Riley: Bitcoins? Trust Those Who Know How to Play the Short Side
Wednesday, December 13, 2017
We live in fascinating times. I have spent my whole life studying, evaluating and trading United States financial markets.
I have always viewed market activity through the lens of listed derivative securities. I watched the opening this week in Bitcoin futures on the CFE Chicago Futures Exchange (CBOE) while the activity was respectable it was not overwhelming.
I expect the volume and open interest to expand dramatically over the next few weeks as various entities move to take early mover advantage of this potential blockbuster market of cryptocurrency derivatives.
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Thus far I have used my extensive trader instincts and limited understanding of cryptocurrency to determine that the short side fraud trade of JPM’s Jamie Dimon was just dumb or early. Either way it was useless advice to anyone. Dimon violated the first rule of trading, “Know what you don’t know." Nobody knows the value of Bitcoin or the value of Bitcoin futures and that includes me. The more I have questioned market traders and professional strategists and risk managers the more I realize how little I know and how complicated the whole discussion is.
In times like this smart traders trade small, close to the vest and look for arbitrage opportunities. Anyone can play macho man and flip coins for a million dollars, maybe that shows balls, but it does not show brains. From my trader perspective, a huge long position in Bitcoin makes little sense right now.
Long-term perspectives dominate the commentary. For example, Warren Buffett says he can’t value Bitcoin,“so it's worthless.” Nobel prize winner Robert Shiller, another skeptic, advises “don’t put your life savings in it, OK?” On the other side, the Winklevoss twins founded the Gemini Exchange where Bitcoin auctions take place and serve as the main source of pricing for CBOE’s XBT (Bitcoin futures). The futures are listed for January, February, and March 2018 and are to be settled in cash on expiration day. The Winklevoss Twins have been referred to as the first “Bitcoin Billionaires” and have been notable long-term bulls believing that Bitcoin will be a “Gold disruptor."
Just search for Bitcoin and you will find a million opinions both short term and long term. Remember though, none of them knows, yet watching CNBC and various pundits all day claim insight. A neutral viewer would reasonably conclude that no one knows anything about Bitcoins. The opinions were so random that viewers would not be wrong in further questioning the entire financial system.
I then sought an informed outside opinion from a friend and colleague I trust, I went to Ryan Atkinson a former employee at LETCO on the American Stock Exchange and later a competitor in the hedge fund world. Both Ryan and I scored big on the “big short” using credit default swaps on subprime commercial and residential Mortgage pools in 2007 and 2008. I trust guys who know how to play the short side and, so I was fascinated to hear his current take on Bitcoin. Please take the time to read “Bitcoins Greater Fools.”
The next few weeks are setting up to be eventful for Bitcoin markets and in general for all market participants as players will be maneuvering for what I expect to be a very dangerous 2018.
Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC News, Yahoo TV, and CNBC.
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