Easy Peazy Wall Street Squeezy

I’ve been enjoying the antics of the Robin Hoodies, tear hedge funds a new one. It’s a sign the world has changed and creative destruction is in the air.

1. The Setup

Last year the government response to unemployment was to issue checks. Here a check, there a check, everywhere a check check. The casinos are closed, the sports books are closed. Dave Portnoy doesn’t have anything to talk about. A company set up day trading for the little guy. The company is called Robinhood, as the fable goes take from the rich and give to the poor. Suddenly these new Millennial traders were making daily book trading QQQ and HERTZ (HTZ now HTZGQ). Hertz had gone bankrupt a fallen victim of the pandemic. The Robinhoodies didn’t care. They kept trading HTZ as if it was alive. To make money all you have to do is buy low and sell high. So although a dead cat the hoodies just kept bouncing that SOB pulling nickels off of each bounce.

Compounding is an interesting thing. Let’s say you buy HTZ for a buck and sell it for a buck fifteen (15% return). The next time you buy low you have $1.15 to invest and if it pops another.15 cents you have $1.32. 15 cents again, 1.52. Trading is free. The government is sending you $600 per week. It doesn’t take very long to make a PILE of cash bouncing the dead cat playing with the houses money. 600/wk at 15% per week and 600 additional added each week is 170K in 26 weeks. It’s the houses money being played with a bunch of gamblers and gamers. Robinhood has 20 million accounts and represents 20% of the daily market volume.

2. Revenge of the ants:

Gamers hone their skills by playing games and sharing strategies. Boomers “invest” meaning they park their cash in some instrument with a scalper like Vanguard, sit around and philosophize about 5% yearly return while the gamers are looking at 350K/yr return on their government checks of a compounded $600/wk. With their skills honed and an open network established on Reedit the ants set about to loot hedge funds. Options contracts are contracts. You don’t buy an equity you buy a time value decaying promise. There is a winner and a looser. If I buy June IBM calls the option means I can buy IBM stock in June for the price I negotiated earlier. If IBM goes up more than my option I will exercise my option and then sell at the higher price. If IBM doesn’t pan out with a higher price I won’t exercise the option and loose the money I paid to buy the option. The option was sold to me by an IBM stock holder so it’s a bet between me and him about the future price of IBM. If IBM is 150 and I buy a call option for $10 and IBM goes to $170 at the call the stock holder gets $160 (150 +10) for his IBM and I get a $170 share of IBM or I can just sell the 170 share and pocket $10. The option cost me $10 and if exercised as described I make back $10. If IBM went to 180 I’d make $10 dollars for 100% profit on the trade less short term cap gains. Short sellers have the other side. Their option is a put, a bet that IBM will go down. If IBM is 150 and they pay 10$ for the put and IBM goes down to i40 the put gives me sell 140 dollar IBM to someone for a 150 price and I make back my $10. If IBM drops to 130 I make an extra 10 for 100% profit. If IBM goes 150 and above you loose $10

A boatload of synchronized and coordinated hoodies can drive a stock price where ever they want in a thinly traded market. Because it’s supply and demand low supply and high demand will shoot up the price dramatically. If you’re short and you’ve sold a put it means when the piper is paid at expiration you have to come up with shares to settle your contract. If you sold a 150 IBM put and IBM goes to 300 you have to buy 300 IBM and sell it for 150 and loose the difference less what you were paid for the option. This is called a short squeeze. I buy a low cost option and force the market to the moon then buy the stock at the option price and then sell the stock at a big profit.

In a thin market it can be done and was done with Gamestop and several other thinly traded stocks. All of this amounts to levered bets on the underlying, like a game, and Millennials are good at games. It worked so well Robinhood closed down trading on Gamestop tp protect Wall Street. I expect they will be sued 10 ways to Sunday for protecting Wall Street over the little guy. Should be interesting how ol lunch bucket Joe responds to the little guy getting screwed.

