If you’re not living in a cave, you’re aware that bitcoin has been going crazy the past few weeks, with current prices hovering between $10,000 and $20,000 per coin. This is for an easily replaceable cryptocurrency with no fundamental value - or, for that matter, even a valuable role in today’s economy. This is tulip bulbs. It’s going to crash, and it’s going to crash big. But when it’s going to crash, and how high it goes before then, are not possible to predict.
So what can you do? With individual stocks, if you (you as a regular guy, not as an institutional investor) see one as overvalued, you generally have three options. You can short it, you can write naked calls, or you can buy puts. These have different pros and cons, but in general, shorting and writing naked calls expose you to unlimited downside (downside for you, upside for the security) since you may be required to buy the underlying security at any arbitrary market price. Buying puts caps your loss at the amount you bought the puts for, though there is a decent chance that you will lose 100% of that if the market stays irrational longer than your puts’ expiration horizon. However, they’re highly leveraged, so you can easily make many multiples of your investment if you hit big.
If bitcoin were a stock, buying puts would be the right investment vehicle for how I’m seeing it: the market seems to be completely irrational, and I have no idea how irrational it’ll be, so I don’t want the uncapped downside. But I can easily see bitcoin trading for under $100 when the dust settles, so highly leveraged seems great. And I don’t know the time horizon obviously, so the highly leveraged nature of puts gives me a few shots.
But while I see some exchanges that let you short bitcoin, and now there are a couple of legitimate futures exchanges that are offering various forms of calls on bitcoin, I’m not seeing a way to buy puts. Am I missing something here? Anyone else looking to cash in as a bitcoin bear?
Borrow a large sum of bitcoins. Use them to buy some other assets that will hold their value. Then pay the loan back with bitcoins that have lost their value.
That’s just shorting them, Little Nemo. The problem is that bitcoin can rise much faster than a normal asset which is holding its value, and the lender can demand their bitcoins back. And will demand their bitcoins back if it looks like you’re going to have trouble re-buying them.
I completely agree with your view but I’m afraid I don’t know the answer to your question. I understand the futures market in bitcoin has only begun very recently (as in, this week) which could explain the fact there is not much out there. If there are puts, who is going to take the other side of them? Even more irrational people, I guess.
It’s a good question, and I’ve only thought about it a little bit since I’d have some concerns on counterparty risk. Perhaps the answer is no one, and therefore they don’t exist.
It’s not really any different than any other loan. The only shorting factor is your prediction that the value of bitcoins will fall. And in a situation like that, you won’t sign an agreement that allows the lender to call in the loan at will.
Ultimately, markets develop for puts and calls only when there’s enough interest going both ways to make it worthwhile. And the market becomes a lot less wild west when some regulator standardizes the contracts and standardizes clearing.
It wasn’t that many years ago in this country that there was a booming business in fake securities. If you wanna buy a boat you’ve got to lay enough money that you’re gonna care about things like having a settlement system that won’t seize up during the crash.
Considering most of your real counterparties are criminals, overseas, or Johnny-come-lately can’t-miss speculators, reliable clearing is a tall order.
Like most bubbles, if you buy now or earlier and sell just before the crash, you’ll make a fortune!
Like most bubbles, most investors think they’re smarter than most of the rest of the investors, and thus will better be able to predict when the crash will be, and thus will be among those who sell at the right time.
Like has happened in most bubbles, most of them are mistaken.
What do you mean? The only thing being bought *en masse *are bitcoins. And a few percent of bitcoins are spent on drugs that get consumed.
If you’re thinking people are spending the “paper wealth” of their Bitcoin appreciation that’s not much happening. Because in order to realize that wealth to spend it on a, say, boat, you need to sell the Bitcoin to recover dollars. And once somebody does that, they have real dollars and then a real boat and the risk is gone. Transferred to somebody else actually. But given the recent appreciation rate of Bitcoin, you’d be silly to be cashing it out piecemeal. The boat you spent $50K on this week would cost you $100K in lost appreciation in a couple months.
