Sunday, 16 July 2017

Bitcoin - Pick a number, any number.


I’m going to write about Bitcoin. Not because I like it, or hate it, just because I rank it as one of the maddest delusions of a market that I have ever known.

A market which is a case study of -

Correlation vs causality
Wealth redistribution.
Randomised social mobility acceleration
Disconnected arguments
The technical analysis of noise.
Cyber crime indices

Bitcoin is the blockchain equivalent of Trevithick's 1802 Coalbrookdale steam locomotive


It is the harbinger of a technology of coding that will change the way many data management functions are performed. It is also an anonymised payment system.

As a payment system, its value can be calculated in the same way you calculate that of a credit card company - the value of the sum of charges made for the transactions by the company, less the costs to run it.  I don’t believe Bitcoin charge transaction fees so on that basis it is zero and I don’t believe they have any IP ownership of the blockchain idea, so zero value there too. As a stock price is effectively a discounted function of future cash flow and Bitcoin has no cash flow, the value of Bitcoin Inc is zero.

Some say that Bitcoin is a currency. Is it? What drives currency price differentials?

Trade balances - Does Bitcoin represent a trade bloc and so move on trade flows? No

Interest Rate Differentials - Does Bitcoin have an interest rate benefit? At zero interest rate, it has a negative carry against any +ve yielding currency - Mostly no (unless you are Swiss).

Foreign Direct Investment - Does Bitcoin see demand due to FDI into a domestic economy? No.

Reserve Asset - Is Bitcoin a global reserve currency displaying all the criteria needed to be seen as such? No.

Inflation - Does Bitcoin move due to relative supply against competitive monetary systems. - Yes, but with the contraction of global QE this is not moving in Bitcoin's favour. An additional consideration is the uncertainty of the evolution of other competing pseudo currencies or the competitive function of gold or any other non-monetary commodity. Why buy Bitcoin when you can hedge your future demand for an underlying essential directly rather than using an intermediary?

Even if we assume Bitcoin is a currency, on the basis that it can be used for transactions, using the parallel to FX markets the transactional function of Bitcoin is identical to a very very short duration FX swap, where both parties agree on a fixing spot rate on which to base other charges, such as interest differentials. As it is on a micro time scale with no transactional charges, those costs are pretty near zero and the fixing rate is immaterial. It doesn’t matter whether the  GBP amount you need to buy something priced in USD is 1 Bitcoin or 0.0001. You also expect the recipient to really be pricing in USD with a BTC conversion occurring at their end - just doing the reverse action as soon as possible. If anyone is mad enough to price their goods at fixed Bitcoin prices then they deserve to see no business or go bust as folk arbitrage the FX rates.

If a retailer does decide to hold its BTC receivables as BTC then they are taking a massive FX risk. Which is why I read this from an Overstock ($OSTK) exec saying they keep 50% of their BTC received as BTC somewhat of a concern if they see themselves as a retailer rather than an FX punter. So should I be short or VERY short of their stock?

Having decided that Bitcoin technology has no unique value to Bitcoin itself, as it can be replicated by others (indeed the proliferation of crypto-currencies is a testament to this) and decided that for transactions one only needs to rent it for a fraction of a second, then why would one want to hold and store it?

It is said that Bitcoin is a store of value that will only go up as there is a limited supply and the rules of issue are immutable.

Even before the current issue of a bifurcation of the Bitcoin platform is considered, the primary condition for storing value is that the value of your store does not change relative to what you value. Most of us value the security of food, shelter and warmth, all of which have to be purchased in local currency. The value of Bitcoin relative to these things is currently oscillating at +/-30% a month. That is one heck of a risk that leaves even investing in CDOs a preferable store of value.

Yet despite all of my cynicism towards the price of Bitcoin, the price has indeed gone up. When the price of something moves in the direction that the narrator predicted it is used as a form of substantiation of their initial arguments. The ‘see I was right’ view is dangerous for the old reason that correlation does not imply causation. Bitcoin prices can effectively soar on the ‘greater fool’ theory rather than any of the tulip like arguments of long term value holding water.

In some cases, the huge volatility risk is a price worth paying for anonymity. Cybercrime ransom holders, money launderers and capital restriction bypassers may well be happy to run the risk but if these are the sole beneficiaries then you can be pretty sure that society will clamp down on the tool tat facilitates their crimes.

I mentioned in my last post on wine and trade selection that complexity is used to imply expertise and I seen this demonstrated in the complexity of technical analysis that is applied to crypto-currency trading. I agree that technical analysis is a fine tool to apply for market timing and can be used to detect changing behavioral trends but its over-precise application to a market which is impossible to apply a fundamental value to strikes me as futile.

