Saturday, December 09, 2017 ... Français/Deutsch/Español/Česky/Japanese/Related posts from blogosphere

Responsible TRF readers recommended to sell most crypto-stuff today

Futures are keys unlocking cages with horny, hungry Bitcoin grizzlies, tigers that will devour clueless Millennial Bitcoin calves, vegetarian gazelles in their safe spaces

The unbacked cryptocurrencies – led by the Bitcoin as of now – have almost certainly become the most dramatic financial bubble in the world's history. It was possible because the relatively speedy (but not too speedy) financial transactions helped by the computers were combined with the speedy communication between the Millennials – also aided by electronics – that has grown the fanaticism more effectively than the regular conversation during any of the previous bubbles.

The cryptocurrency fever has almost certainly trumped the tulip bulb mania in Holland that ended in 1637, the South Sea Company bubble that grew up to 1720, and the dot-com bubble that burst in 2000 although to some extent, the burst continued for two more years, and a few more events that should have taught us the same lesson. Alan Greenspan has compared the Bitcoin to the first unbacked early "continental U.S. dollars" that dropped to 2% of their price within several years.



I have written some bullish texts – e.g. one claiming that the Bitcoin at $100,000 is compatible with the laws of Nature (that price surely seems significantly more imaginable now than in August) but most of my comments about the Bitcoin have been bearish. I could have imagined several events – forks (that were suspended), Chinese bans, Chinese clever manipulations etc. – to bring the lethal blow that would terminate this whole irrational movement.

Just to be sure, in none of the cases, I was predicting that the individual possible death scenario was more likely than 50%. There have only been possibilities. None of these death scenarios has materialized so far – but yes, the combined probability of "some death before December 2017" of all the lethal scenarios I have predicted over the years is higher than 90% – but the Bitcoin is still around. The same is true for all other Bitcoin bears' comments, too. In fact, I would say that most of the Bitcoin fans have been almost as shocked by the irrational explosive growth of the price as the Bitcoin skeptics ;-) so one shouldn't even say that the Bitcoin fans were "more right" than the skeptics.




Lots of bad things could have happened to the cryptocurrencies which aren't currencies – but none of them has happened. The behavior of the dominant traders may be described as utterly irrational and dominated by a religious greed that is not constrained by any considerations at all. The cryptocurrency exchanges are dominated by the financially illiterate young people who will consider the Bitcoin and its cousins to be undervalued at any price, with a possible exception of the infinity, which means that they simply buy for any price that is demanded and many of them may be buying the Bitcoin and others at arbitrarily inflated prices for every single dollar they can find somewhere.




At least for many months, it has been obvious that this is a totally satisfactory model of the traders at the Bitcoin exchanges. They're just mindless and Godless buying machines. From this viewpoint, the exponential if not super-exponential growth of the Bitcoin price is absolutely unsurprising. As long as the traders and their sentiment are dominant for the Bitcoin price, the rocket growth is basically unavoidable and could have been predicted – although all such claims are much easier to be said with hindsight.

At the same moment, I find it obvious that this evolution simply can't last indefinitely. The representatives of a huge fraction of the financial elite of the world – Buffett as the best value investor in the world history, founders of the greatest hedge funds, bosses of largest commercial banks and most of the important central banks, economics Nobel prize winners, and lots of others – have been heard as dismissing Bitcoins for the same reasons as mine. Its intrinsic value is zero. It's volatile, and therefore unusable as a currency. Because no one can start to use it as a real currency for business – perhaps except for organized crime that has nearly 100% profit margins – no inertia can be created and the coins will remain volatile, and therefore unusable.

Almost all these people pay lip service to the "blockchain technology" which is great but different from the Bitcoin. As a person who understands all the "mathematics" behind the Nakamoto consensus rather well, I agree it's great and different from the Bitcoin but I think that the "blockchain technology" is insanely overvalued, too. It's a cute curiosity that one may "decentralize the trust" but this fact hasn't really been useful anywhere. "Centralized trust" is surely better for every single easily imaginable company, especially if you don't need to waste $1 billion dollars a year for electricity.



