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Riley: Bitcoins? Trust Those Who Know How to Play the Short Side

Wednesday, December 13, 2017

Michael G. Riley, GoLocalProv MINDSETTER™

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.

Related Slideshow: GoLocal: Benchmark Poll, October 2017

Sponsor: GoLocalProv

Sample: N=403

Rhode Island General Election Voters Margin of Error: +/- 4.9% at 95% Confidence Level

Interviewing Period: October 9-11, 2017

Mode: Landline (61%) and Mobile (39%)

Telephone Directed by: John Della Volpe, SocialSphere, Inc.

Are you registered to vote at this address?

Yes: 100%

When it comes to voting, do you consider yourself to be affiliated with the Democratic Party, the Republican Party, Moderate, or Unaffiliated with a major party?

Unaffiliated: 49%

Democrat: 32%

Republican: 15%

Moderate: .4%

Next year, in November of 2018, there will be a statewide general election for Governor and many other state offices. How likely is it that you will vote in this election?

Will you definitely be voting, will you probably be voting, are you 50-50...

Definitely be voting: 78%

Probably be voting: 13%

50-50: 9%

In general, would you say things in Rhode Island are headed in the right direction or are they off on the wrong track?

Right track: 39%

Wrong track: 45%

Mixed: 10%

Don't know/Refused: .6%

What would you say is the number one problem facing Rhode Island that you would like the Governor to address?

Jobs and economy: 21%

Education: 12%

Taxes: 12%

Roads: 12%

State budget: 9%

Corruption/Public integrity: .8%

Healthcare: 3%

Governor: 3%

Homelessness: 2%

Immigration: 2%

Other: 7%

Don’t know: .9%

Over the past three years or so, would you say the economy in Rhode Island has improved, gotten worse, or not changed at all?

Changed for the better: 35%

Changed for the worse: 16%

Not changed at all: 43%

Don't know/Refused: 5%

Over the same time, has your family's financial situation improved, gotten worse, or not changed at all?

Changed for the better: 26%

Changed for the worse: 19%

Not changed at all: 54%

Don't know/Refused: 1%

Recently, a proposal has been made to permit the issuance of $81 million in bonds by the State to build a new stadium for the Pawtucket Red Sox. If there was an election today on this issue, would you vote to approve or reject issuing $81 million in financing supported moral obligation bonds to build the stadium?

Net: Approve: 28%

Definitely approve: 15%

Probably approve: 14%

Net: Reject: 67%

Probably reject: 19%

Definitely reject: 48%

Don't know: 4%

Could you please tell me your age?

18-24: 7%

25-34: 15%

35-44: 15%

45-54: 20%

55-64: 17%

65+: 25%

Don't know/refused: 1%

What was the last grade you completed in school?

0-11: 2%

High school grad: 16%

Technical/Vocational school: 1%

Some college: 23%

College grad: 34%

Graduate degree: 24%

Don't know/refused: 1%

The next question is about the total income of YOUR HOUSEHOLD for the PAST 12 MONTHS. Please include your income PLUS the income of all members living in your household (including cohabiting partners and armed forces members living at home).

$50,000 or less: 27%

More $50,000 but less than $75,000: 13%

More $75,000 but less than $100,000: 13%

More $100,000 but less than $150,000: 17%

$150,000 or more: 13%

Don't know/refused: 17%

What particular ethnic group or nationality - such as English, French, Italian, Irish, Latino, Jewish, African American, and so forth - do you consider yourself a part of or feel closest to?

American/None: 21%

English: 13%

Italian: 13%

Irish: 12%

Black or African American: 6%

Latino/Hispanic: 6%

French: 6%

Portuguese: 3%

Jewish: 3%

German: 1%

Would you say that Donald Trump has done an excellent good, fair or poor job as President?

Excellent: 13%
Good: 12%
Fair: 14%
Poor: 57%
Never heard of: 0%
Cannot rate: 3%

Would you say that Jack Reed has done an excellent good, fair or poor job as a United States Senator?

Excellent: 22%
Good: 29%
Fair: 23%
Poor: 15%
Never heard of: 6%
Cannot rate: 6%

Would you say that Sheldon Whitehouse has done an excellent good, fair or poor job as a United States Senator?

Excellent: 17%
Good: 22%
Fair: 21%
Poor: 28%
Never heard of: 6%
Cannot rate: 7%

Would you say that David Cicilline has done an excellent good, fair or poor job as a Member of Congress?

Excellent: 9%
Good: 29%
Fair: 21%
Poor: 27%
Never heard of: 6%
Cannot rate: 8%

Would you say that James Langevin has done an excellent good, fair or poor job as a Member of Congress?

Excellent: 7%
Good: 30%
Fair: 20%
Poor: 18%
Never heard of: 13%
Cannot rate: 11%

Would you say that Gina Raimondo has done an excellent good, fair or poor job as Governor?

Excellent: 6%
Good: 28%
Fair: 30%
Poor: 31%
Never heard of: 1%
Cannot rate: 3%

Would you say that Daniel McKee has done an excellent good, fair or poor job as Lieutenant Governor?

Excellent: 3%
Good: 16%
Fair: 21%
Poor: 8%
Never heard of: 26%
Cannot rate: 25%

Would you say that Peter Kilmartin has done an excellent good, fair or poor job as Attorney General?

Excellent: 3%
Good: 20%
Fair: 28%
Poor: 17%
Never heard of: 13%
Cannot rate: 19%

Would you say that Seth Magaziner has done an excellent good, fair or poor job as General Treasurer?

Excellent: 4%
Good: 18%
Fair: 24%
Poor: 13%
Never heard of: 21%
Cannot rate: 21%

Would you say that Nellie Gorbea has done an excellent good, fair or poor job as Secretary of State?

Excellent: 5%
Good: 21%
Fair: 21%
Poor: 10%
Never heard of: 20%
Cannot rate: 23%

Would you say that Jorge Elorza has done an excellent good, fair or poor job as Mayor of Providence?

Excellent: 4%
Good: 24%
Fair: 24%
Poor: 22%
Never heard of: 9%
Cannot rate: 15%

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