The nugget to glean from this networks matter. They change the “game”. The Bayesian odds shifted from a rigged wall street game to a bunch of unaffiliated little guys who rose up to loot the bastards. A network that represents 20% of market volume is a network to be reckoned with. If the network set up a PAC then it would REALLY matter because that network would become the new AFLCIO in terms of political clout. $5 a month from 20M peeps is 1.2 billion per year. If the government tries to shut it down, who’s the Nazi? Not the Donald, he’s hiding out in FL. BTC and Ethereum are also money based networks. Suppose the contracts move from an exchange to a decentralized network with a standard verifiable contract that trades in Ether instead of dollars. I could trade by VPN from a Hong Kong address in a non exchange way and there wouldn’t be a Robinhood to pull the plug on the money machine. Networks matter. Maybe not to geezers earning 5% while Vanguard rips them off but to those interested in playing the game. Networks matter to the geezers as well but they don’t even know it. If you own a mutual fund you own an instrument that has a similar risk to manipulated Gamestop because the price becomes disconnected from value. At one point Gamestop became the MOST VALUABLE stock in the Russel. If you own VTWO you own Gamestop. Game stop is one stock. Suppose 100 stocks in the Russel become part of a basket of network trades. How does the government respond to that? Mutual funds are not indexes. They are derivatives and susceptible to risk distortion through network means.

If you think you’re going to rely on a 60/40 to get you through, that’s last century thinking.

BTC in a Roth?

I’d love to have some BTC in a Roth. It’s difficult to custody alternative assets in a Roth. It all has to be done just exactly right and it’s certainly not set up for trading. Hedgeye has a new BTC trading product which provides buy and sell signals on BTC, GBTC the Grayscale BTC Trust and MSTR which is another stock that owns a LOT of BTC.

GBTC is my experimental candidate. I seems to track BTC directionally with about 60 to 75% of the volatility. Today BTC is up 14% and GBTC is up 9%. The advantage of GBTC is I CAN own it in a Roth, so I can buy and sell without tax consequence and trading is free at Fido. The Hedgeye product gives me enough information to judge when to trade. The product gives a daily risk range channel which allows you to make outcome weighted bets with a high probability of success. The bets allow for when selling has high probability of payoff and when buying has a high probability of payoff.

The result is a tool to compound your money. Say the top end of the BTC range is 40K and the bottom is 33k. If BTC hits 33k BUY as BTC approaches 40k start selling 25 bp at a time. So if I had 100K invested I would sell 25bp of each incremental move up maybe starting at 37K. 33K to 40K is a 21% move so I might pull out 2 K on the way to 40K at 40K (or what ever the new top of the range is) I would be all out and wait for the next bottom end to be reached. This time I may have 107K (100K + 7K profit) to invest and so my investment compounds with every cycle and I’m constantly booking profits preparing for buying at the next low. It’s really only worth doing this in a Roth. Completely different approach that buy and hold and hope.

2021 Prognostication

Paul Pal from Real Vision released his 2021 prognosis into Youtube. Definitely worth the 34 minutes. Real v predicted jobs numbers were off by 350% meaning the government got it wrong by 4.5x. It was 1st week Jan so likely the liquidation has started in small business. I read the NEJM article on the Pfizer vax, 95% effective with 2 doses spaced @ 3 weeks at reducing deaths. Doesn’t say a damn thing about reducing morbidity. I read an article out of Wuhan that claimed 75% of virus survivors have some kind of ongoing morbidity. Another article out of Europe claiming viral immunity is reduced in 52% of people recovered from infection 6 mos post infection. I heard Biden admin was considering ordering 1 dose instead of 2 in order to jab twice as many with half as much. I have no idea if that’s true but I also have no idea what happens to efficacy with a 1 jab solution. I read an article where a hospital CEO was preparing for a surge of deaths because of inadequate infrastructure to support the sick. This doesn’t sound like happy days are here again by summer to me.

Japan, Europe, US, and China still face a demographic economic disaster as my generation retires. Retirement by definition is deflationary. Money printer go brrrrr won’t cause retirees to spend money. If anything it will cause them to save money. Money printing is asymptotically tachyphilactic. I’ve read studies that it takes a 1.5 to 2 x increase over the previous brrrrr to get an effect. In places like Iran Egypt Africa and India the population is young and not adverse to families which is fertile ground to create a middle class and middle class stimulates economic growth and commerce. There is a reason when you call some tech company customer service is in India. You may hate the experience but the guy who picks up the phone gets relatively well paid and he/she will buy a couch or car with that dough.