Current BTC price. It was 15,812 when I embedded it.

On top of that, there are lots of technical threats to the Bitcoin which are being dramatically underestimated by the cryptofans. One of them is that they don't seem to understand that the "issuers of the currencies" control it pretty much exactly in the same way as the central banks control their fiat money. They have complete control over them. The only difference is that the central banks e.g. of the Bitcoin, the miners, are "decentralized". So they're owners of some hardware that is at many places of the world. They're expected to act independently of each other and with this assumption, their efforts to maximize the profits keep the non-currencies going.

In reality, the miners aren't that decentralized. Most of them are located in mainland China and the Chinese government, not one of the most democratic ones in the world, may nationalize the mining hardware or order it to play an official Chinese game. I have argued that all the Bitcoins in the world belong to the Chinese government according to the actual rules of the Bitcoin that are described not only in Nakamoto's paper but that are incorporated into all the software, too.

The Bitcoin religion envisions some new system in which no people are powerful but this is a logical contradiction. Nothing like that is possible. Someone is always in charge. His "location" may just look fuzzier in the Bitcoin case and the Bitcoin may have brought a new method how the "issuers of the currency vote" and who matters and how much. But the simplest way for the Chinese government to show that it owns the Bitcoin network is to order all miners located in China to mine empty blocks such as this recent one only. They bring 12.5 Bitcoins to the miner, anyway, take about the same to be mined as the "full blocks with transactions". The miner sacrifices the extra fees – some $4 in average today (the average transaction fee is $30 in recent days) – but it has advantages, too. He may ignore the requests for the transactions from everybody. Also, the number of waiting transactions – now around 170,000 – increases which encourages users to pay higher fees in the near future. So a dominant clique of miners may very well benefit from occasionally mining empty blocks.

They might also mine empty blocks only – and refuse to "elaborate upon" all added blocks that are not empty. So the dominant miners may easily be in charge of the longest blockchain out there – which is the correct one – even though all the new blocks in it are empty. It means that the Chinese government may stop all Bitcoin transactions completely. It could stop the transactions for 12 hours to point out that it owns the Bitcoin network in the world. And after that, it could agree to restore the payments e.g. if the cap is raised from 21 million to 100 million coins. The extra minted 79 million Bitcoins could belong to the Chinese reserves which could be used helpfully, the Chinese statement could say, and so on. It's remarkable that they haven't done anything of the sort yet.

On top of that, there are good reasons why governments, central banks, commercial banks could work hard to ban the Bitcoin and similar payment mechanisms. However, the most urgent death scenario for the cryptocurrencies are obviously the futures.



Bitcoin futures are live tomorrow

Tomorrow (Sunday December 10th), since 5 p.m. Chicago Winter Time, CBOE – one of the companies trading options – will offer the Bitcoin futures for the first time. CBOE will be followed by its larger Chicago-based cousin, CME, exactly one week later.

The initial margins will be between 30-35 of the exposure in both cases which corresponds to the 3-to-1 leverage. The single contract is 1 Bitcoin in the CBOE case, and 5 Bitcoins in the CME case. There are some upper limits that a single user may have, to prevent the cornering of the markets. I am not sure whether the big banks will be allowed some exemptions.

Both companies "prescribe" some stability. CBOE will stop trading for 2 minutes when the price changes too much while CME wants to ban the opening of new positions if the price deviates by 7-13-20 percent from the previous closing price. There are lots of similar technical details in which both futures exchanges differ. I don't think that they're terribly important but in particular scenarios, even the smallest details could matter.

