Category Archives: Cryptocurrency

BTC = 0 Is A Possibility

My warnings on Tether and cryptocurrencies in general have come to pass. $2-4K was my original downside target but I have now came to the conclusion that 0 is not as implausible as it sounds.

I have always seen bitcoin as a series of bubbles, each built on a new crop of buyers. The most recent buying climax coincided with the crescendo of financial media coverage just prior to the launching of CBOE/CME futures. That was the tell-tale sign. Without that level of sustained or ever increasing coverage it’s hard to attract new buyers. Bitcoin may be the largest bubble in human history, but its demise is/will be exactly the same as all others — by running out of buyers.

Bitcoin miners must extract fiat from the system to pay on-going expenses. This Bloomberg article dated Jan 9, 2018 provides a nice breakdown of mining costs in China: from about $3869 to $6925 per coin depending on electricity rates ($0.03-0.13). It implies a fixed cost of $2952, and electricity costs of $917-3973 per coin. It goes without saying that Chinese miners are not the marginal producers globally.

Overnight, bitcoin price dropped to $7540 on GDAX, and has rebounded to a range of $8400-9100. I believe the decline is likely to resume after some consolidation at this level. It may even attempt to bounce but former support has turned into resistance. The next support is likely to be around $5000, at which point BTC price will have come below the running cost of marginal miners, putting them out of business. As hash power declines, the difficulty should re-adjust; however, it also opens up the possibility of a nefarious actor acquiring hash power on the cheap and mounting a 51% attack on the whole network. Trust in the system would have long eroded before reaching that point.

My previous downside target was based on price action alone and did not include this dynamic of ever increasing mining costs. When the whole network consisted of a bunch of PCs in dorm rooms, it was OK for the price to linger. Such is night and day from the current reality of industrialized mining. Bitcoin has become a bubble that, if not inflating, will quickly implode upon itself.

Bitcoin has been a great trading vehicle. Whatever the technical merits of blockchain, it does not rise to the level of the internet. Pretty much all the promises of internet made during the DotCom era came true eventually, but the bubble still collapsed. To-date, the real benefits of the blockchain have been largely ethereal (pun intended). I still roam around Bitcointalk and Reddit forums to observe the human drama. Little by little, the sentiment is turning. It will be a hard lesson for many people. The only consolation: most of the riches weren’t there in the first place.


My full crypto trading record can be found here. I do not currently have, nor plan to start in the near future, any positions in cryptocurrencies, long or short. I currently hold a small number of $OSTK puts.

Performance Tracking January 2018

For calculation methodology see this post.

It was one of the best Januaries for stocks in history. Despite a pull back in the last couple of days, $SPY finished up 5.64%. Its chart now has all the appearance of a parabolic rise. Bonds took a hit however, as rates rose with inflation fears with the economy heating up. $AGG was lower by 1.13%, bringing the 60/40 down to a still very respectable +2.93% for the month.

My passive account was up 3.5%, without PMs it would have been up 3.61%. In other words, PMs were again the source of a small amount of drag. Stable value funds definitely helped with the returns in January. Small cap and total international underperformed while EM did slightly better than $SPY. The active account gained 16.38%, propelling the total portfolio to a monthly gain of 11%. This is the fourth record in as many months, and by a wide margin. The main return driver was options which were responsible for nearly 3/4 of the dollar gain.

The individual stocks were +6.67% for the month, +1.06% relative to $SPY and +5.17% since last April. The FI CEFs took a hit of -1.19%. While the multi-strategy funds benefited from interest rate swaps and foreign positions, the muni CEFs took it on the chin. The flattening of the yield curve squeezes leveraged funds from both ends. The FI CEFs were -0.07% relative to $AGG this month and +6.98% since last April.

Transactions: added $NAC as its discount widened to 10%. It’ll be a good trade as long as rates stabilize somewhat. This month I executed my first volatility based trade with $UVXY calls. This is a new, long-vol strategy based on a technical indicator and readings. It has the added advantage of being negatively correlated with my equity and other option positions. Indeed I could afford to take a much larger position than I did. Other transactions included adding $OSTK puts, $DIA calls and moving up other short put positions.