Many are predicting a bad second half. The drumbeat is loud enough further investing at this time gives me pause. The volatility of Apple Google Amazon IBM VIX are all up double digits reminiscent of early 2020. The greed index is at 70% so fear is the next most likely cycle move. The higher greed goes the more likely fear follows. Commodities are exhibiting volatility decreases

BTC is down 2.71% for the day, but up 11.3% for the week and 89% for the month. ETH down 1.78 for the day, up 3.7% for the week and 93% for the month.

Let’s see what Mr. Pal says:

A Little Ditty ‘Bout Log Regression

Humans don’t do exponential very well. Humans do linear well. Humans experience exponential all the time however since nature runs on exponential. If you get in your car and go from 8 m/s to 16 m/s and your car weighs 1000kg your kinetic energy goes from 32KJ to 128KJ double the speed 2^2 x the energy. Another example is the growth of the virus. We look at the death counter shake our heads and say WTF happened!

When we look at Crypto prices we look at variable exponential growth with variable growth oscillating in and out of bubble territory. By doing a log plot on Y axis growth v X axis time and looking for a smooth fit to the data to some formula y = b*log (x) + a you generate a log regression curve and by adjusting b and a the curve fits the data. Below is a video that describes how this is done and looks at time of the X axis v non bubble growth on the Y. The argument is ETH is 5 years behind BTC in its adoption and is just coming into the second cycle peak while BTC is coming into its third cycle peak. It’s from this kind of analysis that 500K BTC is derived.

I was listening to Raul Pal and instead of charting exponential growth against time he charted against the time it took to various amounts of account addresses. Account address expansion is Metcalf’s law. As the addresses expand the network increases in complexity.

When he did that fit, BTC and ETH were tracking exactly meaning the growth in ETH will follow the same complexity path as BTC just offset by 5 years time. Is it true? I don’t know. It is a way to think about exponential growth v a variable that may not be time, but may just be be functionally related to time in some way.

Beats hell out of standing there staring at a screen saying WTF, while non linear reality unfolds before your glazed over doe eyes. I think understanding this stuff at least at the flavor level has merit even if it’s only based on probability and Bayesian inference. For example I’ve noticed BTC and ETH don’t accelerate in time with each other. When BTC is accelerating ETH goes sideways or down and when BTC goes sideways ETH tends to explode. I think this is the basis of the diversity and risk reduction provided by owning both assets. I think the diversity is not structural but behavioral.

BTC at present is preferred. When it’s moving trading is deferred to BTC and ETH and the other alt’s go dormant. When BTC goes sideways money flows to ETH which causes it to explode because things are exponential. When BTC moves again ETH goes sideways. This effectively provides diversity and tends to reduce risk in the overall portfolio. Eventually the 2 assets will perform different economic functions and diversity will be derived on that but I think in this nascent crypto soup of barely understood assets it’s buy the FOMO that drives diversity enough to create an efficient frontier.

What Blows Up BTC?

Every time I get into an investment the very first thing I do is figure out how to get out. Once you buy the risk you have to decide when to sell the risk. Risk is the actual thing we trade. If we buy the risk low, our next task is to try and figure out when/how to sell that risk high, or at least to sell it at a small loss.

The Bogglehead philosophy is BUY. Every month BUY. If the market goes up 100% regardless of cost BUY more risk. If the market drops 50% BUY more risk. The Bogglehead philosophy presumes a constant rightward and upward growth curve. It’s the ultimate in recency bias. The BTC game at present is asymmetric exponential growth.