Scarcity will be over

But the main message of mine is that either very quickly or gradually, I am not sure about that, the Bitcoin futures should stop the growth and then deflate the Bitcoin bubble – and probably all other unbacked cryptocurrency bubbles (Ethereum, Bitcoin Cash, Dash, Iota, Litecoin, Bitcoin Gold, Monero etc. etc.) Why? Because a huge set of powerful bears and lions will finally be released and allowed to devour the clueless Millennials, the Bitcoin calves and gazelles (probably better labels than the "bulls"), for the first time.

So far, the "trading" of the Bitcoin and pals only took place inside their "safe spaces", quasi-religious communities that keep on repeating insane hype and that assure themselves that the Bitcoin is the future of the world, if not the multiverse, and that's why it's not only wise but also a moral obligation to buy the Bitcoin or pals for all your money, at any price, and never leave. The moral imperative "not to return to the cash again" is summarized by the "HODL" slogan – a 2013 misspelling of "hold" which may also be expanded as "hold on for your dear life" – and it's much stronger among the actual Bitcoin cultists than among the users of the other currencies such as the Bitcoin Cash (the latter tend to be far more pragmatic and moderate).

In effect, this quasi-religious cult has some 10 million members. Each of them thinks he is worth some $20,000 in average – although the inequalities are huge (most members have less than $50 in their wallet – they are just symbolic members but these irrelevant losers can still be more annoying trolls on social networks!) and much larger than the inequalities in the "real world". In the cult, the $20,000 member fees aren't universal. The early adopters, maybe starting from Satoshi Nakamoto if he's still around and in charge of his 10% of Bitcoins, have a huge advantage – they paid much less to get a much higher relative wealth in the Bitcoins. The Winklevoss brothers, two identical parasites and bullies who have tried to steal the Facebook from its actual creator (by claiming that Facebook was mostly "the same thing" as their ConnectU "idea", wow), have become the first "Bitcoin billionaires". They "invested" the $65 million collected from Mark Zuckerberg after a court decision to the Bitcoin and that money has grown above one billion dollars recently (it's probably the sum of both jerks' share, not that it matters). These two men represent the parasitic worthless character of the whole cryptocurrency industry rather nicely, too. They also own the Gemini exchange on whose auctions the settlement prices of CBOE will be based upon. (CME derives its standard price from a larger number of exchanges and more credible ones – it's another question whether manipulation focusing on Gemini will matter in the trading of the futures.) Well, I will argue that if the twins keep their Bitcoins, they will be below a billion rather soon again.

There are all these inequalities and insane advantages for the early adopters but aside from these morally weird features, one thing is still true: almost all the owners of the Bitcoins now are believers. All of them say that the Bitcoin is super-duper-great and basically has the infinite value. And people sharing this basic religion are just selling the Bitcoins to each other. Where is the price going if the only participants in the market are the people who think that the fair price is infinity? It goes to infinity. And that's exactly what we have seen so far – even though the price hasn't quite converged to infinity yet (it's a value that is hard to converge to, partially because such convergence would be called divergence LOL).

But aside from this cult, mostly young anti-system people who live in an extreme and fanatical group think, you still have the real world with lots of people who still realize that the Bitcoin is worthless and there is really no reason why the total value of the Bitcoins should be higher than JP Morgan, the world's largest bank by capitalization. The Bitcoin is marketed as a revolutionary system for payments. But in the last months, 2 liters of beer were bought for the Bitcoins in the world. The fair transaction fees – to keep this payment competitive with the cash – is some $0.02 (I reminded you, the average transaction fee is over $30 in recent days). How can this real economic traffic justify the capitalization well over $200 billion for the Bitcoin and above $400 billion (half a fudging trillion dollars) for all cryptocurrencies? Well, it obviously cannot.

So these people outside the Bitcoin cult – the world that is still worth some 99.9% of the world's capital – are overwhelmingly dominated by those with the opinion that the huge and growing Bitcoin price is insane and a reasonable one should be vastly closer to zero than to the current price, if I remain slightly vague. Tomorrow night, they will be able to short the Bitcoin for the first time. And each of them knows that he won't be alone. I am not the only who uses dramatic language. Jim Cramer also said that the futures trading will annihilate (or kibosh) the cryptocurrency. Kibosh, a word similar to Lubosh (derived from "love"), means to behead. ;-)


A typical correct prediction so far plus sentiment by the Bitcoin grizzlies.

