Bitcoin is a Teeny Market


tip of the hat to @twaintwain for the image.

One of the things that people trading Bitcoin think is that it’s a huge market.  They look at all the volume, the ICO’s and all the press and confirmation bias skews their thinking.  I got news for you, it’s teeny.  Not just teeny.  When it comes to bigger markets out there, Bitcoin is a pimple on their ass.  Traders know about them, but Bitcoin is hardly the straw that stirs the drink.

I want to be clear.  I am bullish bitcoin long term. I was a part of one of the original blockchains. A commodity clearinghouse was a private blockchain.  The other day I blogged about how CME should do an ICO.

I also want to be clear about this.  I think cryptocurrency can open up trading to new people.  Right now, it’s harder to break into trading.  Trading firms are consolidating for a lot of reasons.  Having a wide distribution of large and small traders is good for markets.

Here is some data. One Bitcoin is worth $2700.  It got hit a bit yesterday(10%).  If I want to move a billion dollars worth of bitcoin, what will happen? Suppose I want to move a billion euros?  I know I can do that with nary a ripple.  How about Eurodollars?  1 lot is worth $1M.  I used to trade a billion Eurodollars at a crack and I wasn’t that big a trader.  When you want to move a number in traditional markets, they don’t move with any visible movement.  The bid might go offered and it might trade a lower bid, but it recovers quickly.

I remember when Louis Borsellino (LBJ) came to the Eurodollars to trade.  Louis was a large S&P local.  A broker offered a thousand.  Louis started to sell into the market ahead of him.  Another trader(DIXI) bought all the offers including Louis, and then what was offered.  Louis remarked, “I never saw a market where 1000 or more didn’t move it.”.

Different markets act very differently.  Crypto markets are no different.  Crypto traders shouldn’t be deluded that their markets are large or liquid.  They are until they aren’t.  Crypto fanatics will say that is true of every market.  But, some peter out faster than others.

I think that the crypto traders need to take a step back and have perspective.  Making money pretty easily causes you to lose perspective.  Maybe it’s time for them to buy the Porsche.  Floor traders will know exactly what I am referring to.

The true health of a market is the notional volume that trades and the open interest held. Daily volume is but one indicator.  Remember what happened in China when they eliminated wash trades and actually started charging to trade. Volume plummetted.

Yes, I am an old fart. I have been intimately involved with markets since 1986. I traded my student loan when I was in college(1980-84). I borrowed at 3%, and reinvested in money markets at 21%. Yes, short term rates were 21% in 1980. Today they are 0%. That is the beauty of markets. They change.  Most of the time, they don’t let you in on when they are going to go the other way.

Maybe I am delusional.  Maybe my experience clouds my judgement.  Maybe this time it’s different.  Tulip bulbs, stocks on margin, CDO’s.  When I was on the CME Board and we launched the NASDAQ 100 Index, I met the CEO of an internet storage company when it was trading $120 a share back in 2000.  Everyone was rich.  They aren’t in business anymore.

Yes, you can make millions trading Bitcoin if you get long at the right time.  Can you make money being short?  I don’t know of a crypto market you can short.  But, I could be misinformed.  Great, deep liquid markets have longs and shorts.  They have options. They have futures.  They have options on futures.  They have derivatives.  Bitcoin operates by the greater fool theory at this point.  From what I can see, there is no way to short it.

There are also zero ways to hedge it.  When you own bitcoin, you are are naked.

If it goes up in price, great.  You made money.  Go down, you own all the exposure.  I don’t know a reasonable business person that would accept and hold Bitcoin over the long haul on their balance sheet. Even Overstock.com and the Golden State Warriors convert it to fiat currency as soon as they are able.  The risk of holding as an asset on your balance sheet it is too high.

In traditional Forex and debt markets, there are umpteen ways to hedge.  Bitcoin is early, and those ways don’t exist yet.  Certainly, they are coming.  I don’t mean to demean Bitcoin.  I am bullish crypto.  However, I am realistic.  You need a good amount of capital to really trade it.

Ledger X was approved by the CFTC yesterday. That’s a great development.  But, traders need to understand this isn’t a true hedging vehicle.  It is a swaps exchange for institutional type investors.  The amount of margin required to hold a position will make it tough to really use as a hedge.  The cost/opportunity costs associated with it are going to cause volumes to be lower than expected.

In 2000, single stock futures were approved at the SEC after a decade’s long battle.  They were regulated out of existence.   Today, OneChicago still exists and if regulated properly, they’d be a great market and great hedge.  But, the powers that be won’t let it happen because they don’t want the competition.

If you want to be Warren Buffett of Bitcoin then buy it and never ever look at it again until you’re about to die.  The people that invested in Berkshire did really awesome.  First capital in was 1964.  53 years ago.

I know.  I am an old fart.  I don’t understand the new paradigm.  Things are not the way they used to be.  It’s the information age. We never had cryptocurrency before. Remember  Pets.com?

