“The market can stay irrational longer than you can stay solvent.” (John Maynard Keynes)
Especially relevant to short selling
I agree that BTC has been in a bubble, but if I had ever acted on this hunch, I'd be so far underwater right now. There's no telling how long the rally might continue, nor where the correction will settle.
The other commenter made the astute observation that the less leveraged way to make this bet would be to go long on some competing asset.
We have gone from %90 negative a couple years ago on HN to about %50 negative today.
Of course, if one rules out the possibility that cryptocurrency is going to be a thing, then it's in a bubble by definition any time it's worth more than zero. This appears to be the underlying view of at least some commenters here.
When Bitcoin first hit $1000, many businesses started accepting bitcoin, even some hosters. Tipping bots became popular on forums, there were tutorials for old people on how to use bitcoin on TV and in the newspapers even, etc.
Now? I don't know a single business I use that offers bitcoin payments. All of them have removed it again. Bitcoin's actual value as currency has gone down massively.
Yes, it is used. A lot, even. But not as day-to-day currency.
Completely false. Occasionally you will read a newsstory about a merchant who stopped accepting BTC. But, as of today 160k+ merchants accept it, and there was never any large scale event where "all" of them stopped accepting it.
http://www.businessinsider.com/merchants-arent-accepting-bit...
Also this Morgan Stanley research note, and the reporting on it, is of laughable quality...
1) They don't release data: "Morgan Stanley, which based its usage analysis on the information, didn’t say which companies are using bitcoin."
2) They extrapolate from an insufficient number of data points: 3 companies in the top500 this year, down from 5 last year, accept Bitcoin. It's like saying Ferrari's market share is dropping because only 3 billionaires bought a Ferrari this year, down from 5 last year.
3) They attribute a quote to the analyst ("The disparity between virtually no merchant acceptance and Bitcoin’s rapid appreciation is striking,") when in fact it was a quote from Overstock CEO: https://cointelegraph.com/news/bitcoin-merchant-shunning-is-...
4) They claim Bitcoin's skyrocketing price is one of the causes of the decrease in payments. They present of course no facts to justify this theory, because it's false. In the past, anecdotal data reported by merchants has shown precisely the opposite: customers spend their newfound riches.
The complete opposite is true for shorting, not a bet I would make on any certainty level.
You run a small / theoretical risk of getting stuck in a short squeeze situation where you can't get out, but that risk varies substantially by security and there are often laws or mechanisms you can use to protect yourself.
Its how many operate.
- craziness is only going to increase: people have realised they can create money out of thin air with an ICO, or fork of an existing coin
- authorities will take a while to catch up and make arrests
- a lot of people will be taken for suckers
- crypto prices will continue to rise, including both halves of the bitcoin fork
- I'm not going anywhere near this madness
Good luck on the short . . . many hedge fund gods were "right" on the tech bubble but lost their shirts trying to short it before the exuberance subsided
So far I have a 4.6% total return on trying to capitalize on the volatility. That's much less than if I had just held at the original buy. I'm going to keep doing it though to see how it works in long term flat and drop periods. When you hold yourself to rules, it also decreases maximum losses too. I see the strategy as a great way to make safe money relative to crypto.
Right now if the volatility and my returns hold for even just two years, it could be going from $500 to over 100K. It makes it really tempting not to increase the amount I'm playing with even slightly, but I have yet to see how the strategy fares on long term drops. I do have confidence it will perform well on long term flat periods though.
> So far I have a 4.6% total return on trying to capitalize on the volatility. That's much less than if I had just held at the original buy.
If you compare the returns between those two strategies (buy and hold vs mean reversion), make sure you include comparisons of their beta profiles. Their risk measures are going to be very different.
> When you hold yourself to rules, it also decreases maximum losses too.
Speaking of rules, do you have a maximum tolerable drawdown for the strategy, or a number of consecutive losses at which you stop loss or retire the strategy? In order to add more rigor to your work (and so you know there is an element of empirical strategy here instead of just luck), you should conceive a set of priors for the strategy that allow you to set a hypothetical win rate. If you deviate too far from the win rate, or too far from a drawdown as mandated by your risk management rules, you should shut down the algorithm pending a review of its inputs and retire it if it's no longer working.
> Right now if the volatility and my returns hold for even just two years, it could be going from $500 to over 100K.
There are a few hypotheses implicit to your thought here:
1. Market volatility for the target cryptocurrency will remain functionally stable for the next two years,
2. Your strategy will remain functionally stable for the next two years,
3. There is sufficient liquidity to allow you to continually compound your trading strategy's assets with its returns for the next two years, from an initial outlay of $500 to over $100,000, without hitting capital constraints along the way.