Now if you could get a dollar loan collateralized by your bitcoin holdings *and *the bank will agree to take even worthless post-crash bitcoin at face as full settlement, *then *you could go blow all your free newfound wealth on yachts and supermodels.
I also want to by a small boat - a canal/narrow boat, actually. It’s there, sitting in Bitcoin but I also know, based on the past 12 months and what should happen in the next 12 months, that boat will have cost me at least 6 times today’s value by next December. Hell, on that basis I can buy a huge boat this time next year - or maybe lose both, and my shirt.
It’s a somewhat mad time but it’s a great ride too.
No one ever went broke by taking profits off the table when the profits were there to be had.
Plenty of people have gone broke by leaving their money in play for too long. For some reason I don’t have the mindset that allows me to look back and say “oh I should have stayed in the game longer”.
So I wouldn’t necessatrily call it ‘silly’ to take all your money out now just because you may miss out on future potential gains. It’s up to the individual though.
I guess the other point is there is such a broad spectrum of opinion on what happens next; it’s a classic bubble or it’s the future, it’s a mugs game or it’s a space-for-all gold rush.
We could argue from here to next Christmas about that - everyone has to make their own call.
Fwiw, from January I am thinking of withdrawing 10% of new profit each month.
One minor(?) difference is that if you borrow bitcoins, you presumably have to repay in bitcoins, not those pieces of paper inscribed “legal tender for all debts public and private.”
Which leads to the question: How do you borrow bitcoins? What is the interest rate? Googling led me to a site where prospective borrowers apparently have to prove they own a Facebook account and then other Facebookers bid on the loan. Another site mentions Getline.in with interest rate shown as “0 ~ 1%/day”, fee of up to “30% of lender’s profit” and default rate of “+30%”. :eek:
Right, and what I’ve seen is that that market exists for a small number of calls. Both the CBOE and CME are offering contracts that are effectively calls, if they aren’t that in name. But no puts. So I guess that’s what I’m asking: is that actually the case, or am I missing something.
Well, I said the boat thing tongue-in-cheek, but yeah, having reliable counterparties is a must. If what I’m looking for doesn’t exist, I’m happy to sit this one out until it does, and hope the bubble lasts.
Yeah, “everyone” said that the huge jump from like 11k to 18k+ was because the futures market was launching and everyone was pumping it up so they could cash out, tank it and make bank on puts. What ended up happening is that futures launched and it went up, from 14k to 16k, and now back up to 18k+.
If people could have bet heavily against Bitcoin when it was at the absolutely ridiculous price of $700, they would have, and they’d be screwed right now. You can bet heavily against it at the absolutely ridiculous price of $18,000, and it might go up to $180,000 a coin in 6 months.
Are these mutually exclusive? If the hyperinflated value of bitcoin crashes (which seems to be such a certainty that I am tempted to say “when”), does that negate the place of private, digital currency in modern economies?
Bitcoin’s progress would be more encouraging were it gauged more by it’s increasing acceptance than by its ballooning relative value. It’s not like there is NO coverage of bitcoin acceptance, but I’m not real clear on how one uses bitcoin to buy a sandwich in Buenos Aires. Further, checking out terms and conditions of mainstream merchants like Expedia reveals that they don’t really accept bitcoin per se; they accept traditional currency from a midprocessor that deals in bitcoin. You might call this splitting hairs, since the arrangement Expedia has with Coinbase mimics the arrangement they have with traditional midprocessors like Paymentech, but the rates of exchange involved with bitcoin are so volatile that I don’t think this is a trivial distinction. A $300 hotel room today is essentially the same as a $300 hotel room three weeks from now; one cannot say that about bitcoin at all.
I’m not saying society won’t transition to bitcoin like we did from paper money to debit cards, but its volatility isn’t encouraging in the long term, even if its direction has only been up.