Since March of 2009, trading has been pretty easy if you were a long only trader.  Markets have rallied off of cheap money and Federal Reserve endless QE.  I know two-sided markets.  I have seen melt downs happen.  Sure, 1987 was close to financial Armageddon.  I was there.  In 1998, LTCM blew up and it was horrible. In 2001, the new paradigm of the time blew up.  In Silicon Valley there are people with gray hair that call that time “nuclear winter”.  Of course, 2008 happened.  Today, there are people trading that see the 2008 melt down only as a Wikipedia entry.

My friends and I that have traded made more money trading the red side of the card than the blue side.  If you don’t know what that means, look it up.  Old traders will know.  If they are reading this, maybe they can talk about their experiences in the comments.

There were other melt downs outside of financial stocks.  I remember 1998.  Lean Hogs traded .08 cents per pound.  Farmers couldn’t give hogs away. If you were long, forget about unloading a position.  For context, today Hogs are trading around .80 cents per pound.  I remember 2006 in the grains.  Traders there saw things that never happened before.   They carried them out on stretchers.  People lost their entire careers because things happened that never happened before.  I remember in the early 90s when Eurodollar spreaders said that three-month spreads could never go negative.  How’s -200 sound to you?  I watched traders buy them all the way down and puke.   I sold crude oil at $145 a barrel. I bought it back at $145 a barrel. On the way to $30 a barrel.  I was dead right.  You might say I had no balls.  Easy to say in hindsight.  As a trader, you have to manage risk.

I am not going to tell someone not to trade crypto because it’s “unsafe”. Just go into it with eyes open. It’s not like trading a NYSE stock. It’s not even like trading futures where in some markets getting out is like trying to leave North Korea on a visa.

I am here to tell you that Bitcoin markets might feel liquid. But I am telling you they aren’t. The true test is when the shit hits the fan. We haven’t seen that in crypto.

But, it’s gonna happen. Don’t get caught with your pants down. Warren Buffett also said, “It’s only when the tide goes out that you learn who’s been swimming naked.”

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  • Dan Kunze

    I only invest in companies/things I understand. I sleep well at night. I miss out on the bubbles, but don’t get crushed in the nonsense either. Right now, I don’t understand Bitcoin fully and it’s market. So I’m out for now.

  • Thanks, great read. Bitcoin just crawling out or the ocean!!

  • The OCC won’t clear digital currency futures and options. Gonna take awhile for the derivs market to come into being….

    • If they won’t, there are other clearing operations. Someone will.

  • Andrew Cashion

    I remember the dot.com crash I also remember being happy to see some rich assholes lose their house. Trading crypto is impossible to lose. It’s all upside if you go into it knowing that it’s a game that is most likely going to make you lose. ( you left out mining it )

    I stuffed pell grants inside an FHA loan in college. Thanks to the idiots that caused the 08 problem.

    I gave a guy a ride to his Porsche a few months ago….. was a big time prick asshole type. Private equity. NYC. He was a pussy. A rich pussy. I’m amazed that anything around these types of investors/trader people that I never find a character that has some kind or normalcy about them.

    I don’t know what you mean by “buy a Porsche ” but I HATE Porsches.

    Fuck Porsche.

    • When we were on the floor, sometimes hot young traders who made a quick buck would buy a Porsche. Then they’d have a bad day and they would whine that they had to sell it.

      • Andrew Cashion

        Bahaha lol

  • awaldstein

    Why does the size comparison matter honestly?

    Sure, looking at this like an investment platform is one thing which you articulate well.

    Looking at this as a capitalization platform that is moving the value quotient for many non hard good platforms to the currency itself is another.

    This is disrupting the very business that you are in–no?

    • Because of liquidity. Let’s say I want to move $1 billion in treasury debt. I can do that a variety of ways and the market won’t even burp. Move $1B in Bitcoin? Gonna move the market big time.

      FOREX futures are priced in larger denominations that Bitcoin ($125,000 per one lot I think) You can move real big blocks using all kinds of forex. but you can’t in Bitcoin.

      I think it can be a capitalization platform-but only if it’s strategically and culturally aligned with a core mission of the company. Not as an add on or replacement for traditional VC.

      • awaldstein

        Of course i agree about how integral the coin is to the model.

        What is going to happen of course is that every service based offering of any sort will raise funds this way for as long as they can.

        But honestly I think we are in unchartered territory and my gut tells me that many funds are figuring out ways and investing in these ICOs.

        Are you?

        • Currently we are not. Tough enough to find great seed stage companies in B2B Fin Tech with founders that want to build something huge.

          • awaldstein

            Makes sense though of all people who understand trading, it is you.

          • Ha. A lot of the HFT shops in town are trading them. For an individual, it’s tough because it’s very illiquid. There are those that disagree with me, but the HFT shops are well capitalized.

  • Andrew Cashion
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