Bitcoin

 

The Bitcoin Groupie


by Rick Johnson

Stealing a lyric from the band Journey, Bitcoin worshippers hope and pray we “Don’t Stop Believing”.

In the past two months, the drop in price of Bitcoin has played like the final scene in the movie Bubble Boy-pop! But to the many true fans of Bitcoin, the daily price of Bitcoin is so overrated. This type of steadfast commitment is what the music industry used to call groupies.

The very word drums up all types of folklore about music fanatics and the bands they worship. Whether they waited in the rain for hours to get front row seats, or followed the band around on tour, it represents a certain kind of obsession. Before you get judgemental, following a band can be a rewarding social activity for anybody. A “groupie” does not have to be somebody waiting backstage for a hookup, but can also be a person simply supporting a local band seeking fame, fortune, and a cover on the Rolling Stone.

We develop genuine relationships with these bands and provide that initial fan base which fuels their rise to the top. Heaven forbid they actually make it big, we feel validated knowing we played some small part in their success. After all “we were there” when they were just a garage band. And “we were there” when no one showed up to their gigs.  And yes it’s a very personal thing. And so I’ve come to find many similarities in the rise of Bitcoin which indeed comes with its own devoit screaming groupies.  And like a any hot band, faces the inevitable possibility of ” here today-gone tomorrow”.

Using our garage band analogy, we can rant to the new Bitcoin followers, where were you when the price was under $5000?  Fact is Bitcoin didn’t seem to generate any media attention until it was at nose bleed bubble levels. And it doesn’t take a genius to call that top.

While Bitcoin has left a lot of recent speculators underwater, many are still keeping hope alive with a religious like dedication to change the world. Like many religions, the proliferation of Bitcoin worshipers are vast and wide. But 2017 must have taken the most devout believers by surprise when in a brief period of time Bitcoin rose 1000% in value. Like a garage band that just got its first record deal, the rebellious underground garage nature of Bitcoin found itself with a big top 40 hit. Bitcoin is now a daily topic in all the news media, which must seem overwhelming to the early adopters.

After all, whom would expect that in just one year so much would happen in the cryptocurrency universe. Major events such as the creation of Bitcoin futures, provided some serious validation that this currency was too legit to quit. The old school Bitcoin groupies now had to watch their favorite crypto  rise from the chat rooms to daily CNBC coverage. Keeping it real the promotion of Bitcoin was always the strategy, but nobody wanted a shooting star. If Bitcoin were a band, the 2017 rise must have felt like playing a seedy club one weekend, and playing the Super Bowl half-time show the next.

We’ve finally learned from the countless episodes of Behind The Music, that life at the top is a short stay at a Motel 6 with a continental breakfast. Who wouldn’t feel a bit jittery perched at the top of Mt. Everest under perfect blue skies? The hard part about Bitcoin is who can really say where the top is? Historians and market technicians appreciate the fact that cycles are unavoidable, where empires and assets must eventually fall back to earth. But who needs to have a doctorate in history or physics when all you need to know is the story of a few legendary musical groups. Stories that seem to always end the same way.

Nevertheless, the early believers, the true followers can feel some pride in the fact “they were there” when Bitcoin was a garage band currency. Maybe they made some money, and maybe they didn’t but regardless of today’s prices, cryptocurrencies are probably here to stay. In addition, blockchain technology has unlimited potential whereby we could just be scratching the surface. And so it’s only human to be sentimental for the old days of this new revolution we call Bitcoin. Rest assured if there is one thing we can say about Bitcoin and the cryptocurrency market, the hits will keep on coming.

The Bitcoin Price Dilemma

 

12/26/2017

by Rick Johnson

By Christmas day Bitcoin had dropped a whopping 21% from its yearly highs – reached only four weeks ago.  But an asset still worth around $15,000 may not be the end of the world, or is it?

Everyday the forces of supply and demand drive markets of all types, where economic theory suggests that elasticity is directly proportional to the perceived value of that asset.  In other words, a merchant may decide to charge $20 for a Snickers Bar, but he may find sales weak as buyers reject that asking price.  For goods and services, price ultimately seeks that equilibrium determined by a wide number of factors giving the buyer “shopping power”. However in the financial markets, the issue of pricing   is a bit more complex, especially in the case of Bitcoin and other cryptocurrencies.

While we are being sold that perhaps our government may be too dependent on regulation, some of these regulations or protections are actually effective and important.   To be specific, it was discovered long ago that market assets such as stocks, could be susceptible to price manipulation. Most people don’t fully grasp the concept of “shorting” a stock, let alone the mechanics of price manipulation. Not to imply the price of Bitcoin is being manipulated, but to drive home the point that fair value and market driven asset prices are at the core of why “regulated exchanges” exist.