How does shorting remove scarcity?

The Bitcoin fans are almost universally financially illiterate – sorry if there are exceptions but after I have interacted with some 100 Bitcoin fans, I haven't met an exception so far. So it may be a good idea to explain the "shorting" or "futures trading".

When futures are traded, there are always two sides of the story. One side enters the "long position" which is basically a bet on the increasing Bitcoin price (in the future, especially by the expiration date). It's almost exactly equivalent to buying the Bitcoin so the Bitcoin bulls (believers that the price will go up) are generally buying long positions. The opposite side, the "pessimistic" Bitcoin bears, bets on the decreasing position and enter the "short position".

When the expiration date (last Friday of each month in the case of CME, some weekly dates in CBOE) arrives and the price went up from the moment of the purchase, the successful Bitcoin bull – who was in the long position – wins the payment from the Bitcoin bear – who was short the Bitcoin. If the Bitcoin price goes down, the opposite thing happens. The bull has to pay money to the bear.

The compensation takes place in the U.S. dollars but this is totally irrelevant. If you have access to some Bitcoins, you may get these dollars – if you're obliged to pay – by selling the Bitcoins for the current spot price at the expiration moment. And if you get compensated in the U.S. dollars, you may immediately buy the Bitcoin for the spot price once you win your U.S. dollars. The settlement in cash (U.S. dollars) is an irrelevant technicality – unless the trading stops or becomes extremely volatile, the spreads become very big, or something like that. It doesn't really matter how the positions are settled. The effect is always the same.

And the effect of the trading opportunities is that the price of the futures is almost exactly equal to the price of the "real thing" at almost all time. If there is some difference, the difference will be small and, if significantly nonzero, a rather constant function of time that remembers some constant fees or risks.

Why are the prices of the "futures Bitcoins" and "current real Bitcoins" equal? Because if the future Bitcoins were cheaper, every prospective buyer of the Bitcoin could buy the cheaper "future Bitcoin" (enter a long position), and delay the purchase of the real Bitcoin up to the expiration date. This Bitcoin bull probably believes that the Bitcoin will grow between now and the expiration date, but he may collect the same profit from the futures as well. And if the Bitcoin is cheaper according to the Bitcoin futures, he will save money! So the futures can't really be much cheaper than the real Bitcoins because the Bitcoin bulls could temporarily replace their Bitcoins by the futures and save/earn money!

Not all Bitcoin traders are capable of this basic reasoning. I am actually convinced that if you count heads that participate, a big majority is actually incapable of understanding simple ideas like that, "it's better to buy basically the same thing for a cheaper price". But I think that most of the capital that is circulating in the Bitcoin trading is controlled by folks who can figure these things out. At the end, it's enough for several such rational traders to exist and have enough cash (and/or Bitcoins) and the market will behave rationally. The futures will cost the same as the Bitcoin spot price.

Just to be sure, the symmetric argument implies that the futures won't be too much more expensive than the spot Bitcoin price. If the future Bitcoin were much more expensive than the current real Bitcoin, it would be profitable for the people to simultaneously buy the real Bitcoin and enter a short position in the futures. This is a strategy that mathematically guarantees the profit. At least some people who realize this safe opportunity will exist and they will be enough to link the two prices.

Fine. So unless something is spectacularly different about the Bitcoin – an almost complete absence of rational traders – the Bitcoin futures will cost almost exactly as much as the real Bitcoins. All the Bitcoin fans who claim that these two prices will have nothing to do with each other only demonstrate their complete financial illiteracy, I think.

So what will happen with the price?

