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.

Popular delusions 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.

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Update on 2017-12-21: Since this was written, bitcoin has climbed to $19,891 on December 17, and fallen to $10,700 on December 21. In a mere four days bitcoin has experienced nearly a 50% decline, just as predicted. Because bitcoin is pure gambling, and gambling has no economic foundation, even greater volatility is looming on the horizon.