Readers who take the time to read the remainder of what I posted will find that more general information which was not specific to the example was actually relevant. Why? Because there seemed to be a misunderstanding afoot about the relationship between derivatives and their underlying entity.

Why thank you -- all the best fog is shapely.


This has nothing to do with the original argument, which does not seem to be valid. You've now given many additional reasons to believe the Bitcoin market is predictable. Originally, the reason you gave was that it must be predictable, because otherwise there would be no successful speculators. Throwing out that original argument and switching to a different one does not make the original argument any more valid or sound.

I am not arguing that the Bitcoin market is or is not predictable, and in fact there are good information theoretic grounds for believing it is relatively inefficient. Nor am I arguing whether there are or are not successful investors. Rather, I am pointing out that the original argument was not a good argument: speculative success does not imply predictability, although obviously it is entirely consistent with it.

At the risk of nudging the thread off topic, it seems to me that this doesn't quite follow. The success of speculators by itself does not imply anything about the predictability of markets. Given enough people trying in enough different ways, there will always be some who 'succeed' at speculating, even if they wind up getting the 'right' answer for the wrong reasons.

Similarly, if you set up a single elimination tournament to be decided by tosses of a fair coin, there will always be a winner. There will always be someone who wins every single coin toss, one after the other, regardless of how big the tournament is. The fact that there must be a winner does not mean that anyone is naturally more talented than anyone else at winning coin tosses. It doesn't mean we could identify them beforehand as top notch coin toss winners, and it doesn't mean we could analyze after the fact how they came to be such great coin toss winners. Of course, there could be natural born -- or fantastically skilled -- coin toss winners, but the fact of winning doesn't by itself make a compelling argument for that conclusion. (I suggest a related line of thought in an article called 'How to Lose Money with a Bitcoin Investment, Part 1: The Easy Money Mantra'.)

None of this implies that there are no talented investors. Of course there are. But relying on that for an argument that therefore, markets are predictable, takes more work. IMHO, the longer term success of some investors comes down to quite a bit more than predicting markets.

I'm having some trouble understanding exactly what you're proposing, mainly because if I've understood correctly what you've described so far, what you've described has very little to do with how inverse ETFs work in the outside world.

Generally speaking, inverse ETFs approximate the inverse of whatever the underlying entity might be over the course of a single trading day. In addition, typically they don't rely solely on the blunt instrument of just shorting the underlying entity for that day and rely instead on a mix of derivatives and shorting. And they necessarily rebalance every single day, usually near the end of the day. (If they did not, they would no longer be able to deliver daily inverse performance. To avoid performance drifting wildly away from the target, delivering inverse performance requires specifying a starting time and an ending time, with corresponding rebalancing.)

Can you say any more about how what you're describing would match up with the expectations that ordinary investors would have of how an inverse fund like this would work, how actually running one manually would work, and whether you have some other time period in mind besides a single day?

It's worth noting that from the perspective of a Bitcoin investor, all investments of this type represent an unhedged short position in Bitcoin relative to the underlying entity, in this case fiat-denominated real estate and the fiat-denominated future revenue stream. Therefore, they incorporate unlimited risk with respect to appreciation in the value of Bitcoin as expressed in units of the underlying entity.

I'm not saying that necessarily makes it a bad investment, only that for investors looking to grow their Bitcoin-denominated assets, they have to be coming at it with a strongly negative view of the future value of Bitcoin versus sterling-denominated real estate and sterling itself. For investors looking to decrease their Bitcoin holdings anyway, it might be great.

There's more to this line of thought in an article called How to Lose Money with a Bitcoin Investment, Part 2: The Unhedged Short.

For comparison, Bitfinex currently shows 91.77/91.98, BitStamp shows 91.76/9.99, and BTC-e shows 89/89.033, while Mt Gox shows a last trade at 98.50. Given the hassles which Mt Gox has had processing USD ever since their "temporary hiatus" on 20 June (and their "resumption" and "improved banking" on 4 July, and their "enhanced banking compliance" on 10 July, etc.), it wouldn't be too surprising if additional demand for Bitcoin -- which has no such hassles -- caused the price on that specific exchange to be higher. In other words, if you have dollars sitting in Mt Gox, you might be willing to pay a bit extra for Bitcoin so that you can move your capital elsewhere.