The Bitcoin skeptics, bears, and naysayers who believe that the Bitcoin is an intrinsically worthless, irrationally and insanely overvalued bubble, will be able to short the Bitcoin, bet on its decline. This bet carries risk but the long bet carries risks, too. All such positions are generally "insured" by stop-loss commands. If the Bitcoin went up by too much and you were betting on a decline, your position would close and unless some cataclysmic evolution would overshoot all the stop loss levels, your loss would remain "finite", at most equal to some expected upper bound.

An important point is that almost everyone who believes that the Bitcoin has to go up – and continue to increase – has already bought the real Bitcoins. On the other hand, those of us who share my opinion that the Bitcoin is just worthless šit couldn't really do anything – except for talking and immediately converting the donated Bitcoins to the real money (which meant to lose 80% of the donation, relatively to the conversion now, but we still found it reasonable).

Tomorrow, the Bitcoin skeptics will open their first short positions. It means that they will offer the Bitcoin bulls to enter the long-short contract above. If the Bitcoin goes up by the expiration date, the bull pays to the bear, and vice versa – the payment is exactly equal to the growth/decrease of the price. The first Bitcoin bears will offer the price to be near the current Bitcoin spot price. (I talked about well-defined pairs of bulls and bears in the long-short transactions. That's how the transactions are made but when the bets are settled at the expiration date, the pairing is irrelevant. The losers generally collect and pay their money and the winners take them and divide them – it doesn't really matter who pays whom individually. You pay to or get paid by the CBOE or CME, i.e. the intermediary, and perhaps another intermediate bank that connects you to CBOE/CME.)

But there will be hundreds of thousands or millions of horny and hungry Bitcoin bears, lions, and tigers with their billions or tens of billions of dollars waiting to enter their short position – something that the Bitcoin network has prohibited them to do so far. So if you believe me that the bears will be more horny – basically because the Bitcoin bulls have already spent their dollars on the real Bitcoins – it means that the Bitcoin price indicated by the futures will quickly decrease, relatively to the price when the futures trading began.

Another reason why I think that the bears will dominate e.g. among the institutions is that it seems that the larger and wealthier a bank or financial institution is, the more critical of the Bitcoin it seems to be. So even if the majority of the institutions or members were Bitcoin fans, most of the capital is controlled by Bitcoin critics, I am almost certain.

The opportunity to trade the futures and real Bitcoins simultaneously will mean that the Bitcoin's spot price will decrease, too. There will still be Bitcoin bulls and fans who just want to keep on buying the Bitcoin because they think it will go up and it's the future of the multiverse. But their money will be divided to the real Bitcoins and the long positions of the Bitcoin futures. And these Bitcoin fans may simply run out of the money, the demand for the Bitcoin or Bitcoin long futures positions will evaporate, the price will plummet, and the Bitcoin bears will win their bets.

Perfect imitation of the Bitcoin

You know, a funny and important fact is that from the financial viewpoint, at least up to the expiration date, the Bitcoin futures long position worth 1 Bitcoin (that's 1 CBOE contract or 1/5 of the CME contract) is indistinguishable from the real Bitcoin. Your immediate worth may be argued to be exactly the same in both cases at each moment, they change simultaneously and equally.

This is guaranteed by the arbitration opportunity above – which links the prices – along with the ability of the CBOE or CME to take the price of the real Bitcoins into account. The settlement (in cash) is the procedure that guarantees that the "real" and "futures" prices of the Bitcoin are exactly the same at some moments (when the futures expire), and because this "future equivalence" is known in advance, the market guarantees that they're equal at previous times, too.

What does it mean? It really means that the Bitcoin bulls – people betting on the growth of the Bitcoin price – will be able to decide whether they want to buy some of the 16.7 million current "real Bitcoins" or one of the long positions. But the latter number, the number of long-short contracts worth 1 Bitcoin, is basically unlimited. It may increase whenever a Bitcoin bear decides to invest one more dollar into the Bitcoin short position.