Here’s a basic example:  If I owned 50,000 shares in XYZ Widget Company purchased at $10 per share, what is to prevent me from offering to buy 10 additional shares of XYZ stock at $12 per share? If another person sells me 1o shares at $12 per share, then it could be factually reported that the price is now $12 per share. No harm no foul right?  Well, let’s say the person who offered to pay $12 per share also had 50,000 shares of XYZ Widget Company.  Now let’s say these were the only two trades made the entire day. Clearly, a potential conflict of interest arises whereby these two large shareholders could be  “bidding up” the stock of XYZ Widget company to drive up the value of their own portfolios.

How could such a thing be prevented in a massive global stock market?  It’s called “transparency”.

Within our regulatory structure, a record of stock purchasers and sellers are recorded at what are called  “exchanges” and “broker-dealers”.  It is this record that publishes all of the transaction information for the entire world to see. If two large shareholders of a small stock started posting higher prices, it wouldn’t take Sherlock Holmes to conclude there may be games afoot. Now for arguments sake, let’s create another scenario whereby instead of just two large shareholders bidding up prices, there are hundreds or thousands of buyers bidding up prices.

This quantity is known as “volume” which logically we can conclude represents a more reliable market  to represent fair value of the stock. While large shareholders still stand to gain, rising prices derived  from market volume carries far more legitimacy. Further, all of these purchases would be on-the-record  by exchanges and broker-dealers as a proven deterrent against manipulation and fraud.

So what does all of this have to do with Bitcoin? Some of you have already figured it out. Bitcoin is NOT  a transparent asset. While the romanticism of a rogue asset created outside of our economic regulations  may seem pretty darn cool, the trade off is the opaqueness, or lack of transparency. The lack of transparency can be assumed to be directly proportional to risk and asset volatility.  One can argue      the point that Bitcoin is acquired and traded all over the world and thus significant volume must exist. Again these are assumptions which at the end of the day are all relative to other global assets.

If size matters we could compare the one-day volume of  Tesla stock option contracts traded, to Bitcoin futures contracts traded at the CBOE and the CME combined.  Survey says… the ONE DAY volume of Tesla stock options contracts traded is at least 20x times the number of Bitcoin futures contracts traded at the CME and CBOE combined.  Thus despite all of the news hype,  that’s not a whole lot of volume by any stretch of the imagination.

Is Bitcoin and the cryptocurrency revolution an advancement in science…absolutely! Is it a glimpse into the future of a new alternative to commerce and trade…only time-and volume, will tell.

Additional Information:

Bitcoin Basic Facts

More on Bitcoin Futures

Bitcoin and Ethereum Prices

 

What is a Bitcoin Future?

 

With all of the talk surrounding Bitcoin futures, this might be the perfect time to explain exactly what futures are in plain english.

The financial instrument known as “futures” were developed to help farmers. While futures are tied to all sorts of financial assets and commodities, there primary purpose was to aid the volatile business of agricultural production. Volatility in this context is defined as an unpredictable range of price swings. These price swings to an American farmer can be the difference between feeding your family and going broke.

The average midwest farmer had to guess on how successful his crops, or yield, was going to be in order to calculate revenue and profit. The problem is the farmer’s forecast is going to be high or low depending on factors such as weather.  Not knowing whether you were going to make a profit, let alone break-even, is a risky way to operate any business. Farmer’s needed a way to lock in prices to remove some of the unpredictable nature of agriculture and price volatility.  “Futures” contracts revolutionized the food industry as it allowed farmers to lock in a selling price at some point in the future-hence the name.  Not only did it allow sellers of crops to lock in prices, it also helped buyers lock in prices whom are on the other side of the deal. As no one had a crystal ball to how good or bad the crop season was going to be, these contracts acted as a “hedge” against the unpredictable nature of prices in agriculture. A wide  range of raw materials and foods use futures contracts to manage prices, from crude oil to pork bellies.

For example, if bad weather created less yield for soybeans this would typically create less supply and thus higher prices. If the farmer “or seller of the crops” used futures or forward contracts to lock in a price, they risk not being able to benefit if the price of these crops suddenly start to rise.  This method    of doing business dates back centuries, and the introduction of contracts simply made these agreements legal obligations.

Today there are hundreds of futures products that represent or “derive” their pricing from all different types of securities which go by another name , “derivatives“. While this word causes some people to cringe for being the root cause of the subprime mortgage crisis, derivatives themselves are only as stable as the underlying asset it represents. Company stock options are another example of derivatives, where the value is “derived” from the price of the company stock.  I don’t imagine Mark Zuckerberg  would have anything negative to say about the derivatives that represent Facebook’s stock price.

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