End of Month Portfolio Composition

PMs were at 11.3%, equities 51.9%, fixed income 23%, cash 5.1% and other 8.6%. The “Other” category was composed of 3X ETF 0.4%, and options 8.3%. Exposure from options grew to equivalent of 97.8% of the total portfolio, for a leverage ratio of 11.8X. Total portfolio equity exposure increased to 150%.

Tether all the way down, Weekly Wrap 1/21-27/2018

Macro and Markets

Investors were undeterred (encouraged?) by the turmoil in bond and currency markets and continue to bid up stocks. There are signs that we have entered a parabolic phase which if continue unabated will reach S&P 3500 in April.

To be clear, this early a blow-off top is NOT the scenario I had been expecting. I established my options position in two large tranches, first in Jun-Aug, and then Oct-Nov of last year. All were Jan’19 expiry LEAPs with the hope of realizing long term capital gains from the long call side. Peaking in April is too far from the 1-year anniversary that it’s uneconomical to try to use protective puts to tie me over. So I’m mentally preparing to take the gains early if necessary. It won’t be the first time. It’s exactly what I did with cryptos. I had wanted to wait till March but the price action didn’t allow that luxury.

That said signs of excessive optimism are everywhere. One example is the equity put/call ratio being at extreme lows. The most recent Epsilon Theory letter also covered this topic.

I’m still holding the $UVXY calls. VIX was flat on the week even as stocks made new highs, indicating a degree of nervousness out there. Everyone is looking to the FOMC meeting for some direction. The $UVXY calls are a very small position as I’m expecting only a minor pull-back.

Muni CEFs sold off this week while the interest rate hedged multi strategy CEFs held steady — no surprise there. I’ve made the decision not to make any changes on the fixed-income side until a clear sign that the credit cycle has turned; however the discount in $NAC is looking mighty enticing. In general I expect money coming out of bonds into stocks should further fuel this rally.


The chatter around Tether is growing louder. The sub-Reddit (/r/Tether) is becoming a hang-out for concerned people. YouTube is another source (search Tether). I bought a few puts on Overstock ($OSTK, Mar 60), a crypto proxy. In December I made some quick money in its calls.

I actually quite like Overstock’s idiosyncratic CEO, Patrick Byrne, but this is not about personal likability. $OSTK was at mid 70’s this week, still up a hefty amount from mid teens back in August when it announced keeping the cryptos that its customers paid, and later establishing its own cryptocurrency. I’d say there is still plenty of “fluff” in that stock price should the whole cryto complex implode.

The supposed defense that Bitfinex/Tether put out actually implied egregious accounting misconduct: at a minimum co-mingling of funds belonging to separate legal entities even if the principles are the same. I suspect Tether is “printed” to purchase BTC which should have been sold for USD to back Tether but was not. Were I to feel generous, I’d assume that Bitfinex hands Tether fiat for that BTC. At any rate, Bitfinex/Tether is probably holding a massive amount of BTC giving them further incentive to prop up its price. But should BTC continue to fall, e.g. breaking $10k again, they will be under pressure to liquidate and it’ll be like a dam bursting. Trading has been unusually calm in the last couple of days. It’s hard to tell real vs. wash trades to give volume analysis any confidence.

History tells that when one has a weak hand and everyone else knows about it, the outcome seldom goes one’s way. A recent example was Amaranth when every hedge fund went against its position; Long Term Capital was a more distant example. Everyone who holds crypto will be affected when this thing implodes. You are forewarned.


Oh how I wish I held onto $LABU a little longer, that was another 15-20% that I missed. I’m still short $XBI puts so still have exposure there. Other trades this week were to move up strike prices on the short put positions. I also continued to add to PM miners.

Current portfolio composition is as follows: PMs 11.2%; equities 51.6%; FI, 22.0%; cash equivalent, 5.8%; and other, 9.5%. The “other” category is composed of 3X ETFs, 0.4% and options, 9.1%. Effective exposure from options is equal to 95.9% of total portfolio value for a leverage ratio of 10.6X. The portfolio is 147.5% long equities (not beta-adjusted). Options value and effective exposure both increased along with that of the underlying. Gamma remains positive. Options had and will continue to have outsized returns as long as this bull market continues.

