The awkward mathematics of booms and bubbles
When short and long aren't opposites.
One of the most common responses in the many, many comments to my pieces on Bitcoin over the last couple of weeks has been to ask me why, if I'm so sure it's a bubble, I don't short it.
The simplest answer is that journalism isn't a career which leaves a huge amount of money left over after the bills are paid with which to gamble, and that I'm not entirely sure it's ethical anyway. There's also the fact that the two main Bitcoin meta-exchanges aren't particularly liquid, which leaves me doubtful that I'd get the best value for money on any shorting contract,
Then there's the problem that being pretty certain the bubble is going to pop doesn't leave me any surer about when it's going to pop – something which most methods of shorting require you to know.
Shorting usually involves borrowing the thing you want to short for a fixed amount of time, selling it straight away, and then buying it back just before your loan is up. Ideally, the commodity has dropped in value, and so you make a profit by you pocketing the difference.
In a normal commodity, going short and going long – buying the commodity to sell at a higher price – are roughly symmetrical. If a share in Apple goes up $1, the people who are long make a dollar a share; if it goes down, the people who are short do.
But that symmetry breaks down when you're dealing with a commodity on the sort of parabolic trend that Bitcoin is shooting along now.
If I spend £100 on Bitcoin, then the most I can lose is £100. Conversely, if the trend continues, I could have £1000 in a month. And the maximum possible payoff is basically uncapped. Suppose I'm catastrophically wrong, and Bitcoin becomes the world currency by the end of the year – anyone who'd bought in to it, even at today's inflated prices, would be a millionaire.
But what if I short it, by borrowing £100 of Bitcoin? Well, then the most I can earn is £100, if the price drops to zero. But the amount I could lose is potentially uncapped, for the exact same reasons that make buying in to it so appealing.
That lack of symmetry – which is an innate feature of, well, maths – serves only to goose the bubble higher and higher. And at the other side, when the down swing comes, it will be vicious; with no shorters ready to step in and buy the coins of people trying to cash out, the volatility will have nothing dampening it.
So that's why I'm keeping my money where it is. But don't think I'm not pretty damn confident when I say that if I had any extra, it still wouldn't be in Bitcoin.