Originally posted on the authors site HedgeAccordingly.Com

By @sellputs

All the world is a stage—for the Bitcoin Bubble.

Never mind that stocks have soared up 30% in the full year since Donald Trump stunned even himself by winning the presidential election—everybody would rather talk about bitcoin and its brethren.  The other day I got this text from a friend:

“What’s up bud long time , u know anything about litecoin”?

This, from my gardener.

JPMorgan Chase’s CEO, Jamie Dimon, calls bitcoin a “fraud” used mostly by “murderers, drug dealers and other miscreants,” as the FT put it. Fed Chairwoman Janet Yellen just called out bitcoin as a “highly speculative asset” that “doesn’t constitute legal tender,” nor is it “a stable store of value.”

After which the price of bitcoin (BTC) rose another $3,000 or 18% in the next four days, to approach the $20,000 mark.  Nobody puts Bitcoin Baby in the corner.

The boldest risk-loving investors out there view bitcoin as a panacea for the digital millennium: a soaring store of value propped up by insanely great encryption, untraceable origins and the urgent need for a post-dollar currency that can survive global catastrophe.  Similar enthusiasm adorns “altcoins” that came in bitcoin’s wake: Litecoin (LTC), Ethereum (ETH), Zcash (ZEC), Dash (DASH), Ripple (XRP), Monero (XMR) and some 800 more rival forms of digital currency.

A soaring store of value: yes, indeed. If you were ballsy enough to buy a bit of bitcoin at the end of 2013, investing, say, $1,000, you got in at a low of $600 per coin; today that $1,000 stake would be worth roughly $15,000. That is up 24-fold—2,400%!—in four years.

And if you were ballsy enough to bet on bitcoin, it may be time to get out now, because other people view the cryptocurrency as the Next Great Meltdown, a malignant mash-up of P.T. Barnum (“There’s a sucker born every minute”) and Charles Ponzi, the circa-1920 swindler who popularized the kind of scheme that made Bernie Madoff famous.

The truth may lie somewhere in-between—and, either way, it’s good to know a few things about bitcoin and all that it entails.  This is the first part of a series on my Bitcoin Breakdown—read it and reap!  First, some breaking thoughts:

– Bitcoin just got more real. The legitimate, old-guard world of Wall Street and finance now figures this crypto-currency is worth betting on (that’s high praise from these guys.)  On the Chicago Board Options Exchange, futures for betting on bitcoin price swings began trading on December 10. A week later, TD Ameritrade began letting holders of its 11 million accounts trade those futures, just as Cboe’s crosstown rival, the Chicago Mercantile Exchange, launched its own bitcoin futures exchange (although with no TD Ameritrade support, as yet).

– Bitcoin futures contracts, essentially, are electronic bets on the future prices of bitcoin (just as other futures let you bet on and hedge prices in pork bellies, soy beans, orange juice, ad to-infinity-and-beyond). You buy or sell a futures contract based on whether you think bitcoin prices are headed up or down. Eventually, I expect the CME to create options on futures contracts: traders will be able to buy and sell “puts and calls,” the right to buy (a “call” option) or sell (a “put” option) a bitcoin futures contract at a particular price by a particular date.

– So when a pro someday will trade options on bitcoin futures, he’s using a kind of triple-synthetic. Bitcoin itself doesn’t exist the way, say, bacon from pork bellies exists, so that is one synthetic layer; a Cboe option is a second synthetic layer; and on the CME traders may one day bet on the future-price-of-bitcoin-futures, not just on the price of bitcoin—a third synthetic layer. A triple-synthetic. Bitcoin’s fans are anything but fazed by this.

– Coming soon: Bitcoin ETFs. ProShares and VanEck have filed applications for new ETFs (Exchange Traded Funds) based on bitcoin futures.  (Come to think of it, that’s a triple-synthetic, too.)  Look for SEC approval by the end of the first quarter of next year, some reports say. New ETFs would push bitcoin even more into the mainstream for mom-and-pop investors.  All of this increases already manic investor demand for an “asset” that no one even can see.

– A bitcoin supply-squeeze could fuel more price gains. Supposedly, only 21 million bitcoins are in existence (however invisible, digital and intangible that may be).  It is said that a thousand early buyers of the digital coin own fully 40% of the world’s supply. (And I bet ya dozens of these bitcoin billionaires are drug smugglers, given that’s how bitcoin got its start.)

– Typically, ETFs are required to own the underlying assets on which the ETFs are based—an ETF representing a “basket” of energy stocks requires the ETF’s issuer to go out and buy those stocks and keep them on hand. Given the short supply, if enough bitcoin-based ETFs enter the market, each one required to hold a store of bitcoins commensurate with its total value, the law of supply and demand dictates what happens next: the price of bitcoin could rise higher still.