So the relevant "total number of Bitcoin-like investments" is 16.7 million plus the number of Bitcoin short contracts that the Bitcoin bears have entered. The total may very well be 100 million within weeks (or hours). And it's this number that supersedes the number 16.7 million. The long futures positions are basically new banknotes saying "this banknote is worth 1 Bitcoin and if you visit a Bitcoin bear, he will pay you the price of 1 Bitcoin at a future [expiration] date".

In effect, the current Bitcoin holders are kids obsessed with Bitcoins as if they were tamagotchis and the banks will say: Dear kids, are you willing to pay over $10,000 (of your parents' money) for a tamagotchi? Do you hate that there are only 16.7 million of them? We can produce and sell billions of tamagotchis to you, up to the moment when your thirst and the price disappear, almost to zero.

CBOE and CME may print these banknotes. Well, it's the Bitcoin bears who enter the short positions who "cover" these banknotes. In effect, CME along with the Bitcoin bears can print an unlimited number of banknotes that are worth 1 Bitcoin in the CBOE case (or 5 Bitcoins, in the CME case). Do you get this basic idea? The "scarcity" of the Bitcoin only exists when you can't borrow Bitcoins, you can't have a negative number of them, you can't short them. But the futures trading effectively allows some players to own a negative amount of Bitcoins – which means that the positive Bitcoins that may be owned is higher.

Now, the Bitcoin is a purely financial instrument. In the case of gold, there are some buyers who really need gold – for their jewelry, electronics, golden teeth, coating of fancy building or toilets, and other things. Or they need gold because they believe that all the cash and banks will be demolished – so the futures aren't as good as gold. These people represent a nonzero amount of demand that needs "actual gold". Gold futures aren't good enough for them.

But the funny difference between gold and the Bitcoin is that you can't make any teeth or wedding rings out of the Bitcoin. So the Bitcoin is purely financial. It means that if you imitate the financial behavior of the Bitcoin, and I have argued that the futures do so nearly perfectly, they you imitate everything. So unlike gold futures, the Bitcoin futures are really perfect imitations of the real Bitcoin. Well, they're only a perfect imitation up to the expiration date but that's just a technical glitch that is easily circumvented. If you want to bet on the Bitcoin rise, you may enter a long position in the Bitcoin futures, and periodically update it by selling it and buying Bitcoin futures with a later dates (they should cost the same, anyway). If the Bitcoin survive in some way, "ETFs" will appear in 2018 and will do this "update" automatically.

Again, unlike gold, the Bitcoin may be perfectly counterfeited and will be counterfeited by a cooperation between CBOE+CME and the Bitcoin bears. The "scarcity" of the Bitcoin is often quoted as the main – or only – reason to think that the Bitcoin "should be" very valuable. But merely scarcity is simply not a reason for something to have a nonzero value. You still need some beef. If the total beef of the 16.7 million Bitcoins is zero, then the fair price of the Bitcoin is zero simply because 0 over 16.7 million is still zero, despite the fact that 16.7 million is a "rather small number" that "doesn't increase with time".

(Well, among the true cultists, there could be an analogy of the "golden teeth". Some hardcore Bitcoin fans may simply prefer to own "real Bitcoins" indicated by entries in the "actual blockchain" – which they can show using the Bitcoin software to other people – over anything that has the same or better financial implications. On the other hand, it's also plausible that some of the Bitcoin holders only hold the Bitcoins to "brag" but they will "insure" their position by entering compensating short positions. Because the latter and the true bears may dominate, the fair price of the Bitcoin futures may even be negative!)

And this worthlessness of the Bitcoin will be made obvious once the Bitcoin futures start trading. The Bitcoin is a purely financial instrument and CBOE plus the Bitcoin bear may just "observe" the trading of the real Bitcoin and therefore imitate all the financial properties of the Bitcoin – which means all the properties. As long as people really buy the Bitcoin for the financial reason – they expect it to go up – the scarcity is over and CBOE plus bears will print an unlimited number of Bitcoins.

