Financial markets

Bitcoin Bears Are Excited About Futures

But will shorting bitcoin keep the price a little closer to reality?

Ponzi scheme or mankind's salvation?

Photographer: Roslan Rahman/AFP/Getty Images
This post originally appeared in Money Stuff.

Bitcoin futures start trading next week, and people who have spent the last few years convinced that bitcoin is a dumb bubble are very excited to finally be able to put their money where their mouths are and start shorting bitcoin. But is this right?

“The futures reduce the frictions of going short more than they do of going long, so it’s probably net bearish,” said Craig Pirrong, a business professor at the University of Houston. “Having this instrument that makes it easier to short might keep the bitcoin price a little closer to reality.”

I mean, it's not wrong. Bitcoin futures do make it easier to go short: Borrowing bitcoins to short them physically is difficult and expensive; shorting them through futures should be straightforward. Bitcoin futures also make it easier to go long: Buying bitcoins to own them physically is rather annoying for institutional investors; if you own a lot of bitcoins you have to worry about getting them hacked or stolen, or you have to store them in cold storage (slips of paper, safes), which makes them inconvenient as trading assets. It is strictly true that bitcoin futures will do more to make shorts easier than they will to make longs easier -- just because being long bitcoin, now, is easier than being short -- but I am not sure that that will be net bearish. If there are 100 people lining up to go long once it gets 10 percent easier, and 10 people lining up to go short once it gets 50 percent easier, then making it a little easier to go long and a lot easier to go short may just lead to more longs. 

RBS's Davies Says Bitcoin Is 'Irrational Exuberance'

Also here's a guy:

Some see the bitcoin market as “one of the greatest shorting opportunities ever,” said Lou Kerner, a partner at Flight VC who invests in the cryptocurrency. “You have a lot of zealotry, and a lot of people, including me, who think it’s the greatest thing to ever happen in the history of mankind. You have a lot of people who think it’s a bubble and a Ponzi scheme. It turns out both of them can’t be right.”

I appreciate that he is aware of and appreciates the divergence of opinion on the matter, but nonetheless not only is on balance bullish, but thinks it's the greatest thing to ever happen in the history of mankind. It's hard to go back to "we think the fundamentals of XYZ are fine but we are a Sell on valuation" after getting involved in an asset class that is either a Ponzi or mankind's salvation. 

Elsewhere hey look it is factor investing in cryptocurrencies:

According to Hubrich, three factors work in the major digital currencies: value, carry and momentum. The philosophical challenge is finding a way to replicate those traits. They’re reasonably straightforward in stocks, say, measuring value through a company’s price-earnings ratio.

To find a crypto corollary, Hubrich gets creative. He translates value to mean the token’s market value versus the dollar volume of blockchain transactions. For momentum, Hubrich uses a four-week horizon because of limited historical data, rather than the 12 months typically used for equities.

There are two deep theories of what factor investing is. One theory holds that the "factors" are risk factors, and that -- say -- the value factor has above-market returns because value stocks have some additional risk that investors need compensation for. The other theory holds that the factors are behavioral anomalies, and that -- say -- momentum investing has above-market returns because humans predictably like to buy things that are going up. If you believe the first theory, it would be a little weird to extend it too literally to bitcoin. But if you believe the second then, I mean, go nuts. There is no market more ... behavioral ... than bitcoin.

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    Matt Levine at mlevine51@bloomberg.net

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