I'll apply a BTC example I saw last night

Technical analyst - Price is approaching huge support at $2000!
Price - Cleanly passes through 2000 and keeps grinding lower.
Tech Analyst - Price has broken huge support at $2000! Next support at $1800
Reality - $2000 was never a massive support apart from in the eye of someone with a pencil and ruler and $1800 is just as likely not to be either.

So what does this tell us? Apart from adding to the belief that Bitcoin price is as irrelevant and unpredictable as a random walk, it tells us that a lot of people are applying a lot of effort in the wrong direction, trying to make free money from a gambling machine.

Does this serve a function to society? In one respect it does - It redistributes money. In effect, it is a steroid to social mobility. As 'social mobility' has become a term that solely reflects wealth Bitcoin is a wonderful way to take from one person and give to another. Poor people get rich and rich people get poor though rich people can get richer and poor people poorer. It is a lottery ticket with the benefit of an average yield of 0%, which is better than the -50% of most lottery tickets and winning the lottery is the fastest way up the income tree, even if many winners wouldn't be classed as moving one jot in the true meaning of ‘social class’.

In summary, I remain of the belief that Bitcoin has provided the world with a wonderful starting point from which humanity will benefit, but anyone buying a Bitcoin for long term investment purposes will end up as rich as a man who ordered 200 of Trevithick's 1802 Coalbrookdale steam locomotives expecting them to dominate the railway age for the next hundred years.

Friday, 14 July 2017

Donnie and the Great Glass Separator

Donnie and the great glass separator


As Trump is now pushing for his Mexican Wall to be transparent, let's have a guess at future news headlines.


-- Pilkington stock resembles Bitcoin during a cybercrime outbreak..

-- Window cleaners paid 250k a year as national window cleaner shortage bites.

-- Wall Street offices remain the most opaque since 2007 due to window cleaner shortage.

-- Microsoft stock trebles as algos misinterpret news of massive new demand for windows

-- Plastic surgeons move to new Mexico cashing in on the surge in facial injuries due to walking into unseen barriers.

-- Convexity within structure causes unforeseen losses. - Wildfires ignite due to sunlight focusing at bends in the wall.

-- Drug prices in US collapse on increased supply as drug dealers can now see and catch the incoming contraband.

-- Mexicans break the world record for mass mooning.

-- Curtain sales soar as design flaws in original plan ameliorated.

-- Trump warned not to throw stones as old English adage upheld by a court in Albuquerque.

-- Algorithmic trading companies use wall as massive fiber optic data feed.

-- Vogue declares glass this year's thing.

-- Opthalmologists argue wall should be corrective.

-- 'Rain-x' hording blamed for 2% rise in US retail sales.

-- CNN mock Fox News story that wall to be double glazed to keep Texas cool.

-- Seaworld petition for double glazing to have 30ft separation with a water-filled interior to create first Atlantic to Pacific dolphin race track.

-- Dolphins trained and fitted with anti-drug dealer missiles.

-- Wall to be semi-mirrored so Mexicans can't look in, but US can look out.

-- Peep-show business establishes 300 miles of booths.

-- Rayban sponsor wall.

-- Anti-discrimination groups march under the banner "The glass is always cleaner on the other side"

-- Glass ceilings ruled legal on glass wall president precedent.

-- China build new Great Wall, invisible from space.

Tuesday, 11 July 2017

Vinicultural Analysis.

For the past few months I have been pretty inactive in the markets, instead parking money in dull old dividend paying stocks as I couldn’t see much else to get excited about.

Since then we have seen various scares pop up and disappear but, like perennial weeds in the garden of information, they sprout and either die or get pulled out. The continuing debate over who put the RU in TRUMP, the noise around how Brexit will or won't happen, the odd resurrection of how China is doomed or Australian property is about to go bust. The regular resurrection of "look at global debt it’s all going to blow up", the odd explosion of crypto-currency excitement based on the fact that the price has moved (normally due to someone using it to blackmail the world's computer users) or we have the perennial oil will dump/rally because xyz. But the markets have been steady. Of course, if you fractalise a chart you can always paint a picture of sharp moves but look at longer charts of much at all and nothing is really that exciting. Even USDMXN is back to where it was a year ago, acting as a class example of how short term trading on really long term ideas nearly always ends in disappointment.

So hence I have been sitting it out, picking up dividends.

There have been the odd opportunistic punts, normally fading fast moves, but I have even closed out my long time favorite of long USDTRY. Turkey is still a major focus for me as it sits at the intersection of so many regional power plays, but with the Justice March now over, media attention will wane and the country reverts to the back burner.

