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"I am an optimist. It does not seem too much use being anything else."

— Winston Churchill

Thursday optimistically pessimistic mailbag

Q: Is bitcoin a risk-on or a risk-off asset?

Yes.

When nothing particular is going on in markets, bitcoin is generally uncorrelated to risk assets like equities, and that is valuable to traditional investors (because diversification is the only free lunch in finance). 

But when equities suddenly lurch lower, bitcoin usually follows, and that is not so helpful — if bitcoin is mostly going to make investors’ portfolios more volatile on down days, not many traditional investors will be interested.

This has been a little disappointing for crypto investors, too, as they mostly hold bitcoin because they’re worried about hyperinflation and global disorder — but headlines on both rising inflation and increasing disorder often prove to be bearish for bitcoin.

I think I know why: Bitcoin is an asset for pessimists, but Bitcoiners are so optimistically risk-on about it that they’re prone to get stopped out of their positions when risk-off market events occur, as they did this week.

Nearly $500 million of leveraged bitcoin longs were liquidated around the Israel/Iran headlines on Tuesday — all while people (presumably different people) were frantically buying bitcoin’s big brother, gold. 

When bitcoin and gold go in opposite directions on negative news like this, it’s a reminder that "digital gold" is just a narrative, and not some rule of physics.  

The price of both digital and analog gold is simply a function of supply and demand — there’s nothing about Bitcoin’s design that would mechanically make the price go up when things get worse in the world. 

This also explains why gold is making new all-time highs while bitcoin does not.

It’s not that gold traders have sniffed out some macro or geopolitical event that Bitcoiners and the rest of the investing world have not yet come around to, as is often claimed.

Instead, it’s simply because central banks and Costco members have been buying gold, for whatever their reasons, and not bitcoin.

But this is all short-term stuff.

In just the slightly longer term, Bitcoiners appear to be as optimistic as ever that their pessimism will prevail: Per data from StoneX Digital, open interest in bitcoin options with a $100,000 strike price has surged to nearly $1 billion of notional value this week.

Q: Will options on bitcoin ETFs create a shortage of bitcoin?

Some people think so — there’s a trending theory that the SEC’s recent approval of options trading on the IBIT ETF will result in a GameStop-like "gamma squeeze" that will send market makers scrambling to buy the limited supply of bitcoin at ever-higher prices.

Would be fun, but I doubt it — mostly because shares of, say, Apple, are also limited (shrinking, actually) and options trading has never caused any problems there. 

Crypto options are weird, though.

Three years ago, in my second-ever newsletter for Blockworks, I wrote about how strange implied volatility on bitcoin and ether options looked to me. 

In equities, upside-call options are almost always cheaper than downside puts (as measured by implied volatility), and generally by a lot. 

In crypto, however, upside calls are equally expensive as downside puts — and sometimes more so — as you can see on Deribit.

This is slightly disorienting to someone just arriving from TradFi, as I was at the time — and I thought it was instructive, too.

It showed me that while equity options are mostly used to hedge downside risk, crypto options were used just as much to hedge upside risk.

I think it’s maybe even more instructive to see that they’re still used that way.

Bitcoin is about unchanged since I wrote that newsletter three years ago and ether is down by about one-third — and yet, options volatility shows that crypto people remain at least as worried about missing the upside as they do about suffering the downside. 

I love their optimism (especially when it’s for pessimistic bitcoin).

Also weird and wonderful is that crypto options tend to get more expensive when crypto goes up, which is the exact opposite of equities options.

Equities options assume mean reversion (something that’s gone up is less likely to go up more) while crypto options assume momentum (something that’s gone up is more likely to go up more). 

Despite all we’ve been through over the last few years, crypto is still a place where people primarily worry about missing the upside.

I hope it stays that way.

Q: Who is Satoshi Nakamoto?

I thought we had all decided it was the late, great Hal Finney, but HBO seems to think it's Adam Back, judging by how many times he appears in the trailer for Money Electric. The documentary promises to dox the creator of Bitcoin on Tuesday next week (the day before Permissionless!).

Other plausible candidates include Jamie Dimon, the CIA, Dick Cheney, lizardmen living underneath the Vatican and a time-traveling AI.

The only person it’s definitely not is Craig Wright.

But if HBO says it’s anyone other than Finney, I’m not going to believe them because we already know they haven’t verified it in the one true way — none of the 1.1 million bitcoin controlled by Satoshi’s genesis address has been moved. 

Some very early bitcoin has been moving recently, however (and eth too), so maybe something really is afoot.

(And the timing aligning with the start of Permissionless can’t possibly be a coincidence.)

Should be entertaining either way.

Q: Will I see you at Permissionless next week?

Yes!

Let’s meet up — look for me wherever the free food is.

Or ping me an email here and I’ll let you know where I plan to be.

Utah ho!

— Byron Gilliam

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Don’t miss it — join us at Permissionless.