Most of the Bitcoin bears really understand all these things very well. They know that the capital owned by the Bitcoin bears, including big banks etc., vastly beats the capital that far left Millennial quasi-religious cultists and activists may have "invested" to their carefully nurtured bubble. I think that all the Bitcoin bears know that there will be a big numerical dominance of the Bitcoin bears in the trading. And if I am wrong, they also know the opposite. ;-) They may have agreed how to trade. They probably have some data that I don't have.

But if I am right and the horny and hungry Bitcoin bears will dominate the futures trading on Day 1, it's obvious that the price of the Bitcoin futures will go down, and the real Bitcoin price will go down as well. I think that this decrease should be rather fast because the earlier you secure your Bitcoin short positions, the better conditions you will have. We will just enter a new stage of the Bitcoin trading that will be somewhat similar to the enthusiastic bubble stage that is ending now – except that the sign will be reversed.

In the case of the Czech crown, I made the correct prediction – and earned some thousands of dollars on it – that the crown would strengthen rather smoothly and reliably. And it did. EURCZK is as strong as before the interventions began in late 2013. Still, the speed at which the pre-intervention exchange rate was reached was slower than I expected, perhaps by a factor of 2-3 or more.

The Bitcoin futures trading is something that has no precedents. I have virtually no idea about the speed at which the bubble should deflate. I can imagine this will be dominated by some true sharks and those can make the decisive movements within minutes or seconds. But I am not sure. On top of that, I am not sure what will be the actual impact of the CBOE's and CME's attempts to regulate the volatility. In my opinion, these efforts may protect CME and CBOE but they simply cannot tame the volatility of the actual trading of the Bitcoin outside CME and CBOE. If the price jumps by more than 20% in either direction so that CBOE or CME signal "extreme volatility", it will probably mean that the rest of the Bitcoin market will decide that CBOE and CME have been proven incorrect and the recent trend should continue much farther. It may work in both directions.

There are lots and lots of things I can't predict. Lots of small or huge players may have some extreme plans what to do, how to confuse others, and do many other things that we can't be aware of. So I wouldn't have the courage to make substantial bets on the speed, depth of the first decline, and other things.

But I think that it's more likely than not that the introduction of the Bitcoin futures trading will lead to a dramatic decline of the Bitcoin price – and because of their spiritual and trading proximities, also the price of all other unbacked cryptocurrencies (I am somewhat less certain about those but I still think they should drop as well). If you have "invested" your house to the Bitcoin and you will keep it tomorrow, I think that you're extremely irresponsible or basically suicidal.

It's also possible that some extreme phenomena will kick the Bitcoin to $100,000 in coming days or weeks but I think that a sub-$1,000 Bitcoin in coming days or weeks (or a literally broken Bitcoin payment network, because of some plan of those that control some Bitcoin holdings, futures, as well as mining) is far more likely. There are just way too many simple ways not only for the "banks that wouldn't touch the real BTC" but especially for the current holders of the Bitcoin to make huge profits by entering the short positions and selling the Bitcoin and/or crippling the health of the mining operations. The founder of Coinbase, often considered the world's largest cryptocurrency exchange, sent a mail to us, everyone who has an account there, warning against the "irresponsible investment". I think that this particular step is wise and ethical and all other exchanges should do the same. Some extreme events are likely in coming days or weeks, the Coinbase boss is aware of them, and it's a matter of integrity to warn his users. The Coinbase infrastructure may also collapse when it matters, he warned them. We surely want to hope that the Coinbase servers won't be broken "deliberately" by the owner.

If something dramatic happens, and it's rather likely, he will have a better position than those who remain silent. I think that the bosses of these other cryptocurrency exchanges are deceiving their users. The coming days or weeks have an obviously elevated probability to mean the end of the huge crypto-mania as we're observing it today. Most of the people doing business in the cryptocurrency industry implicitly encourage their users to dance at the Titanic and sing that everything is so safe and great. It's really a deception.