Though, I mean, who knows, right? Bitcoins are, in truth, little more than a contrivance, a non-existent thing derived from some horribly complex, secret formula cum algorithm invented by some guy (or gal or people) whose authenticity remains masked and uncertain.  What’s to stop him (or her or them) from tapping a few buttons on the keyboard to make 21 million more bitcoins?  Suddenly, supply doubles, each coin is worth only half what it was just days before.  Or what’s to stop the same anonymous forces from inventing a “New! Improved!” version of bitcoin that obviates the original?

If you do get involved in the bitcoin rush-to-riches, you would do well to discard any notion of yourself as an investor; view yourself as an ice-in-the-veins speculator, a gambler with gonads (or ovaries) the size of boulders.

Next up: Should you buy into the bitcoin bubble? 

@sellputs is a derivatives trader, algorithm wizard and advisor to hedge funds.

Part 3

Title. Bitcoin Breakdown: Should You ‘Invest’?

Second Part of a Series. 

Originally posted on the authors site HedgeAccordingly.Com

By @sellputs

Hey guys.  Remember the giddy Internet bubble and what it spawned—the Tech Wreck of 2000?  I was somewhat aware of the destruction, despite my distractions as a teenager with raging hormones at the time.  A decade later I was trading hard, scared of losing it all in the aftermath of the real estate bubble and the Great Meltdown of 2009.

And now, as the Bitcoin Bubble inflates to ever more epic proportions, I get a creeping feeling of dread. There’s this way old sequel to “Alien,” and this one character, Hudson, is played with scary, panicky intensity by the late actor Bill Paxton.  He keeps warning his shipmates: “Game over, man, game over! We’re fucked!”

He was right about that, he got ripped apart moments later.

So, will you get ripped apart if you invest in bitcoin, much less the lesser copycat cryptocurrencies it has inspired: Litecoin, Ethereum, Zcash et al?  No doubt a lot of speculators will meet a monstrous end by chasing the Bitcoin Bubble, while others get in early enough and get out early enough to pocket profits in fantastical proportions.

It’s more about gambling than investing.  In fact, I’ve heard that some professional poker players in the legal card rooms of Los Angeles are investing in bitcoin’s fly-by-night rivals, targeting what they believe to be Ponzi-like scams and using them as “escalators” (my term)—you board at the bottom, ride it upward for as long as you dare and bail before everything topples.

Elsewhere, I have a friend whose gal pal—she’s this artsy Burning Man type, and sometimes she is so tight on funds she has trouble paying her phone bill—has just put $400 into a new Coinbase account to trade in bitcoin, Litecoin and Ethereum.

Bad idea, right?

Yet this Burner sees bitcoin as the struggling non-investor’s ticket to riches.  Federal regulations aimed at “protecting” the poor block them from many investment options because they aren’t “qualified investors”—read: with a net worth of $1 million. Whereas, the feds haven’t yet tried to grab control over bitcoin exchanges.  This is unregulated turf where newcomers can freely roam.

And she’s right—she could make a windfall if she watches closely and sells early. (That old saying comes to mind about bulls and bears getting rich, while pigs get slaughtered.  A lot of Johnny-come-lately cryptos will be “makin’ bacon” a year or two from now.)

Bitcoin Bubblers revel in dreams of a DRW windfall.  Do you know that story?

Donald R. Wilson runs a large, aggressive high-speed-trading firm in Chicago known by his initials: DRW Global Holdings.  In 2014 he formed a cryptocurrency-trading subsidiary and named it Cumberland Mining (for the Grateful Dead song, “Cumberland Blues”).  A year later, Cumberland bid $5.5 million at a federal government auction.  The prize: 27,000 bitcoins, of a total 44,341 digital coins seized by the feds in the shutdown of the notorious Silk Road drug-dealer site on the dark web.

Silk Road had racked up $200 million in illegal-narcotics transactions in a few years, all of it in bitcoin.  The cache of 44,000+ coins was found in the laptop hard drive of Silk Road’s creator, the infamous Ross Ulbricht, who was 32 years old at the time.  In federal court in New York, he later was convicted on seven counts related to drug-kingpin offenses, after which he lost on appeal and now serves a life sentence, with no parole.

DRW’s investment of $5.5 million, at roughly $200 per coin on auction day, has soared upward to more than four hundred million dollars.  Some $405 million at recent prices of almost $15,000 per bitcoin, up 72-fold in two years, if prices hold.

Ahhhhh, there’s the problem: If prices hold.  More on that, coming up.

Next up: Should you buy into the bitcoin bubble?