People and youtube is full of blue curve mania. Will BTC go to 250K, 500K 1000K? 10,000K? Right mow BTC is running on a Bogglehead dominant philosophy. Just keep buying more and more risk and ignore reality. BTC will eventually become a red curve dominant reality. As institutions buy in they will not buy risk at any price. They will manage risk because that’s how they make money. Managing risk means some BTC actually gets sold at various points like quarterly rebalancing. At some point, a well defined well known point (when the second derivative of the red curve goes negative) the growth starts to slow. It still grows but at a slower rate. At that point the exponential growth party is over. At that point the cost of your risk goes way up.

When that point happens I don’t have a clue, but that red graph is how things will play out for BTC. Institutional adoption because they actually manage risk will force growth to be managed also which means the volatility of the asset will be dramatically reduced. It means the rate of growth drops, the asset goes from being underpriced to correctly priced and the price growth due to asymmetry vanishes.

ETH OTOH isn’t relying on asymmetric growth to create it’s value but it’s ability to do work. It’s protocol will make it into a super secure and super efficient means of transaction and therefore a low friction secure platform upon which to do business. Right now there is a bunch of friction built into transactions. Everybody is skimming points. ETH eliminates “the everybody” and so the transaction occurs between node A and Node B. The transaction is transparent and permanent and secure. Because of a high degree of reliability ETH contracts They eventually will become the basis for credit, leverage and derivative trading IMHO.

BTC’s feature is it doesn’t belong to anybody but you. It’s open source and apolitical. ETH’s feature is it will cost more to steal anything than the value in what you can secure in the theft. I’ve seen credible professionals (not swinging dick youtubers) do log regression analysis ranging from 400K to 1.2M per BTC occurring in 1 to 5 years. So if those values are correct and you have say 10 coins take 1 off the table at 400K. Take another off the table at 500K another at 600K. That leaves 7 coins and 1.5M in cash. I would continue to sell coins till I have 5 left. As the value goes up the asymmetric return goes down and the sky’s the limit becomes limited. Once half the value has been extracted, half the risk is also extracted. BTC can be used to generate interest. Right now as much as 8%. The remaining 5 would then go into generating interest. This plan or some similar variant. In the end it’s not how much money you make, it’s about how much risk you hold.

BTC is NOT an American phenomena. It is a global phenom. It’s traded 24/7. It does not respect American holidays. Lately the volatility has been occurring in the middle of the night aka in the middle of the Asian day. Americans and American financial media tends to have a very parochial understanding of “markets”. BTC doesn’t care about the QQQ’s or a bunch of anti-fa dressed up like buffalo storming the Capitol to take a bunch of selfies.

Crypto 2021

At Thanksgiving I wrote an article urging the adoption of some long term crypto strategy based on an asymmetric exponential probability of gain. Since Thanksgiving my BTC has increases 300%, and 900% for the year. I bought some Ethereum in April for for $100 and today it’s worth $1100. Th market cap of the crypto space has grown from just over 300B to just under 1T. I’ve had some 6 and 7 bagger investments in the past but they never grow this fast. Typically it’s a 5 to 10 year horizon. Early this morning there was a dip. Prices fell from $33,666 to $27,900 and have regained $32,327 in about 14hours. That tells you the demand is monstrous. A 17% correction was erased in a hand full of hours.

I recently saw a you tube video claiming if you own just 1 BTC you are in a group of 808,000 people in the world and if you own as little as 0.22 you will exists in the top 1% of BTC holders forever because the # of BTC is capped. 0.22 BTC is about $7260. If you want a 100K/yr retirement for 30 years you need about 15 BTC At todays prices that’s $495K. Pretty cheap retirement to purchase.

BTC and Ethereum constitute an efficient frontier. The least risk BTC:ETH portfolio is 74:26. I hold these roughly in the 75:25 proportion and have seen the fruit of diversification in my own portfolio. I keep seeing predictions based in 2SD regression lines that put BTC at 1M/coin in 5 years based on Flow models. It’s statistically possible but I think something like 20%/yr compounded is more realistic.

Here is a vid on some stats

Real Vision Power Shares

Real Vision is allowing “powershares” up to 5 shares per month on my plus account. In order to share I need an email address. This I’m sure will generate a “special offer” to join real vision but in the meantime I’ll send you the share curated by me from behind the paywall to view. I’ll try to chose videos by professionals who give their unvarnished rants apart from the typical Wall Street sales boiler plate. i’m not sure how many “close friends” I can accommodate, but I’m not a well read blog so likely I can get 25 on the list. So if you want some behind the paywall curated content drop me an email addr in the chat and I’ll cut and paste you into the cue.

