Friday, December 8, 2017

Wisdom arb, BTC, everything as a derivative

I guess this is an unofficial pt.2 rambling on BTC etc, but at least trying to have a broader short VIX/ econ perspective.

What is a scam but wisdom arbitrage?
As a preface and reminder, I have no real issue with the core BTC protocol, most of my issues are with when BTC overlaps with USD- at exchanges, centralized businesses, price for electricity effecting mining priority/fees, and now even cash settled futures.   
"Scam" is just a classification described by regulators, bears, people who know more or less about something, so how does that even help?  Rather than think of structures as a binary 'scam' or 'legit/not scam', I try to think more broadly as levels/spreads of wisdom arbitrage.

"The stock market is a device for transferring money from the impatient to the patient."  

Is any wealth transfer a scam? Could Buffet have said "transferring from the ignorant to the informed"?  From the same idea could he say "fake IRS phone scams are a device for transferring from the ignorant to the informed?"  This is expressed with another classic: 
“When a man with money meets a man with experience, the man with experience leaves with money and the man with money leaves with experience.”  
Does this case always represent what you think of as a scam?  Is a first time trader setting a market order instead of a limit order being scammed by their broker, or are they exchanging some money now for experience later?  This is a tiny wisdom arb between the new trader and the broker- now the broker has a little more money and the trader has a little more wisdom, the spread on the arb has collapsed just as any normal arb functions; eventually that specific divergence dries up.  

One of my goals is not to 'point to how things should be,' as I'm not advocating a Mad Max Ancap unregulated wasteland, I just try to point out how things are and how we can better emotionlessly perceive them through the short VIX lens.  Whether you love or hate regulators, there will always be a place for them because people will always cry when they get wisdom arb'd. Then arb opportunities disappear and in time new ones will arrive.  The cycle goes on and on, so its important to recognize the structure that will always exist. When people cooperate, at a very basic level that is what government is.  When it gets more and more bloated then we call those decisions regulations, its an unavoidable part of the human condition.

Getting back to BTC and thinking about cases for further upside/downside, I was thinking broadly if you can consider BTC as a derivative of an underlying being stupidity/hope/etc.  While SPY options are very precise where you can fully calculate your exact delta exposure due to 1 tick changes,  BTC is a little more nebulous but if you think of a recreational buyer coming in at all time highs hoping it goes up (greater fool theory, etc), then a case to be long there is that BTC itself becomes long exposure to human stupidity, so its kind of a derivative of that, creating a further feedback loop.  This isn't really touching on the liquidity/market depth issues of crypto exchanges specifically, which would constitute another 4 hours of rambling.

Back to short VIX, given the Buffet quote and my previous discussions on short VIX=long SPY, I really think we can add short VIX to the list of wisdom arb areas.  My fear from that is that like all arbs, the well will eventually dry up, but at the same time if you picture that world, that would mean all future risk premium is 'correctly priced' which is hard to even make sense of conceptually.  If future risk/unknown didn't have a premium, that would shockwave into insurance and other markets.  

Next time you see a "scam", just think of it as a transaction, how much money vs wisdom is going in which direction, and how fast will this trade/spread contract, as if it was any other kind of arbitrage/convergence trade.


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