
How to bet against the bitcoin megabubble - flavor8
http://finance.fortune.cnn.com/2013/12/05/betting-against-bitcoin-bubble/
======
patio11
Counterparty risk makes this an even worse option than buying bitcoin.

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.

~~~
dia80
There can be no options since volatility is impossibly high.. lets take an
example. You buy an $850 put with the spot price at $850 and it expiries in 6
months. 90 day realized volatility has been 130% annualized so the black-
scholes formula says i have to charge you $300 usd for that option. You make
money if BTC is $550 or below in 6 months. Your upside is $550 if it goes to 0
and down side is $300 usd. Still want to trade?

~~~
tedunangst
I suspect you could find people willing to sell that put for less than $300.
If there's no action at $300, somebody will step in at $200, or $100, or $10.
Remember that Bitcoin can only go up, so there's no risk. It's like free
money, you just have to be willing to accept a little less free money than the
rest of market to get yours.

~~~
mey
[https://en.wikipedia.org/wiki/Greater_fool_theory](https://en.wikipedia.org/wiki/Greater_fool_theory)

My apologies if you meant your statement as sarcasm.

~~~
mdpopescu
Ah... the "intrinsic value" theory. Hasn't this one died already?

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thatcherclay
Anyone know the ratio of speculative investing versus real goods/services
transactions on bitcoin?

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.

~~~
oleganza
Comparing investment with "real transactions" is like comparing kilograms with
decibels.

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).

~~~
thatcherclay
Yea, I agree with you. I am trying to make a different point though - there is
reserve demand in both dollars and bitcoin, but if the bulk of the pricing set
for bitcoin is by transactions founded in speculation (ie, not tied to a
physical good or service), then it would seem there is a very limited ability
to increase value in the system (aside from new users coming into the market).
A currency like USD is different - you can easily and reliably exchange USD
for goods and services which increase in value independent of the currency
instrument itself. That, and the fact that you can amplify demand by
introducing credit, creates a different dynamic, which is why I think the
ratio of liquidity created by "speculative" investments versus transactions
tied to something external is an interesting indicator.

~~~
oleganza
"if the bulk of the pricing set for bitcoin is by transactions founded in
speculation"

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-...](http://blog.oleganza.com/post/43378777734/on-circulation-of-money)

------
salient
Wouldn't this ultimately help stabilize the price of Bitcoin, in part because
perhaps Bitcoin bubbles wouldn't reach such tall heights anymore, if a lot
more people can bet against them?

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.

~~~
omellet
Other currencies are stable because they're actively managed by central banks,
there's huge liquidity, and the currencies aren't inherently deflationary.
Bitcoin has none of these things going for it. It's not a currency, for the
most part, it's an instrument for speculators.

~~~
skriticos2
Other currencies are (mostly) stable because they have a stable demand. For
example, demand for USD is not increasing to tenfold over a year randomly.

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.

~~~
nhaehnle
On top of that, other currencies have flexible supply as well. Banks create
and destroy money based on demand, because bank loans are essentially newly
created money (and paying back a bank loan means that the money is destroyed).

So the situation is exactly reversed wrt Bitcoin.

~~~
skriticos2
Yes, basically.

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](http://en.wikipedia.org/wiki/Money_supply#United_States)

~~~
bdcs
Great explanation. I would add that a written-off defaulted loan does destroy
money. Hence the need for the fed to create money when the private banks
destroy it.

MZM from St. Louis FRED:
research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=MZMNS&log_scales=Left

~~~
nhaehnle
Actually, I would say it's the other way around. A bank loan is like "anti-
money": it is created at the same time as the new money, and when the money
and the loan a.k.a. "anti-money" meet again, both are destroyed.

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.

------
iSnow
FWIW, there's Predictious too:
[https://www.predictious.com/economics](https://www.predictious.com/economics)
\- they offer binary ETFs on the bitcoin price.

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.

~~~
patrickk
The problem with predictious is the same as the author identified
unfortunately - the currency used is bitcoin, so if you're right and the price
falls, you could still lose money.