YTD the active account is up 20.04% and the total portfolio 13.59%, vs. 7.39% for SPY and 4.08% for 60/40. About 2/3 of the gains have come from options, i.e. about +4.5% from everything else.

Good Reads

None of the above is investment advice, the standard disclaimer applies.

So Long, and Thanks for All the Fish

The title is borrowed from the fourth book of Douglas Adams’ Hitchhiker’s Guide to the Galaxy “trilogy”, where the dolphins leave earth before its imminent destruction.

This morning I sold the last of my ethereum. Later on GDAX, BTC dropped to as low as $9928, below the Dec 22 low of $10,400, while ethereum got to as low as $852. I have been calling $19.8K on Dec 17 THE peak in BTC since the end of December. The odds of that being right are better than 50/50.

I’ll show my crypto account activity one last time. In the last two weeks, I was able to add a little ethereum and then gradually got out between $1100 and $1400. Overall, I made 15 times my money — not bad for 10 month of “work”. Cryptos will surely go down in history as THE most outrageous collective delusion. I count my blessings that my investment philosophy allowed me to hitch a ride and make a decent profit. The words of George Soros ring true:

“When I see a bubble forming, I rush in to buy, adding fuel to the fire,” he said in 2009. “That is not irrational.”

If I’m right, a large part of the human drama is still to be played out. Many late-comers will lose a lot of money. There’s little that I can say to counsel them other than that in a bear market, bounces are to be sold.

None of the above is investment advice, the standard disclaimer applies.

Cryptocurrency 2017 Recap

On Dec 5, I made a prediction for bitcoin to reach $60K on Jan 11, 2018. I can now safely say that is not going to happen. I was mistaken and won’t make any excuses here. The model did have goal posts along the way that prompted my exiting most of the positions. Here I’m going give a recap of my crypto activities in 2017, share a chart and some current thoughts.

I linked to a long-term BTC chart earlier. To the best of my knowledge, it originated here. I made my own chart with price data from CoinDesk.

This is a Log-Ln plot. The fit implies that BTC price has a time dependence of ~T^2.91. We sometimes refer to strong price action as “going parabolic”. No wonder bitcoin looks askance at all previous bubbles — its long term trendline is almost cubic! Clearly, this is not sustainable. The three prior notable vertical phases, labeled with green arrows, all culminated in exponential rises over a range of about e^4. That was the basis of my $60K prediction. Unfortunately, this time the price fell well short.

I bolted for the exit when it was clear the exponential rise wasn’t going to happen. In retrospect, I was too early, but probably still correct. The recent bounce to $17K was a much better selling opportunity. I believe that BTC has seen THE PEAK, based on signs of euphoria rather than any technical analysis. My tape reading, i.e. observation of the real-time price volume action, also confirms that view.

The table below captures my crypto activity from the original purchase in March for a scaled “100” or 0.6% of my portfolio at the time. By now I have cashed out more than 13 times the initial deposit. At one point in December, cryptos were about 9% of the portfolio.

At the end of 2017, I had only about 10% of my coins left. Obviously I could be wrong to top-call BTC and it can come back like it did many times before. I’ll keep an open mind and re-examine if BTC can make a new high. In the meantime, Ethereum has been acting strong and making new all time highs. I bought some more at $883. It’s the only crypto I hold today, at about 1% of my portfolio.

The total crypto market cap has also been making new highs, although it can be argued that many of the top coins are pre-mined, thinly traded, and with even less credible fundamentals than BTC. I’m of the opinion that the crypto party is ending in 2018. During the dot com bubble, the Dow and S&P stayed strong into September after the March peak in Nasdaq. During the housing bubble, house prices peaked in 05-06, two Lehman hedge funds collapsed in Feb’07 (on an Armstrong turn date), but the S&P didn’t peak until October’07. The time now feels like those in-between periods when the last bit of speculative money is funneling into adjacent avenues while distribution takes place.

I’m glad that I took a ride on the bitcoin train, and equally glad having gotten off. Besides writing two big checks to IRS and the CA franchise tax board, some of the proceeds is earmarked for buying gold, the real kind.