Historically speaking, the size of the difference between Mt Gox and almost anywhere else shot right up around the time of their 20 June announcement.

As far as I can tell from that baffling page, these 'futures' have close to nothing in common with real futures as used by the rest of the investing world. More to the point, however, nothing on this page explains any connection at all between the meaning of the word 'volume' when entering an order and the meaning of the word 'volume' when the exchange reports total trading activity in a chart.

These 'futures' look like a whacky front end for ordinary margin trading married to a guaranteed stop loss order (maybe something akin to what is to my mind the simpler and cleaner-looking BTC.sx setup?), but who knows? If that's correct, they're much closer to a CFD than a future.

Good luck; I have nothing to add to the party.

BTC/USD futures 'volume' is often reported not in contracts, but in dollars. Looking at the chart you linked, by far the highest volume I see in any period is 137988.86. The chart provides no units. By comparison, the current 24-hour volume on ICBIT for the September contract is $1,346,180, an order of magnitude higher.

Since you have not told us anything about the contract, and you have not told us anything about how the numbers are actually reported -- and you hopefully do not expect anyone to run off and sign up for a new account just so that they can log into the site and answer the question for you -- the default 'sanity check' explanation that those of us who don't know the answers to those two questions would probably opt for is that the exchange reports dollar values, not contract numbers (and almost certainly not BTC values, for that matter).

If you're keen to grind an axe about fraudulent reporting, you'll need to show that the 'sanity check' explanation is false.

I'm not saying you are incorrect; you may be exactly correct. What I am saying, however, is that neither citing Mt Gox trading volumes in BTC nor citing 'futures volume' without any units attached will make a convincing case that anything is out of the ordinary.

Without any personal experience with 796 or even any knowledge of the exact terms of the futures contract you've mentioned, I can't offer any insights specific to this example.

A more general point might be useful, though: there is no necessary connection of any kind between futures volumes on any given exchange and volumes in the underlying commodity -- or, in this case, currency pair -- on any other exchange. Speaking very generally, especially significant changes in open interest would probably suggest some kind of activity in the underlying currency pair as well, but even there, there's no "how is that possible" conceptual problem.

In principal, derivatives traders could swap contracts back and forth all day long in a speculative frenzy, without any direct exposure to the underlying at all. And, in principal, that sort of speculative frenzy could go on as long as you like, without necessarily moving the needle on open interest.

Having said all that, futures liquidity on BTC/USD on other exchanges such as ICBIT has historically been pretty weak, making it challenging to use them at all. So, on the face of it, I'd personally find it quite surprising if a new entrant like 796 were suddenly generating large volumes of trade in the kinds of contracts which have been available for a relatively long time elsewhere but which haven't generated much in the way of volume.

For communities that have a functioning economy, where it is partly the economy that defines the community -- like, say, a group of people in the same nation state trading with one another -- I think it's quite unusual to see that in terms of buying power within the community. I.e., the currency might go up or down versus other currencies, but in terms of local buying power, I would have guessed it's more often trending up or trending down rather than bouncing back and forth. Where it does start suffering too wildly, I think historically the 'solution' has tended to be either replace it or peg it.


IMHO, top-down price controls rarely work out, but as for more trade -- more merchants accepting it, more consumers buying with it, etc. -- that seems like a winner to me. Also, I know I'm frequently banging the derivatives drum, but for businesses to handle any significant volume of BTC is going to require more effective hedging mechanisms than just converting BTC to fiat as quickly as possible. What business wants to bear additional risk without some kind of potential benefit to counterbalance that risk?


I'm guessing that most assets which are both relatively liquid and standardized -- as gold is, at least in coin form -- could be viewed as a decent way of moving USD around. Gold in bar form introduces higher assay costs, reduces liquidity, etc., but even then it could serve the purpose. On the face of it, it's not necessarily a great way of doing it, since storage and delivery costs are significant, but I suppose it depends on the goals of the person wanting to do it.

As far as I can tell, this is exactly right. (And after all, this is essentially what the 'float' means, that currencies are valued in pairs against one another.)