Real Vision

Real Vision is running a promo. It gives you a free trial to the site. Real Vision is the premier in depth financial new outlet on the planet and I generally watch at least one video daily. They cover every kind of topic you can think of by top people in the niche. They have a monster crypto library. It’s low on hype and high on financial dope (see what I did there)? As I understand it you can get a free trial without divulging CC info.

It’s behind a paywall so they aren’t selling anything but information. Take it or leave it but I find it worth my time. If you use the above link I get some kind of credit which could add up to a free year. You can read blogs by some plumber selling you on 4 x 25 or you can spend an hour with Stan Drunkenmiller or Ray Dalio being asked pointed questions about their opinions. There are 3 price levels, $199, $599 and $3499 each level gives access to more specialized content. It’s worth $1.64/day to me to have access to 24/7 Real Vision content and not be consigned to Youtube, but I have the time and the interest. There is also a multi topic forum called the exchange where people exchange. I searched FIRE on the main site and the exchange and not one reference. There were some references to financial independence like one entitled “Playing the Next Financial Revolution”, “Confronting the Establishment in Financial Markets” and “Financial Markets Confidence Trick” Not a single video on just “DCA into low cost mutual funds…” So if you want access to something beside FIRE echo chamber this may be your ticket.

I’m Diggin’ This ‘lil Box

Article and more pics here

I bought one of these Raspberry Pi 400 computer in a keyboard devices a couple weeks ago. I normally would not write about such a device but it’s $70 and is good enough (as in adequate) for a desktop replacement. To be fair you need a mouse, Micro SD card, power supply, some kind of HDMI monitor and a cable between keyboard and monitor to get it running. They have a starter kit that includes everything but monitor AND includes a book for $100. Many of us have a few old LED monitors laying around.

It’s features include the ability to run 2 monitors, built in keyboard, fan-less completely silent operation, 2 usb 3 ports, 1 usb 2 port, an Ethernet port, WiFi and Bluetooth. The O/S is burned to a $5 Micro SD card. It is possible to add a USB SSD drive to boot from which increases speed. The operating system is a variant of Linux called 32 bit Raspberry O/S well maintained, updated regularly and has available tons of free downloadable programs. The software can be upgraded by adding 3 lines to a txt file for slightly improved performance, and then you too can call yourself a hacker.

I have a Microsoft Outlook 365 account which includes web based access to the office suite of programs like Word, Excel, Outlook, Power Point, Calendar, ToDo plus access to One-drive online storage or Google-Drive. This makes the computer usable as a dorm room, summer cottage kind of device, where real work can be accomplished. It can be set up for some gaming but I don’t play games so I don’t know how well games work. It is completely adequate for financial tracking, brokerage and banking. If you don’t have an office account there is a complete perfectly adequate office suite built into the O/S, but I like Word and Excel and Power Point so all of my files are readily available for editing as I like using 365 and One-drive. This blog post was done on the Pi 400. It also has photo editing, audio programs, YOUTUBE, the ability to access my satellite TV, access to my network printers etc. I can run it from a remote desktop control program called VNC from any of my other computers.

Mine has 2 monitors (which were sitting around in boxes), a cheap $12 wireless mouse, and a $30, USB 3, mSata 120GB hard drive I got off Amazon, and a little massaging of the software, and I have a completely usable desktop environment. It’s probably not quite good enough for engineering majors or graphics intensive majors but pretty well good enough for the average college kid or high school kid on a budget.

Pi computes are well know for their programming capability and this one is no exception, with a complete compliment of programming software built into the O/S. Once set up, it’s been 100% reliable. At max load it uses only 6 watts of power and at idle it uses 0 watts of power. You can install other flavors of Linux for free but I find the Raspberry Pi O/S works fine. Every time you install a new O/S it requires initialization of various accounts like email etc, so if it ain’t broke…. Did I say it’s plug and play at $100 plus an old HDMI monitor or TV?

