Technology

Bitcoin Breakdown: Bigtime Bubble-time

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 soonBitcoin 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

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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?

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

Part 3

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Title. Bitcoin Breakdown: How-to, Step by Step

Third part of a series. Part 1Part 2

 Originally posted on the authors site HedgeAccordingly.Com

By @sellputs

Merrrrrrrrrry Bitmas!

Bitcoin has been crashing like a Bad Santa all week long—it had surged up to $19,856 last Monday and had plunged as low as $11,590 by Friday, bouncing back up to $14k and change. So anyone who bought bitcoin last Monday is still smarting, and those who bought below $12k yesterday are feeling just plain smart.

Either way, this column will tell you how to join the fun.

In search of a Christmas miracle, we’re going to map out the ten steps for setting up your own bitcoin trading account. It is so fast and simple that in 15 minutes or so, you will be linked-up, “appified” and able to invest in bitcoin and other digital currencies from your smartphone. Once you are set up, you can make each crypto purchase in seconds.

If you dare. Lately it has been a pretty scary videogame.

Millions of people seem undaunted; convinced this bubble still has plenty of room to grow.  Coinbase, the cryptocurrency exchange, now is said to have 13.3 million accounts—more than Charles Schwab & Co. (10.6 million) and, maybe, sign of just how much this Bitcoin Bubble is inflating.

This, at a time when stocks are especially hot since the Trump election that has so many of my liberal pals in New York apoplectic and foaming at the mouth. (Then again, they never have felt so outraged and alive—they love it.)

It took a full year for stocks to go up 30%, yet you can lose 20% on bitcoin in just two days. Example: if you bought into bitcoin, Ethereum and Litecoin this past Wednesday evening (12/20), by Friday afternoon you were down a sickening 20% in bitcoin and almost as much in ETH and LTC. Don’t ride this wild rollercoaster if you can’t stomach that kind of a setback.

For those of you who can, and for those of you who believe you are ready to get started on this tumultuous investing journey, here’s an easy guide, step by step, to setting up a cryptocurrency trading account. We did it the other day at Coinbase. When in doubt, go with the biggest, it may be the biggest for a good reason.

Step 1: Go to app store, download Coinbase app. In a minute or two it’s ready to go.

Step 2:  Before you open up the app for the first time, make sure you know, ahead of time, the online password to your checking account, if that is the account you will link up to Coinbase to transfer real U.S. dollars into purchases of tiny increments of untraceable bits. Same goes for the credit card you might link to your new Coinbase account (which triggers a 4% fee rather than the 1.5% fee charged for linking to your bank account).

Step 3: Open the app. Give fingerprint, and the opening screen shows the Bitcoin price at the moment, and a year-long fever chart that starts at $800 in January 2017 and soars to $19,205 by December 2017.  It is exhilarating. Two buttons beckon: Sign Up or Log In. Touch on Sign Up.

Step 4: A few screens in, the app has you use your phone-cam to snap a picture of your driver’s license, front and back, and then it has you take a selfie of your face.  It tells you it must verify the photos and will get back to you in five to 10 minutes.

Step 5:  Five minutes or so later, you are verified, and a fast questionnaire pops up: fill in your occupation and “employed by,” and a message flashes: “You’re almost ready to invest.” Click the green box labeled, “Complete account setup.”

Step 6:  The app teases you with the current flashing prices of the coins you anxiously are waiting to buy (BTC, ETH, LTC), as it sends a verification number to your phone. You enter that number into a box on-screen, and the next message says: “You’re almost ready to buy.” (Italics added). Note the change in verbiage from “ready to invest.”

Step 7:  “Please complete your account,” the app instructs. You add a payment source (your banking account is recommended), a user name and a password (write it down on a slip of paper and slide the paper into your wallet; security pros might preach against it, but they preach against most everything, and hacks keep happening anyway.)

Step 8:  Now take a deep breath and psyche up. For some people wary of how bubbly bitcoin is, talking yourself into making the first bet is like a testosterone-soaked trader trying to talk himself into getting married.  You never will be truly ready, so just take the leap. Do it in a small way, and don’t flinch when what you bought suddenly slides in value.

Step 9: Commence buying. Touch the teensy “Prices” icon in the bottom left of your phone to see the latest coin bids, then touch “Accounts” and you get a screen of “wallets,” one for each coin type. Touch the bitcoin (BTC) wallet and a new screen pops with two buttons: Buy. Sell. Can’t sell what you don’t yet own, so you click Buy.

Step 10: Instantly a new screen shows up, with the numbers pad helpfully displayed near the bottom so you can enter in the dollar amount you are about to spend. You tap in the dollar figure into a box marked USD, the app calculates the microscopic portion of coin that sum will fetch, you tap on “Buy” at the top of the screen, confirm the buy on the next screen and BAM!

A new screen shows, against a field of royal blue, a checkmark in a circle at the top, and below it a headline declaring: “Your buy was successful!” And below that, the exact portion you just bought, starting with a zero and carried out to eight decimal places. Or in the case of this purchase (of bitcoin cash, BCH, a new offshoot that we bought at 11:19 p.m. on Friday night):

0.08721555 BCH

At the bottom of the screen a bar instructs: Go to Accounts. When you press it, up comes the listing of the asset you just bought, with the Buy and Sell buttons at the ready. One back-arrow press and you are back to the full Accounts page listing five “wallets” for buying five separate currencies (BCH, BTC, ETC, LTC and the good ol’ USD).

From there you can get fancier, setting price alerts to learn when a currency has fallen to the price you were waiting to see. “Never miss an opportunity,” the Coinbase app advises. This can get obsessive pretty quickly (and drain your time away from Facebook, Instagram and Snap). The app also can alert you when your bitcoin crashes down through a floor you specified, in case you want to sell.

Although, selling isn’t really the point here, is it? If you are bold enough (or unwise enough) to bet on this ethereal thing everyone is talking about, then maybe it is best to put up your money and leave it there for a while, electing patience over panic. You are a rough rider trying to stay on top of this giant, swelling bubble and hold on long enough to reap returns from those who jump on after you. With easy apps like Coinbase, millions more investors may be aiming to do just that. Giddyap!

Next: Five Easy Pieces of advice for bitcoin trading.

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