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.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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New Times: David Runciman on networks and the digital revolution

The digital revolution has had two profound effects on how power is distributed – both of which squeeze the state's power.

Left-wing political parties exist to use the power of the state to rectify unjust distributions of power in society. What has gone wrong with this project? First, the political parties bit. Established parties everywhere are struggling to seem relevant to most people’s everyday concerns: they look increasingly like the tired relics of a more hierarchical age. The exception, of course, is the current Labour Party, which has opened itself up to become the biggest mass-membership party in Europe. But the trade-off has been to move away from seeing the acquisition of power as its primary purpose. These days parties can only really draw people in by offering to be vehicles for the expression of political resentment and disenchantment. But that is no way to rectify the causes of their resentment; neglecting the challenge of power usually ends up making things worse.

However, this is just a symptom of the wider problem, which is the changing nature of power. Technology lies at the heart of it. The digital revolution has had two profound effects on how power is distributed. First, it has empowered individuals, by providing them with unprecedented access to information, tools of communication and the means of expression. This is power exercised as choice: we all now have multiple ways of registering our likes and dislikes that never existed before.

Second, the digital revolution has empowered networks, creating vast new webs that span the globe. Some of them, such as Facebook, are close to being monopolies. We end up joining the networks that other people have joined, because that’s where the action is. This gives a small number of networks an awful lot of power.

Both of these developments are deeply problematic for the power of the state. The proliferation of choice makes citizens much harder to satisfy. Many of us have got used to micromanaging our lives in ways that leaves government looking flat-footed and unresponsive, no matter how hard it tries. At the same time, states face global networks that they have no idea how to control. International finance is one of these: money is information and information now has too many different ways to flow. States are getting squeezed.

The paradox is that the same forces that are squeezing the state are also giving impetus to left-wing politics. There are huge imbalances of power being created in networked societies. The monopolists are hoovering up money and influence. Personal connections count for more than ever, now that networked connections have become ubiquitous. Education is turning into a way of pulling up the drawbridge rather than moving up the ladder. One temptation for the left is to assume that the evidence of injustice will sooner or later outweigh the disabling effects of these social forces on the state. That is part of the Corbyn gamble: hang around until people are sufficiently pissed off to start demanding social-democratic solutions to their problems.

I don’t think this is going to happen. There is nothing to suggest that popular dissatisfaction will find its way back to the state as its best outlet. It will be channelled through the networks that are making the life of the state increasingly difficult.

The other temptation is to think that the left can achieve its goals by bypassing conventional social democracy and channelling its own ambitions into network politics. This is the other side of the Corbyn gamble, or at least the view of some of the people who have attached themselves to him: a new politics is coming that uses digital technology to mobilise fleet-footed networks of activists who can generate change without going through the cumbersome and time-consuming process of winning general elections. That also looks pretty wishful to me. These networks are just another vehicle for expressing personal preferences. They don’t have any means of changing the preferences of people who think differently. You need to win power to do that.

The state’s power is being squeezed by networks of empowered individuals, but these networks don’t have the kind of power necessary to do the redistributive work of the state. What is the left to do? It needs to try to find value in the fact that the state is not just another network. The right does this instinctively, by talking up the state’s security functions and championing ideas of sovereignty and national identity. But that does nothing to address the deleterious effects of living in a modern networked society, where we are swamped by personal choice but impotent in the face of corporate and financial power.

Rather than trying to harness the power of networks, the left should stand up for people against the dehumanising power of Big Data. The state isn’t Google and should not try to pretend to be. We don’t need more choice. We don’t need more efficiency of the kind that digital technology is endlessly supplying. We need protection from the mindless bureaucratic demands of the new machine age: the relentless pursuit of information, regardless of the human cost. There are limits to what the state can do but it retains some real power. It still employs real human beings; it educates them and provides them with welfare. It should do what is in its power to make the work tolerable and the education meaningful, to provide welfare in ways that don’t leave people at the mercy of faceless systems. The left needs to humanise the state.

At the moment, too much energy is being spent trying to humanise the party. We are told that people are tired of robotic, careerist politicians; they want unspun versions of people like themselves. But robotic politicians aren’t the problem; the coming age of robots is. While the party tries to feel more comfortable with itself, the effects of a networked society are running rampant. Acquiring the power of the state is still the best way to fight back. It doesn’t matter if that has to be done in an ugly, mechanised, artificial way, by careerist politicians with whom we wouldn’t choose to spend our personal time. Better an ugly, artificial politics than an ugly, artificial world. 

David Runciman is a professor of politics and the head of the department of politics and international studies at Cambridge

This article is part of a New Times collection of the future of the left. Read the other pieces here.

 

This article first appeared in the 22 September 2016 issue of the New Statesman, The New Times