I wonder whether the "think in Bitcoins" mantra might be aimed at trying to encourage people away from something analogous to the "what's that in real money?" question that folks sometimes ask themselves when travelling in another country. You know how it goes: "OMG, they want 418 doohickeys for a Coke! Wait, what's that in real money? Oh, it's only 95 cents -- OK, then!" Even when someone moves to a new country, it may take awhile before they stop converting all the doohickey prices they see into their former currency. What eventually makes that transition possible, that transition to seeing the new currency as a "real" currency, is probably developing a network of reference points -- getting paid in the new currency, buying milk in the new currency, pricing accommodation in the new currency, seeing a film with a ticket priced in the new currency, etc. -- that moves it from being a purely mental exercise to one that is grounded in a real environment of goods and services and other people.

Although the "think in Bitcoins" mantra is well intentioned, to me it feels a little artificial given the very early stage of development of that sort of network of reference points.

+1

And smiles to everyone for some healthy debate. 

I take it as obvious that only mining operations "produce" Bitcoins; but it sounds like you are saying there are no other true Bitcoin businesses except for mining and exchange which could possibly exist. I'm not sure what you mean by "without being impacted by the dollar in any physical investment"; maybe you don't believe currency hedging is possible?

More to the point, however, you're saying that you believe your returns from a REIT using as-yet unspecified leverage and with as-yet unknown occupancy rates will more than exceed any rise in Bitcoin versus the dollar. You haven't mentioned where to find any evidence or argument to support this belief, but I understand that this implies a significantly negative view of Bitcoin's value versus the dollar, so it makes sense that you would be asking investors to share your view and take a short position in Bitcoin versus dollar-denominated real estate.


To my mind, your personal history with Bitcoin doesn't seem in any way relevant to the proposal for a dollar-based REIT holding dollar-denominated assets and taking on unspecified levels of dollar-based debt with the intention of generating a principally dollar-based revenue stream. You could be a core programmer, or you could even be Satoshi, but that would make no difference whatsoever to the evaluation of the investment. Unless...you'd like to make it relevant by now introducing new information that you hadn't mentioned before: now you're planning Bitcoin rent, Bitcoin ATMs, Bitcoin mining with "reasonable power costs" (Bitcoin miners represent a significant part of your local market, I guess?), etc. Those extras which hadn't previously featured would require a basic grasp of Bitcoin.


The difference is that new entrants without any previous experience working in any REIT, let alone actually running one, do not typically aim to float their businesses with a public offering right from the get-go.

James, taking a step back from this for a moment, I can't escape the feeling that your priority seems to be arguing with me rather than informing potential investors. I asked about leverage -- which I take to be so blazingly obvious to ask of any REIT that its absence from the original details was glaring. There are many others in the 'blazingly obvious' category that haven't even been mentioned yet. And in response to your suggestion that this investment was somehow a hedge for Bitcoin volatility, I noted that it was, on the contrary, asking potential investors to take an unhedged short position in Bitcoin versus underlying dollar-denominated assets. Rather than just acknowledging explicitly that that is exactly how this is structured -- so as to inform your potential investors -- you've come back now a few times attempting to counter, broaden, and now even to speculate on the future exchange rate trajectory. Each time I have responded to the new points you have introduced, this kind of pattern has played out again.

I don't personally have much interest in engaging in that kind of pattern. I think the bottom line is that you've come asking for cash to set up a REIT, and it would be mildly zany to think that potential investors are going to keep their questions or observations to themselves. If those questions and observations are not at least as pointed and critical as those which would be brought to bear on a real, established company with a seasoned management team and significant operating history, looking to float on a regulated exchange or otherwise tap the capital markets, then your potential investors just aren't doing their due diligence. To the extent that you can acknowledge basic observations about financial structure and engage meaningfully in critical assessment of the investment itself, you'll be doing the job of informing investors, and that will reflect well on the proposed investment.

Given that debt is normally senior to equity in terms of capital structure, I'm guessing that potential investors who think it might be a good idea to take an unhedged short position in Bitcoin in order to buy an equity share in a fiat-based business taking on fiat-based debt in order to produce a fiat-based income stream will be glad to find out in advance just how much claim they'll have on the assets of the business.