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:

[http://imgur.com/vMnFhe9](http://imgur.com/vMnFhe9)

~~~
notahacker
As I pointed out in another thread yesterday, the problem is potentially even
worse than just a price fall; if Bitcoin falls sharply enough (and/or
governments wade in to restrict Bitcoin use) most of these startups with a
Bitcoin-based business model won't survive to pay up.

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.

~~~
patrickk
Yeah what you're describing is a well known phenomenon in financial markets
called counterparty risk[1]. Those betting against the subprime mortgage
bubble prior to 2007 for example feared that those institutions accepting
their exotic CDS bets would actually go out of business when the subprime
bubble popped[2], and the bets wouldn't be realised.

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](http://www.investopedia.com/terms/c/counterpartyrisk.asp)

[2] [http://www.amazon.com/The-Big-Short-Doomsday-
Machine/dp/0393...](http://www.amazon.com/The-Big-Short-Doomsday-
Machine/dp/0393338827)

------
confluence
This is what I've found to happen with stocks. Being short is bloody
expensive, the upside isn't that big (unless you're long some underpriced
insurance) and everyone is basically against you, for ages. If shorting/going
long had the same upside/downside you'd have a much saner world. But that
ain't the world we live in, and guys who want to go short, like me, just go
into straight cash and treasuries (because strong governments have
guns/monopoly on taxes) to wait it out until prices to return to sane levels.

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.

~~~
brc
The market can stay irrational longer than you can stay solvent.

I forget who said it, but it's a very accurate quote.

~~~
confluence
John Maynard Keynes.

------
alexeisadeski3
There isn't a BitCoin ETF yet??

~~~
prodigal_erik
Storing and guarding gold is a pain in the ass. Transaction fees for tiny
positions in the entire Russell 2000 index would be prohibitive. These are the
kinds of things people use ETFs to buy. Why would I want to buy into an ETF
that holds BTC rather than buying BTC myself, is it easier to write options or
loan into short interest that way?

~~~
alexeisadeski3
>Why would I want to buy into an ETF that holds BTC rather than buying BTC
myself, is it easier to write options or loan into short interest that way?

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.

------
Choronzon
Classical Market making is probably the safest way to profit from bitcoin as
the spread is so damn high. Good luck finding a hedging instrument though.

~~~
throwaway_yy2Di
If it's supposedly safe, highly profitable, and no one's doing it (spread's
still crazy), something's very _very_ wrong.

~~~
Choronzon
Slow transaction speeds leave you with inventory for way too long (the bane of
market makers ) and as you have no correlated instruments you can't even hedge
the inventory you have.

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pla3rhat3r
Great article.

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.

~~~
LogicalBorg
Funny! Try skipping to the concluding sentence or paragraph. Or just reading
the first sentence out of each paragraph. That's how I skim the long, boring
stuff.

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muyuu
Looks like a great way to get swiped out.

------
dschiptsov
I am really curious about how to bid against the event in the past.)

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omarkatzen
Shorting Bitcoins would be a terrible idea. I hate Bitcoin, and expect it to
eventually crash, but if you nakedly short something and it goes up in the
meantime (which BTC could) you can get whacked with margin calls and lose
money even if you're right. That happened to a lot of people who shorted the
Nasdaq (at, say, 3000) and tech stocks in the '90s. They were right, but they
still lost their shirts.

~~~
roc
It's that old line that the market can remain irrational longer than you can
remain liquid.

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.

~~~
omarkatzen
With put options, you're betting on a timeframe. You make a profit if the
price drops below a certain level by expiration.

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.

~~~
this_user
Your description of 'naked shorting' isn't accurate. Options are derivatives
based on an underlying (BTC in this case). Short selling is the process of
borrowing the assets you would like to short (for a fee) from another party
and selling the them effectively leaving you with a negative position. If you
decide to cover your position or if the lender demands you return the loaned
instruments, you will have to buy back the assets. This is the standard
process of shorting and you will usually not wait to cover until you get a
margin call from your broker, but do it if the trade doesn't work out. 'Naked'
short selling is the same process, except you never borrow the assets in the
first place. You effectively sell something that you don't have. This is
possible if don't have to deliver the sold assets immediately, but it will
eventually lead to a 'failure to deliver'. This practice is usually illegal
and your broker won't let you engage in it.

