Has Bitcoin Reached Peak Stupidity?

Bitcoin futures trading starts today. From this cryptocurrency base camp, where basic Cartesian common sense — let alone an understanding of the highly nonlinear nature of monetary dynamics — is already dangerously rarefied, the final assault on Peak Stupidity, that magnificent siren beckoning in the distant haze, has begun. Of the eager and ambitious hordes from around the world setting out with lofty goals, backpacks laden with confidence, few will survive.

Unknown to most, the futures market — in any commodity — has nothing to do with trading the underlying commodity itself, but rather, with trading warehouse space for that commodity.

If this basic fact is unfamiliar to you, for God’s sake, please, turn around and go home now. You have absolutely no business whatsoever in thinking that you will survive the trek. Remember, there is no shame in recognizing that you are completely ignorant. Just because the slippery slopes are teeming with delirious souls afflicted with altitude sickness brought on by the Dunning-Kruger Effect, it does not mean that you have to follow in their precarious step. On the flanks of Peak Stupidity, accurate self-assessment is a life-saving virtue.

There are two ways to go long — that is, to own — a commodity. One way is to physically have control of the commodity and to warehouse it yourself. The other way to go long is to buy a futures contract for that commodity, which promises physical delivery at a future date, and let someone else warehouse the commodity for you in the interim.

There is always a cost to carrying inventory — that is, to hoarding (in the non-pejorative sense), or to warehousing — whether you warehouse the commodity yourself, or get someone to do it for you.

Under normal market conditions, a futures contract price for a given commodity is more than the commodity’s spot or cash price. The difference in price reflects the various costs associated with warehousing a given commodity for a given time. You pay the warehouseman to store the commodity for you. Under such conditions, the market is said to be in contango.

Under abnormal conditions, such as when there is a shortage of deliverable commodity — which is another way of saying when there is a glut of warehouse space — the futures contract price is less than the commodity’s spot or cash price.  In other words, the warehouseman will pay you to store the commodity with him. Under such conditions, the market is said to be in backwardation.

For tangible commodities, contango simply reflects true warehousing costs when there is a healthy deliverable supply of the commodity. Backwardation, on the other hand, reflects a shortage of deliverable goods, and the glut of warehouse space — along with a “get the first month free” kind of a deal — provides a financial incentive for self-warehousers to bring more deliverable supplies to the market, which benefits society.

If we were discussing gold futures here — which is an entirely different affair given that gold is a monetary metal, with completely different market dynamics compared to the dynamics of ordinary commodities —  backwardation would serve as a warning signal: timeo Danaos et dona ferentes — beware of Greeks bearing gifts. The deliverable supply of gold has dried up because chrysophobic conditions have spooked holders of gold to keep gold safe in their possession, and the “free lunch” offered by backwardation is a trap to get holders of gold to hand over their precious supply, possibly (or probably) to never see it again.

What, then, are bitcoin futures? First, a bitcoin is not a tangible commodity. It does not occupy a specific point in space at a specific time. A bitcoin is nowhere; rather, like an electron, it is “everywhere” — it is an abstraction “distributed” across a vast computer network. A bitcoin is like a Sierpinski gasket of memory. A bitcoin — like your head, if you fancy yourself as a “bitcoin trader” — is in the clouds.

So, if the futures market is about trading warehouse space, then the bitcoin futures market is about trading bitcoin warehouse space, right? But this is absolutely nonsensical. Distributed intangible assets don’t take up space. There is nothing to warehouse! Thus, bitcoin futures contracts are inaccurately named.

A real futures contract, with a real underlying commodity, addresses natural risk. Addressing natural risk is called speculation.

In stark contrast, a bitcoin futures contract, with an abstraction underlying it, addresses man-made, artificial risk. Addressing man-made, artificial risk is called gambling.

Speculation and gambling have nothing to do with one another.

Bitcoin futures are nothing but side-bets on bets, comparable to, say, roulette insurance (if you can even imagine such a ridiculous instrument). They are fraudulent derivatives of no thing, commonly known as nothing. And more nothing-derivatives are sure to follow, such as options on bitcoin futures, bitcoin ETFs, options on bitcoin ETFs, and so on, ad infinitum.

In truth, bitcoin futures contracts add a sophisticated-sounding yet sinister new dimension to the bitcoin pyramid scheme that will soon tower to the heavens. Bitcoin futures contracts are yet another trendy device for Smart Money to fleece Dumb Money. You are not the former.

Bitcoin is not a tangible asset.

Bitcoin is not “digital gold.”

Bitcoin is not a currency.

Bitcoin is gambling in its purest form.

The price of a bitcoin is frictionless, governed only by the recurrent accumulation and avalanche of fools. It has no underlying economic basis. Its shaky foundation is nothing more than man’s perennial, desperate desire to believe that as far as getting something for nothing goes, this time it’s different.

As of this writing, bitcoin is already the greatest mania ever witnessed, far surpassing the Tulip, South Seas, Mississippi, and High Tech bubbles. And the emerging bitcoin futures trading will magnify the insanity by amplifying volatility as futures enable short sellers to drive down the price every time the true believers and the compulsive gamblers — not necessarily mutually exclusive — push it to the stratosphere. Hypoxic conditions during steep ascents will ultimately cause countless climbers to stumble to their deaths into the series of bottomless crevasses opened up by short sellers.