Those are all testable hypotheses (which, technically, you're involved in doing), and I can't tell you if they're realistic. I wouldn't count on all three of them being correct though.
Could you elaborate on the beta profiles part? I can't say I'm very knowledgeable there. Assume I know very little about formal risk measurements.
As far as the rules I referenced, I have a max single loss but have yet to set a stop loss/retirement point. This strategy evolved pretty loosely based on the idea of capitalizing on the volatility and part of the reason it's an experiment is that I'm okay with losing the $500 if it comes down to it. It's still incredibly risky, which I am aware of. Part of the reason I'm hesitant to put in a retirement point is that I can see losing a significant chunk in certain scenarios (this algorithm is not yet automated, though it very well may be soon, which would mitigate this) that would still be less than the long term gains. For example, given the returns, the strategy could still perform well taking occasional hits of say 20% in one day infrequently (read a few times a year). If/when this algorithm is automated, I will certainly be building in stop loss constraints.
Fully agreed on the hypothesis and not counting on them at all, but I think they aren't incredibly unrealistic. I carefully chose two years in the post above because I don't see the volatility lasting much longer than that. Right now the strategy is incredibly liquid, and I don't see that part of it changing given the micro focus. No hold so far has lasted longer than 24h, and when this is more formalized, I see a hold time limit (as a function of loss/gain) being used to keep the lost opportunity cost down. I think the tuning will likely occur mainly over the next month or two, and after that I'll likely either stop or let it run.
Overall, I would still categorize this much more as a personal test than a scientific one. We'll see how formal it gets.
I used the word "legitimate" because the parent to my post did. The way I see it there is nothing legitimate about any of these so-called currencies. They are probably all Ponzi schemes in the end.
There’s also the block reward halving process, which is separate, but in theory miners will still be incentivized to mine even after it hits 0, due to transaction fees. If not, well, the difficulty will go down until they are.
You don't even understand how mining difficulty works.
I might be crazy, but your perspective isn't any more rational than mine :)
It will become a currency when most of it has been mined and it's in widespread use and there aren't billions of people who have never heard of it... the price will stabilize then.
It's an error to think that the only use of bitcoin is as a currency. (in the traditional sense)
I have literally only seen one use case where it makes more sense to use bitcoin than to use traditional currency exchanges and that is illegal markets.
The downsides (hard to use, one way transactions, high transfer costs due to low block size, super easy to get hacked and lose all your money...) all massively decrease it's value over traditional currencies. Illegal markets only put up with all of those downsides because companies/governments have specifically made it harder for illegal transactions to take place over traditional currencies.
Who decides what it is supposed to be? If serves as a place to store value, then it can do that regardless of what people think it is supposed to be.
Maybe bitcoin will never be used for smaller, more common transactions, and it will remain solely a store of value. But I think it is simply a matter of time before a solution is found to the technical problem of creating a cryptocurrency (or maybe cryptocurrencies) that can serve the purpose of handling many smaller transactions.
Except the fact that anybody can start his own cryptocurrency and therefore there is no upper limit.
Something to consider is that most of the ICO buyers would prefer to exit to BTC rather than exit to fiat currency. Possibly an ICO crash would make BTC go even higher.
Actually, short BTC please.. I need more fuel for my long position :]
It's also littered with the corpses of "very good investments" that will "make you rich quick".
Without any securities standing behind Bitcoin but the promise that it will go higher, it comes down to gambling. Everybody hopes that another fool will come around and pay more than they did before. Bitcoin represents nothing but a currently 150GB large database of transactions. There are no machines (that are useful outside of Bitcoin), no IP, just a few million hashsums on a lot of computers.
It combines the following to achieve this [ hashing algorithms as proof of work, public key cryptography, solution for byzantine generals, game theory incentives to secure network and transactions ]
The result is something that is both digital and scarce so it is a novel way to store value digitally.
The point is that cryptos' values are based on widespread long term confidence. That is something that can be replicated. But, it's not as easy as hitting [fork this repo] on GitHub. At least 900 fizzled forks have demonstrated that.
I seriously doubt that logic would work, because it's very possible that by the time you think the bubble clearly "popped", it has already reached the bottom. Not to mention that half the market is planning the same thing.
There is a horrible counterparty correlation in this trade. If Bitcoin goes up, you're out your short and lose lots of money. If Bitcoin crashes, the exchange runs into problems and you probably lose your original investment. Balanced against those is the limited profit potential from a marginal drop in the price of Bitcoin.
There are failure modes that have plagued exchanges for centuries. Namely, when things go down (a) lots of activity happens in a short period of time, often leading to administration and technical failures, and (b) lots of people lose money which presages them (i) refusing to pony up and (ii) suing.