Email of the day on volatility and bitcoin
Comment of the Day

February 06 2018

Commentary by Eoin Treacy

Email of the day on volatility and bitcoin

If one was long XIV, you just could be screwed...

"Investors" who buy long vol ETN's should be really concerned - VXX completely failed to track the VIX today, going up only 33% as VIX slammed up 115.5%. Now of course they'll say that they squared up after hours, but still achieved maybe 60% or roughly a 50% tracking error. As you and I have discussed multiple times, the vol ETNs were just growing nightmare seeds waiting to be exploded upon the market. Now we may get to see just how good the counterparties are for those ETN's (as we whistle past the graveyard). The press continues to mistake the vol ETN's for ETF's - a serious mistake in thinking.

My rule: never buy a loan based on shaky (or no) collateral that represents a derivative of a derivative of a derivative of a set of derivatives.

I was and am long vol through simple puts and a straddle on SPY. Tomorrow my cash management rule will likely require rolling the puts down. Of course, it is another day, and we could see a super-fast reversal as always...

Tonight, Bitcoin is slipping away towards 6,000. A distant cousin of mine, a late-50's woman whose life was spent (honorably) raising children while her hubby worked as a blue-collar guy in the nearby nuclear weapons manufacturing facility, called me to ask if she should invest in bitcoin. I tried my best to explain to her that she should only invest money she could afford to lose, and should only gamble away money she could afford to burn. I also explained that bitcoin was not a currency, but rather a commodity, and had no intrinsic value whatsoever. 45 minutes of pushback from her was my limit. I'm sure she is busily trying to figure out how to put that 8-year-old PC in her closet together so she can trade those golden promises of untold wealth. 

I'm sure you're VERY busy these days :)

Eoin Treacy's view

Thank you for the insight into your options trading which I’m sure will be of interest to the Collective. I can identify with the story of the person whose money is burning a hold their pocket to invest in Bitcoin. My mother is in hospital at the moment after a scare with pneumonia but is happily well on the road to recovery although it appears she is going to need a heart valve replacement. On the phone this morning she recounted how due to overcrowding at her local hospital she spent two days in the male ward where a fortysomething year old had been admitted following a stroke. However, all he wanted to do was proselytise about the wonders of bitcoin and nothing more than to convert everyone he met into a speculator.

This article from Bloomberg may also be of interest. Here is a section:

Unless you're an outfit running the fastest rigs bought at wholesale prices -- -- 67 percent of all mining power is in the hands of four pools -- chances are you're losing money. The arms race among participants has brought 40 percent more mining power online since Bitcoin prices went above $19,000 on Dec. 18. That's resulted in the rebalancing system built into the digital currency making it 51 percent more difficult to complete a block, according to data from

Miners forced to work ever harder for each Bitcoin have shrugged off this escalating requirement for computational power -- up 18-fold in two years -- because a 21-fold price increase over the same period made the cost worth the investment.

Cryptocurrency mining can only be compared to real world mining in the very loosest sense of the word. However, when a conventional mining operation sees the price of its commodity decline it either has to find a way to produce at a cheaper rate, sell some assets to pay down debt or it has to close. Generally speaking it is the most inefficient sources of supply that go bust first and that is now likely with bitcoin. Anyone running antiquated (3-year old) equipment who cannot afford to upgrade will go bust.  

This article from Bernard Tan “Investing in Serendity” makes a convincing argument for betting on quality. Here is a section:

Reflecting on this, I realised that TSMC probably never had a bitcoin roadmap. I don’t think they anticipated the rise of cryptocurrencies 5-10 years ago and strategically positioned themselves to capture this hot trend by making chips for the industry. It simply landed on their lap.

The reason TSMC is a beneficiary of the bitcoin craze is more because it has consistently focused on being the most advanced (and biggest) logic semiconductor foundry on the planet. In other words, the science and engineering of making logic chips. Because of this, whenever trends that require advanced logic chips arise, TSMC will automatically be on the radar. 

The share remains in a generally consistent uptrend but pulled back sharply today in sympathy with the wider global market. However, a sustained move below the trend mean would be required to question the broad consistency of the uptrend. 

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