Don’t be surprised if you see single-day price swings of $10,000, or $100,000, or $1,000,000 before it’s all over. I won’t.

Manias force people to choose whether to look like complete idiots either before or after they collapse.

Has the bitcoin hysteria reached peak stupidity?

Despite looking so close, so inviting, the view is deceptive — that mountain is much higher, much farther away, and much more dangerous than it appears from here. There is still a long way to go.

So each of us is faced with a personal decision: climb with the deluded masses to a bitter end, or go home and get safe and cozy.

Sorry. This time it is not different.

Sand Drawing #43 — Snowflake

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I have really come to enjoy drawing free-hand. It’s a treat to see what spontaneously unfolds. The flowery mandala patterns I’ve been doing are like snowflakes — while they all have similarities, each is unique.

Sand Drawing #38 — Expanding Universe

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My earlier sand drawings were all Euclidean constructions — geometric designs made using only a straight-edge and compass. For a straight-edge I use two stakes and mason line. For a compass I use one stake and mason line. These two impossibly simple tools have been used for millennia, and are still used to this day, to produce some of the world’s greatest creations.

Most people are visibly shocked when they learn that none of my designs have any formal measurements or calculations involved, and that they instead emerge entirely out of self-referential consistency. Such is the power of geometry.

In contrast to the Euclidean constructions, all of the mandala or “flower” patterns that I have been doing lately, including the one above, have been created entirely free-hand, that is, using no tools other than my drawing implements, and relying on no pre-planned design. Instead, I start with some sort of small circular design, which serves as the center, and then add design elements in ever-expanding concentric layers. The free-hand designs appear to grow from a nucleus.

Both the Euclidean constructions and the free-hand designs have their own unique charms.

The Euclidean constructions are amazing for their precision over huge areas, which produce stunningly sharp effects. And the variety and complexity of patterns that can be produced with such simple tools as a straight-edge and compass are remarkable. Plus Euclidean constructions afford fascinating exploration and insights into the magnificent and vital field of geometry. Drawing them requires having a design plan worked out beforehand, and then executing that plan, so there is little “creativity” while actually drawing — the creative part takes place earlier at my studio. However, while drawing on the beach, there is a high risk of making serious errors (argh!), and there tends to be a lot of on-the-spot practical problem solving necessary to complete the design successfully.

The free-hand drawings, on the other hand, are amazing because there is no design plan. I spontaneously produce a central pattern, and then add to it by feel. I have accrued a mental collection of design elements that I can mix-and-match as the design expands outward, plus I invent new design elements or combinations as I do more of these free-hand art pieces. If you look at my various free-hand designs, you will see the underlying primordial design elements, and that different patterns emerge from using these design elements in varying combinations. The primordial design elements are atoms; the final designs are molecules. The free-hand designs are not really prone to errors. In fact, if I make an “error”, the best thing to do is simply make the error into a new design element and repeat it! (That’s true in painting and music too — if you make an error, repeat it and it will become part of the intended fabric. Or, similarly, if you don’t know how to pronounce a word, say it loudly, and then repeat it with conviction.) The free-hand designs require being aesthetically attuned the entire time, so in that sense they are more demanding than the Euclidean constructions.

My sense of it is that while people love both types of designs — the highly geometric Euclidean constructions and the intensely organic free-hand designs — they favor the free-hand forms. I think there are several reasons. First, the free-hand designs resemble flowers, and everyone understands and loves flowers. (Few mortals understand and love geometry.) Second, people are mesmerized that I can produce such large, highly-symmetric designs by eye. Frankly, I am too. Look at how perfect the final outer circle is in the above photo. And that design is enormous! Third, people love to watch the design develop. They wait with delicious anticipation to see what the next design element is going to be, and how it will be integrated with the previous.

To me, the free-hand sand drawings are a beautiful metaphor for the expanding universe that is our lives.

Sand Drawing #37 — Coriolis

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The wind this day was so strong that it was difficult to stand. Even though heavy intermittent rain kept the sand wet, packed, and dark, the wind was still able to dislodge the upper grains and carry them in glorious shimmering white streamers.

Despite the tough conditions — well actually, because of the tough conditions — I want to try a design experiment. I knew that the light-colored blowing sand would collect on the leeward side of any raised features. I thought the conditions were ideal to exploit this fact. So I quickly drew a free-hand spiral. Sure enough the white sand settled in the downwind interstices and provided a lovely contrast against the dark sand and even darker shadows of the relief.

Also, the static curves of the spiral were gorgeous underneath the dynamic linear streamers of sand.

The overall effect was absolutely mesmerizing.

Taking the photo was very challenging as I was getting knocked all over the place, and sand and rain were getting on my lens because to get the best lighting I had to shoot into the wind. But I raised the ISO to get the fastest shutter speed possible, and voila! I feel my heavy-weather experiment was a great success.

I think I wore half of the beach home with me.