But today I sold US stock indices.

Why? Well, here I have a choice. I can list some complex arguments including charts, spreadsheets, numbers, political insight, positioning information and all sorts of things but is there any point? Explaining why you have put on trades is much like explaining why you like a wine. You only do so if you want others to try it or buy it.

To communicate in the world of wine, a new language has to be learned. One of the terroirs, climates and similes to every possible taste that isn’t wine flavoured - you never hear a wine critic saying a wine tastes of grapes, it's always blackberries, honey, tannins and herbal notes. This language is then used to describe to others, who also understand the language, whether they also should or should not drink it. But if you have no intention of telling anyone else wabout a wine, nor any interest in wines other people like, then you have no need to learn the language. I know which wines I like and I have them on a mental list in order of preference, but I do not need to know that a wine is oaky, citrusy, rich, light, tannic or blackberries with a finish of old dish mops to know, when I drink it, whether I like it or not.

In the world of finance the language of communication is slightly more important as, unlike wine, it really doesn't matter whether I like what I taste, but whether everyone around me likes what I have tasted too, preferably after I have tasted it so that they go out and buy it making what is in my cellar all the more valuable.

So the reams written on financial markets have the purpose of explaining why people like things in the hope that others will follow the trade or pay to read the critics' views, or just as importantly, to explain errors of judgment. Where a stock is purchased but turns out to be corked, the communication  runs along the lines of why, ast the trade idea came from a great house, grown on a terroir of MBA PhDs, lauded by the greatest trade sommeliers in the world,  it really was a great idea but just bad luck that it was pure vinegar to the P+L palate.

The routes to drinking a wine that you like are similar to those to initiating a trade.

1) You buy a plot of suitable land, plant vines, harvest the grapes a few years later, learn how to make wine, make wine and then drink it.

This route is the same as doing your own research. It is hugely time-consuming and you have to be an expert at every point of the process to ensure that errors don't compound resulting with a Balsamic.You run the risks that in the time it has taken your tastes have changed or you have gone bust investing in the infrastructure. This is the losing trade that really should have worked because you have 10 years of records and proof of process, yet you can only offer the excuse that it was really awful as being due to 'unforeseen eventualities'.

2) You follow the critics.

You read the Sunday newspaper supplements and try the recommended wines in the food and drink sections. After a bit, you get to know which critics throw up a higher number of wines you like and so tend to follow their recommendations more than any other. This is the cult of the media guru, the hedge fund god, the big name. But in following them you are always paying more than you should. The critics are already positioned, or their bosses are, and even if you sprint straight from the newsagent to the off-licence you’ll find you've been beaten to it and the shelves are stripped bare.

3) You know a man who knows a man.

I used to know a man the wine industry who specialised in finding the small vineyards next to the big famous ones. Their wines were nearly as good but at a fraction of the price as they weren’t geared for large-scale production or distribution. In finance, the chatter of those perceived to be closer to the big decision makers is deemed more valuable than that of others. Whispers start that a great trade is coming and only the cognoscenti know. And, if you listen to the right people, you may catch a whiff of it too. Twitter is the Tinder of financial gossip matchmaking.

4) You try lots of wines and settle on the ones you like.

You have instinctively grown to know what works for you, though you really can’t explain why you like them to anyone else. Nor want to. You rarely hear of these wine drinkers as they serve wine as a secondary consideration to the main event of the food or a party. They know what they like but won’t ram its wonderfulness down your throat. These are the old traders who just seem to have a gut feeling for markets and rarely say more than "it’s bid" (I like it) or "it’s offered" (I don’t like it).

5) Use a combination of 2, 3 and 4.

This is how things tend to work both in wine and financial markets. Opinions bend according to fashions, fashions are set by style leaders (gurus) and the masses follow. Gurus wax and wane but mostly wax until there are so many of them their value is diluted. Yet to be part of the in-crowd you have to be able to talk the language. To sound more of an authority than the next complexity is exploited. The finer the detail the more assumed the expertise is.But often the finer the detail the less influence it has on outcome and the less it matters.

Apart from methods 1 and 4, one has to learn the language of financial market communications. Either to show one's own prowess, to be followed or paid, or to understand what others are saying, whether it is true or not. Every now and again a critic can trip up, like the CNN lady who claimed this week that Stagflation is a new made up would be the equivalent of a wine critic excusing herself, saying that she just thought that Sauvignon was a typo of Sauterne.

I have sold US stocks. The price can go up or down. 50/50. That is all you really need to know. Why I think they will go down is only important if I want you to also sell US stocks or for you to think I'm really knowledgeable and to be listened to in future.

I really don’t need you to do either.

I just know that I like it.