If the Bitcoin goes to $100,000, well, I won't be able to compensate you – I am saying that it is possible, after all. But even if that happens, I will insist that today, there are good reasons to expect a rather severe, perhaps cataclysmic drop of the price of the cryptocurrencies. You really shouldn't have any money there that you can't afford to completely lose. That's how I understand financial responsibility and a bubble that has doubled every month hasn't changed, couldn't change, and will never change these basic opinions of mine. On the contrary, the bubble's greater size makes all the warnings more important than ever before.

If you want to share the hypothetical exponential growth of the Bitcoin price to infinity in the future, sell 1/2 of your Bitcoins everytime the price quadruples. In this way, you will always get a doubled number of dollars relatively to the last time – so your number of dollars will exponentially grow (approximately with the square root of the Bitcoin price), despite the fact that this money will already be safe for you. ;-) But to keep almost everything in the Bitcoin in the coming days and weeks is a recipe for some big tears.

I agree with the consensus of the financial world that the hypothetical coming collapse of the Bitcoin or other cryptocurrencies will have almost no effect on the real financial markets or the economy. Most of the Bitcoin capitalization is just an illusion of wealth – only those who lock the profit in time have an actual profit. Only an illusion will evaporate. The connections between the Bitcoin and the real economy are virtually non-existent, except for the two beers. Don't expect anyone to bail you out.

By the way, any idea about a "somewhat lower" but sustainable price is really wrong. Even if and when the Bitcoin price drops to $1,000, the markets will ultimately face the same issue. On one hand, you will have similar Bitcoin bulls who will have similar $50 billion to invest into the Bitcoin long positions – that's the estimate value of the Bitcoins weighted by prices when they were mined (much lower than the capitalization but still roughly of the same order). But because the wealthier bear can invest more money to it, they may be sure that they will deplete the bulls of their cash. So even at $1,000 per Bitcoin, one may safely push the price even lower if he knows that he has more money than the bulls. This may become an "ideological" tug-of-war at any price. The Bitcoin fans haven't gone through any battle yet. But in such a tug-of-war, the side with the greater capital simply wins at the end. The losing side is stripped of all their cash they could reserve for the battle. And the sides are basically "Bitcoin is zero" and "Bitcoin is infinite".

Update, Monday morning

The CBOE website went down when it was started. Maybe many people were watching. But almost no one is trading. The table shows that only some 2344+7+39 future Bitcoins were traded with expiration dates January, February, March. Even the January number is smaller than 1% of the trading volumes of the real Bitcoin. The prices for the three months are some $18,000, $18,600, $18,400 now, indicating basically a plateau for three months.

Every holder of the Bitcoin may turn change his super-risky investments to guaranteed profits. He may buy the real Bitcoins for $16,300 (current price now) and short the same amount at the higher numbers above. At the expiration moment, this simply produces 10% of the amount as profit for certain because the prices differ by 10%. Almost no such rational traders exist on both platforms right now, the numbers clearly show. So the Bitcoin holders just consider any risks impossible, 10% as negligible, and they just overlook the futures altogether.

They may also overlook the indication from the futures that the substantial price increases will stop now. It's sort of not shocking given the tiny volumes at CBOE. The two worlds are clearly totally separated. The real financiers won't touch the Bitcoin or even its futures while the Bitcoin "community" won't touch real financial instruments. The latter are living in their own world where they are vigintillionaires who never need to do anything – a whole generation – and who can ignore and distrust all the normal financial markets, including its profit opportunities.

Some clearing houses – Interactive Brokers – don't allow their users to go short. All such restrictions are annoying and the huge risks that are used as justifications are obviously rubbish given the absolute non-event character of this trading. CME may attract 5 times higher volumes but those would still be negligible. The volumes are so small that any individual could rather cheaply manipulate the futures prices shown by CBOE, but there's no strategy to short-and-dump because of the disconnect between the two markets.

Add to del.icio.us Digg this Add to reddit

snail feedback (0) :