That might be especially important seeing as the scheme is guaranteed to lose money in Bitcoin-denominated terms unless the fiat-denominated total returns of the investment exceed any appreciation in the value of Bitcoin versus the dollar...


From 'A.' I think I understand you to be saying that the only reason to be looking at the Bitcoin economy in the first place is that you'd like a source of capital to start a REIT, but that if you'd already managed to do so on your own, you wouldn't look at the Bitcoin economy as a source of capital at all. Any particular reason you favor the Bitcoin economy as a source of capital, given all the other sources of capital which are available, given that you're asking Bitcoin holders to take an unhedged short position to provide you capital, and given that the investment appears to be an entirely non-Bitcoin business from start to finish (apart from the obvious request for some Bitcoins to start you off)?

And from 'B.' I think I understand you to be saying that as far as you understand the industry, nobody has any experience running a REIT except those who have already destroyed one or those who are still running their first and only REIT. Do I have that right?

OK... So, as I originally suggested, the investment itself does not represent any type of hedge whatsoever -- and, on the contrary, represents an entirely unhedged short position in Bitcoin, relative to the value of real estate. The 'hedge' that you're referring to is merely that you're eliminating currency risk for the duration of time it takes to convert Bitcoin to fiat and then conduct a purchase in fiat. This would be like me offering to sell you a bag of apples for .01 Bitcoins and telling you that buying my apples would be a great Bitcoin hedge, because although you could go and convert your Bitcoins to fiat to buy my apples, in fact I'm saving you that extra step and thereby enabling you to avoid exposure to potentially volatile fiat valuation.

You have said that there are very few non Bitcoin investments that can actively produce reliable, safe income in the Bitcoin world. Do you mean to say that this investment does do that? Setting aside the elephant in the room -- namely, the short position in Bitcoins relative to real estate -- do you mean to say that you will actually be generating Bitcoin income?

For that to happen, the investment would at the very least either need to be receiving rental income which was itself denominated in Bitcoins, or it would need to be entering into futures or forward contracts to protect dollar-based rental income from changes in the value of Bitcoin versus the dollar. Have you described how you'll be doing either of those things, and I've just missed it?

Can you point out to me where I'm going wrong in my understanding? As far as I can tell, what you're describing is asking people to give you Bitcoins so that you can change them to fiat and use that fiat to set up an entirely fiat-based property rental business. You'll be taking on an undisclosed level of additional fiat debt (as you described in your other thread on the topic) and (hopefully) generating a fiat-based income stream. In what way is this anything other than a purely non-Bitcoin soon-to-be-business tapping into the Bitcoin economy simply because it's there, Kenilworth-style?

I posted in your other thread about the peculiarity of describing this as a way to hedge Bitcoin volatility, since that's where you had promoted the idea, but since this seems to be the thread where you're talking more about specific investment plans, maybe this is the place to ask another question or two. Normally, equity REITs are at least moderately leveraged, but as far as I can tell in what you've provided here, you've talked only about equity. Do you have plans for debt financing as well? (If so, will you be describing where equity holders will sit in terms of capital structure relative to future creditors?) And can you point us in the direction of material explaining more about the team's background in real estate management in general and REITs in particular?

Actually, I'm a bit puzzled by this. On the face of it, investing Bitcoins into a security whose principal assets are not Bitcoin-demoninated amounts to taking an unhedged short position in Bitcoin relative to whatever the other asset happens to be. As a result, these investments incorporate unlimited risk with respect to appreciation in the value of Bitcoin as expressed in units of whatever the other non-Bitcoin asset happens to be.

For example, buying a fund which invests in gold is equivalent to taking a short position Bitcoin relative to gold and therefore incorporates unlimited risk with respect to appreciation in the value of Bitcoin as expressed in units of gold. You invest 1 Bitcoin and get 1 share of a security holding 1 unit of gold. Then the value of Bitcoin appreciates, so that you can buy twice as much gold with your Bitcoin. But oops, you're short Bitcoin, having sold your 1 Bitcoin in exchange for 1 share of a security holding 1 unit of gold. You decide you'd like your Bitcoin back, so you sell your 1 share of the security, but now you only get back .5 Bitcoins, because that's all the Bitcoins you can buy with 1 share of a security holding 1 unit of gold.

