are "facts" that companies cannot discuss in an open format.
that's the nature of a regulated business. we do not do cat photo sharing. we
hold money and assets for people. think on that.

~~~
thisisit
Two things - One, it's not the comments on hn which is hurting you rather an
adverse reaction to a story which is obviously raising a false flag in many
people's mind. So, if this is story was a PR move, it was a bad one.

Second, you can't have it both ways. Get mad at people for saying wrong thing,
as per you and then refuse to share information citing regulation. While
people might forget the story they will remember the CEO who wanted to
convince people but citing no evidence.

Lastly, you keep replying in a hostile manner to everyone. It is not helping
your case.

~~~
plc
it's absolutely my bad -- when you have been doing this for 4 years, and a
team works incredibly hard to do a trade that makes a lot of sense, seeing
comments like i've seen here on this thread just straight up hurts. and again,
i simply cannot share certain pieces of information. i would literally go to
jail, so it's frustrating to see the stuff that is posted about us (and I'm a
YC alum on top of that)

------
jjoe
I'm curious about how people's arguing about Bitcoin's prospects correlates
with their cryptocurrency holdings.

~~~
Nursie
I'm highly sceptical about the entire cryptocurrency space, due to the weirdly
gold-standard like underpinnings of most of the currencies. I don't like the
idea of deflationary currency. I don't like the idea of decentralised
currency; I think central banks play a useful role, even if they don't always
do it well. I don't think BTC is a good payment mechanism because it requires
exchange at each end, long confirmation times and burning a ton of energy. I
don't consider putting money into cryptocurrency 'investment' because it's not
like putting money into a company or venture - you're just buying a virtual
asset to sit on it. I think a lot of the programmable stuff around ethereum is
an overhyped solution looking for a problem, most/all ICOs are scams and a
whole host of other negative things about the entire sector.

That all said, I got curious and started mining with my gaming machines, and
apparently I now have around $1K in various cryptocurrencies (half an ether,
half a ZEC, some SIA, some ETN, a tiny piece of a monero, a few other little
bits and pieces). The only money I've put in is through the electricity bill.
I may find a way to cash out eventually, but at the moment I'm just going to
hang on to it all and see where it is a year down the line. I don't believe in
any of it - but I know other people do so there might be an opportunity to
make some money.

~~~
ansible
I've had a lot of those same objections since I first heard about Bitcoin.

Ironically, I've been looking to buy some Bitcoin in the last couple months to
trade for Sia, because I was thinking about setting up a storage node that can
earn enough to pay for my own cloud backup needs.

~~~
Nursie
I mined sia and eth together because there was a dual mining program. The idea
behind it is kinda nice, I'm not sure I actually need the service right now...
but I'll hang on to the 1k SIA I mined in case that changes.

I'm not expecting a speculative leap in value as amounts of siacoin mined are
huge compared to the likes of ether or btc...

Do you need Sia to start hosting? I think you can just go for it.

~~~
ansible
_Do you need Sia to start hosting? I think you can just go for it._

Yes, you need to put up collateral to start accepting storage contracts.

[https://support.sia.tech/knowledge_base/topics/how-do-i-
star...](https://support.sia.tech/knowledge_base/topics/how-do-i-start-
hosting)

~~~
Nursie
Oh interesting, thanks for that. It puts up a bit of a barrier to entry...
ooh, and suddenly things look a little bit complicated, as you have to manage
your collateral levels optimally to get a good score and be an attractive
storage option.

------
Nokinside
Is it possible to rationally manipulate and speculate using bitcoin or do you
have to be a believer?

Two year Bitcoin volume when measured in BTC seems relatively stable while the
price goes up and up and new speculators come in. As long as the price goes up
the same pace as demand, there is no upper limit to the price level that
steady supply of bitcoin can support.

At the same time the market gets thinner and thinner relative to the bitcoin
wealth. At some point the social mania around bitcoin peaks and speculators
want to liquidate more than there is buyers.

------
Kiro
Is this really a risky bet? I wouldn't be surprised if we hit $50k within a
few months.

