I just bought put options on MicroStrategy ($MSTR), Coinbase ($COIN), and Purpose Bitcoin ETF ($BTCC-B.TO), all at a strike price not far off the current (late June) price, expiring around Christmas. Here’s the thinking.

Context · But first: This is part of this blog’s Investing theme, whose Intro makes it clear that I have no investment expertise and nobody should take this as investment advice, because it’s not. It’s just a bloggy disclosure of some of my own financial positions, which I owe readers anyhow.

Disclosures · I have personally made money buying and selling Bitcoin.

While I’m an admirer of the technology, I’ve repeatedly criticized Bitcoin specifically and blockchain in general, on the grounds that I’ve seen no practical real-world applications.

Attribution: Flying Logos, CC BY-SA 4.0, via Wikimedia Commons

Beliefs · I believe the following things about Bitcoin. This is not a scholarly article so I’m not going to provide references, but I’ve seen enough evidence that I’m willing to bet my own money based on them.

1. A high proportion of all Bitcoins are owned by insiders; miners and people close to the exchanges. Their cost basis is much lower than the current Bitcoin price, and that cost is in practice sunk.

2. Bitcoin is not usable as a currency because the transaction costs and latency are both too high. (Yes, I know about the Lightning network.)

3. A high proportion of Bitcoin trading is intermediated by Tethers (USDT). There are strong reasons to suspect that Tethers are a highly unstable stablecoin. The facts about whatever backs them up are mostly unknown. In practice they’re quite difficult to convert to real money. There are repeated allegations that Tethers are created out of thin air to prop up the price of Bitcoin.

4. The Bitcoin market is largely unregulated, and it’s easy to believe that much of the trading is seriously sketchy, whether that’s based on ad-hoc Tether creation, wash trading, or other well-known pump/dump schemes. These practices have run rampant on every financial market in human history that hasn’t regulated against them fiercely. Why should Bitcoin be any different?

5. The net effect is that money flows in from, in effect, suckers and rubes, then into the pockets of the insiders. A bit goes back out to non-insiders but, as I know personally, converting Bitcoin into cash is a high-latency high-friction operation. Converting Tether to cash? Good luck with that.

6. Bitcoin’s Byzantine-generals solution, based on proof-of-waste, is unacceptable in the face of the oncoming climate crisis.

7. To the extent that Bitcoin has an ideology, it’s some sort of mutant greedhead libertarian claptrap. Most people on the scene can’t spell “ideology” and are there to make a quick speculative buck. Since Bitcoin has no practical uses, the buyer is a fool who is counting on eventually finding a greater fool.

My best guess is that pretty soon the supply of greater fools runs out. At that point the insiders holding the bulk of Bitcoins will rationally be willing to unload for dramatically lower prices, which probably leads to a dramatic deflation. This could be provoked by a Tether collapse, or legal action from any one of a number of governments, or the public exposure of egregious insider sleaze. Or some surprise of the kind that history is full of, the kind that nobody was expecting.

When will it happen? I dunno. I’ll be astonished if we get through 2021 without an explosion.

How to short Bitcoin? · The classic short would be to borrow Bitcoins and sell them, in the expectation of being able to buy them back for much less when the time comes to return them. But I’ve sold Bitcoin and I didn’t like the experience. Also, if I’m wrong, the downside is unlimited, which violates our #BeCareful investing principle. So no.

Some of the crypto exchanges offer options, including puts. But I personally have little to no faith in the integrity or durability of these organizations. Should Bitcoin take the kind of dive I expect, the chances of getting your Put exercised would be about zilch. So, no.

In Canada, there’s the Purpose Bitcoin ETF (BTCC.B on TSX), which actually trades on the mainstream market. Which I take to mean that a put option should exercise fine even during a meltdown because whoever wrote it would have had to establish their ability to cover margin. Nothing fancy about it, as I write this its assets are 21597.3588 Btc.

Then there’s this company called MicroStrategy ($MSTR) which has been around since 1989 and sells business-intelligence and analytics software. I have no idea if the software is any good.

They became infamous in March 2000 upon revealing “accounting problems”. The share price collapsed, marking the start of the dot-com crash. The US Securities & Exchange Commission sued their asses for fraud and eventually the company settled, paying big fines without admitting any guilt.

21 years later, the company still has the same CEO, Michael Saylor. His Twitter avatar now has Bitcoin-y laser eyeballs, as you can see in the tweet below.

Between August 2020 and June 2021, MicroStrategy bought a lot of Bitcoin. There’s a prominent Bitcoin-labeled pointer on the front page at microstrategy.com which leads to hope.com — Bitcoin is Hope. It’s absurd.

Recall the words “rube” and “sucker” that I used above? I think MicroStrategy is one of those, corporately. Maybe their share price can survive the Bitcoin bet going south? But I doubt it. So I bought puts.

Finally, Coinbase. I see no reason to think they’re dishonest or stupid, and I know people who’ve used them for Bitcoin trading and came away happy. If you believe in the long-term existence of a lively Bitcoin marketplace, they’re probably a good investment. But I don’t. So, I picked up puts.

Looking forward · Puts are pretty cheap. If I’m totally wrong and Bitcoin is still sailing along at the end of 2021, I’ll be annoyed but not impoverished. If it crashes I’ll be sad for the unfortunates who lost their stakes, and entirely unsympathetic to the insider community.

Will report back.