Likewise for a REIT, except replace gold with real estate.

I'm not saying the proposed project is a good, bad, or indifferent investment -- only that your statement that it "allows for an unprecidented [sic] hedge against bitcoin volatility" is puzzling at best. On the contrary, it seems like a paradigmatically unhedged position which is equivalent to selling your Bitcoins and buying an ordinary listed REIT on an ordinary regulated stock exchange. Unless, by "hedged", you mean "something which will decrease in value when the value of Bitcoin goes up versus the dollar"...?

ROTFL. That post should be left as a sticky somewhere -- not just in the newbie section, but pretty much everywhere.

I hadn't given this much thought before, but I think this is exactly right, that somehow people are sensing less risk, or turning down the volume on their BS detectors, because it involves Bitcoin.

Just to speculate wildly: could it have something to do with the sense of empowerment that Bitcoin provides (and which I otherwise see as a fantastic thing)? Bitcoins are so dang easy to move from point A to point B, without waiting on some institution to do it for you, possibly while charging you for the privilege, so you start feeling more in control of your own destiny, you appreciate the greater choice you have, the greater freedom, suddenly all that transitions into a teeny bit of recklessness, and you say "to Hell with them, I'm going to buy me some of those magical beans"?

Or, speculating wildly again: could it be that some users have already discounted the risk right up front (say, when buying Bitcoins with fiat, or when having previously mined them back in the good ole days), so that whatever they do with them now doesn't have to pass the same sorts of sniff tests they would otherwise apply to financial transactions? In other words, they've already taken a risk when deciding to allocate any capital to Bitcoins, so what's a bit more here and there, in case those magical beans really do work out?

I could imagine there being significant value for the development and wider acceptance of Bitcoin as a currency in getting a better handle on the whys and the wherefores of what really does seem like a Bitcoin-induced tendency to underestimate risk.

Yes, to be sure the very limited degree of anonymity is there due to the way the software works, but my point is much less complex than suggesting that identity-verifying companies would have to live on top of Bitcoin: I'm suggesting only that many people are much more willing to spend money buying things from other people when they know who those people are, and when they're aware that those people are accountable to the law of the land. It seems to me that this is true whether we're talking about money in the form of Bitcoins, dollars, or herds of yaks.

And to the extent that we as a community make it seem like there's some inherent necessity to be anonymous in the Bitcoin world, we may be turning off that much broader set of potential users who just want to get some business done -- potential users who appreciate the many advantages Bitcoin has to offer but who either don't grok or simply don't want anonymous transactions for themselves.

I couldn't agree more!

There's a significant chunk of the wider population out there who would be perfectly willing to try Bitcoin transactions with real, identifiable businesses and individuals -- i.e., non-anonymous entities. In my view, the Bitcoin community does itself a disservice with regard to promoting wider acceptance when it focuses on anonymity and its partial solutions created by the problems of anonymity. For example, when a new person with money to spend first encounters Bitcoin and gets told all about the WOT and how absolutely essential it is for conducting business safely with Bitcoin, what do you suppose that does to their confidence in Bitcoin as a currency? "You want me to trust a bunch of pseudonymous ratings of other pseudonymous user accounts? Are you kidding?" By contrast, when someone walks into a pub in London and pays for a round of pints with Bitcoins, nobody cares about the WOT, and your experience paying for a domain name is exactly analogous: far more confidence comes from dealing with a real, identifiable, non-anonymous entity that is subject to real laws and real liabilities than will ever come from any of the solutions so far proposed (WOT, etc.) to the problems created by anonymous transactions.

Don't get me wrong: I fully appreciate the option to conduct business anonymously, and I have no problem with that. But if we really want to encourage wider adoption, fixating on anonymity and how to remedy the problems that anonymity creates just won't cut it.

There's a separate thread called Is Focusing on Anonymity Over Privacy Holding Back Bitcoin? based on an article that tries to expand on this line of thought a bit.