Time To Be Buying BTC and ETH

Money is to be made from BTC and ETH. These will soon enough be adopted by the financial industry because: THERE IS MONEY TO BE MADE FROM BTC AND ETH. Crypto is disruptive technology. Crypto is like moving from riding a horse to driving a car. Crypto is not going to zero. Crypto going to zero is like smart phones going back to landlines. Here is the picture of what is going to happen:

We are just below the little circle half way up the linear growth. There is something called the network effect:

In a fractal sense the picture of the smoke is just a pic of the network upside down. The utility of the network is so revolutionary, so much energy is released, it becomes impossible to go back to the previous state except for major destruction of the infrastructure. This is called creative destruction.

BTC and ETH are different creatures. BTC is an effective store of wealth. It’s highly volatile but it’s volatility has reduced dramatically as it’s become a harder “currency”. When I first bought it in 2015 it had a vol of +- 95% but it NEVER went to zero. Options were created in 2019 and the ability to hedge has dramatically reduced the risk range. In addition BTC banks have been created where BTC can be borrowed and interest paid in BTC. Gold is the closest equivalent. BTC was plentiful at its inception but it is capped at 21M coins. After 21M no more coins will be mined. The rate of return for mining a coin keeps halfing every 5 years. The cost of mining a coin is the energy it takes to do the computation. The cost of mining gold is the cost of extracting an ounce. That is golds bottom line. Also gold is pretty scarce, and so it also is “hard” plus gold doesn’t oxidize so it is stable as a wealth store over millennia. It does have a cost of storage where BTC does not and is more portable. BTC and gold today have similar hardness. After the next halfing BTC will be harder and the base cost of mining will increase because the profit margin in mining will decrease. So the value in BTC is intrinsically biased to growth for a very long time. BTC is yet to be adopted widely but since money can be made a market exists and since BTC is infinitely divisible there is no barrier to ownership. As the price increases you will simply own a smaller % of the 21M total and your stake will be a converted multiple of the currency you wish to convert into. You can invest in Dollars and redeem in Yen. Because the coins are fixed in amount the price per coin is the market variable. Once BTC starts to penetrate as a financial instrument it’s scarcity will force a rise in price. The last coin is slated to be mined in 2140 and today there are 18.6M in circulation, so as time goes on BTC becomes less compliant, scarcer, harder and will grow in value. I consider BTC an energy function equivalent to potential energy (the integral of work) measured in KWH

ETH on the other hand is uncapped in number. ETH is a technology tied to work not potential energy. ETH has a software layer which allows contracts to be executed for pay. Let’s assume you have a computation to do and I have a computer that fits your need. We write a contract where I do the computation and you get the result and I get some ETH which pays for my computation cost plus some profit. Once the contract is executed at the completion of my work, the transfer is transparent, immediate and permanent. You get the data and I get the ETH. That’s the concept. So ETH provides a basis for transparent contractual commerce peer to peer, and so provides a different function in an economy compared to BTC. Both are traded on a market but what drives price are based on different market variables including the ability/inability of purchasers to correctly value its utility but it’s utility will normalize over time. Since ETH is not capped it doesn’t have the kind of hardness BTC does but its utility and value lays in the efficiency in the work it can do. Both are loaded for growth IMHO. I own both so I don’t need an opinion on “which is better”. Both are disruptive technologies. This year ETH has seen explosive growth, in the past BTC was the killer. I own them in a ratio but the ratio is variable not fixed. Since they are completely divisible you can easily DCA or pay a lump sum. Will they pull back? I have no idea. When Fidelity etc starts retailing crypto, investment advisors can put crypto into client accounts, and demand for peer to peer worldwide commerce expands, I don’t see the price going down.

So what is BTC volatility?

BTC 13.77%

GZV (gold) 20.09%

VXAP (apple) 34.49%

VXAZ (amazon) 32.76%

GDX (goldminers) 41.15%

OVX (oil) 42.84%

VXN (QQQ) 25.99%

VIX (SPX) 21.64%