~~~
knocte
If I understood correctly the article, the bet expires this month so if by Jan
1st price hasn't hit the mark, he loses?

~~~
Kiro
No, it expires December 2018.

------
laurencei
So if you "thought" that Bitcoin will go over $50k - why not buy the Bitcoin
itself now at $20k (or whatever it is today)? i.e. what is gained with the
call option here?

~~~
dagw
Let's say you have $20k to invest and you're convinced Bitcoin will be $60k in
one year. If you buy bitcoin for $20k and sell in a year for $60k, you've made
$40k profit.

If on the other hand you buy 10 $50k call options at $2k each then if Bitcoin
hits $60k you'll get ($60k-$50k)*10 or $80k profit ($100k - $20k initial
investment). Basically you're doubled your profits without increasing your
investment.

On the flip side if Bitcoin 'only' hits $40k, you'll have lost $20k if you
bought the call (since calls are worthless if the asset doesn't reach the
target price), but made $20k if you'd bought the bitcoin.

Basically calls allow you to take bigger bets with less money up front.

~~~
lucozade
To close out the comment DAG, this is the ELI5 for cardmagic's answer
"leverage".

~~~
FabHK
Well, futures (or forwards) give you leverage.

Options give you convexity (optionality, as it were), additionally.

------
mikehines
Bitcoin is the new diamond, perhaps even more unethical and irrational.

~~~
headmelted
Fair.

People forget about the drugs, guns and human-trafficking that built Bitcoin.

It may have started as a response to the corruption in the banking system, but
that's not how it got to where it is now.

~~~
kbody
People will see what they want to see. Like one could see Internet as pretty
much the sole thing that enables child pornography and causes immeasurable
damage.

Also, pretty sure Cash and Banking trumps Bitcoin in all of the following:
terrorism, human-trafficking, drugs. Shell companies and weird schemes having
been used and are used for a long time.

Final note, I argue that a lot of Venezuelans and Zimbabweans are thankful
Bitcoin exists and they are not destroyed by the irresponsibility of
governments.

~~~
Retric
With 20+$ transaction fees nobody is using Bitcoin for day to day expenses.

On net people are also caught through the Banking system, so you need to look
at the ratio of net good : net bad. In that context it's hard to see any real
value in Bitcoin as it exists today.

~~~
maehwasu
Shockingly, it turns out that there are people in Venezuela and Zimbabwe who
have demand for unconfiscatable/uninflatable stores of money beyond daily
transactions.

~~~
Retric
It costs more than 40$ to store then retrieve value. That's unfavorable for
the vast majority of people in those countries and not cost effective for
those with means.

------
koliber
Somebody bought these options. That person is betting that Bitcoin will go
over $50k next year.

Somebody also sold these options. That person is betting that Bitcoin will NOT
go over $50k next year.

------
DavideNL
a bet... placed by a Bitcoin millionaire, to make the crypto-currency frenzies
buy some more Bitcoin?

------
candiodari
Okay ... options discussed on a tech forum. The next crash can't be far away
...

------
rbx
Can bitcoin be "damaged" by quantum computers?

~~~
tromp
Yes, a quantum computer with a few hundred error-corrected qubits (many more
before error correction) would clean out all addresses with exposed public
keys, by solving Elliptic Curve Discrete Log to recover the private key.

This includes many old addresses that didn't hash the public key, any re-used
addresses, and, using replace by fee, even all new addresses in the time frame
between broadcasting a spend transaction and that transaction being included
in a block (which can currently take many hours).

~~~
bascule
It's actually closer to 2330 qubits and 126 billion Toffoli gates:
[https://eprint.iacr.org/2017/598](https://eprint.iacr.org/2017/598)

------
runeks
Paywalled. How do I read the whole story?

~~~
camus2
Here is an archive of the article:

[http://archive.is/BE0Zm](http://archive.is/BE0Zm)

------
WheelsAtLarge
That's more like a billion-dollar bet. Ask the Winklevoss twins.

