Tag Archives : bitcoin

Don’t buy Bitcoin. 3

Clearly, what the Internet needs right now is another opinion on Bitcoin (no position).

On the other hand, gentleman, what if we gave a war and EVERYBODY came?

Gary Larson, The Far Side (1982)

With hundreds of newly formed funds, commentators proclaiming the birth of a new asset class, and the general public beginning to take notice of the world’s largest confidence game, it is a fait accompli at this point that huge sums of capital will be allocated to cryptocurrency. That is unfortunate. Generally lost in today’s breathless predictions that a proportion of the world’s wealth will flow into cryptocurrencies, especially Bitcoin, is any reasoned discussion of whether it should.

Aside from some excitement about the potential applications of distributed ledger technology, which are legitimate if somewhat overhyped, there appears to be widespread acceptance that the bulk of these allocation decisions are circular. Capital is flowing into the sector primarily because prices are rising. In turn, prices are rising because of the anticipated inflow of capital. Indeed, many cryptocurrencies are deliberately structured to increase in price as their use increases, a virtuous cycle that proponents hope will reflexively result in increased acceptance. They are not incorrect, which is all the more reason we should hope they do not succeed.

Advocates of Bitcoin correctly hypothesize that the price of Bitcoin must be stratospheric if even one percent of global savings were allocated to it. Yet who in their right mind actually thinks that would be a good idea? Bitcoin’s defining characteristic is extra-legality, and its primary function is to enable transactions that are impossible within a regulated system. Whatever you think of its technological usefulness or lack thereof today, Bitcoin has indisputably been the leading new payment tool of criminals for the past few years. Whether that seems more like a feature or a bug to you, it has resulted in a distribution of resources concentrated in the hands of money launderers, offshore tax evaders, drug dealers, and various other people who have no business managing the world’s money supply. To top it off, the largest holdings are controlled by an anonymous cadre of individuals so mysterious that there is half-joking speculation that its pseudonymous creator could be Kim Jong-un, Vladimir Putin, or various other unsavories. Surely, enormously enriching this group of people is not a desirable outcome. Other digital currencies suffer from the same problem; widespread adoption represents an extraordinary redistribution of wealth to private hands, who are in many cases some of the worst elements of society.

By now, it has been widely demonstrated that the price of Bitcoin, much like a low-float stock, is being actively manipulated through wash trading, abusive margin policies on offshore exchanges, and frequently outright theft. Bitfinex, an exchange in Hong Kong which has had its access to the banking system rescinded and bears hallmarks of a Ponzi scheme, has been a key contributor to the rise. Credible allegations suggest that over $800 million of purported transaction volume on the exchange, which is unlicensed, has resulted from the creation out of thin air of a pseudo-dollar equivalent called Tether, issued by a Bitfinex affiliate. A substantial proportion of the price increase in Bitcoin this year may be attributable to transmission effects from Bitfinex. Critics of Tether question whether dollars actually back the issuance of Tethers, as the company claims, but this may be the wrong question to ask. From appearances, Tether’s liabilities are not so much end-user claims on it as they are claims on Bitfinex that represent customer deposits, never to be recovered. Like most bucket shops with aggressive margin policies, Bitfinex can be expected to convert its customer balances to owned capital over time. The new Tethers being created may well represent Bitfinex’s historical and anticipated takings from its customers. Perhaps you feel little sympathy for gamblers, but it’s the less educated and the desperate who most often end up left holding the bag. Buying Bitcoin today and contributing to its price increase directly facilitates the continuation of an inequitable wealth transfer.

With that backdrop, I don’t see how any responsible fiduciary can argue with a straight face that Bitcoin is an acceptable part of a customer’s portfolio. The introduction of regulated, exchange-traded futures next week promises to make it easy for many more institutions to trade Bitcoin, or something like it, and there is so much volatility that there are sure to be profitable trading opportunities as a result. No doubt it is futile to suggest that any member of the financial industry ought to deliberately avoid an opportunity to profit due to ethical concerns. But curmudgeon that I am, I think the better course of action is not to participate.

Certainly one would be foolish to short Bitcoin outright, given how demonstrably easy it is to manipulate the price to almost any level. Perhaps investing one percent of the world’s wealth in put premiums is a more reasonable course of action. Otherwise, what if we gave a war and nobody came?

CYNK: Sometimes your prime broker is looking out for you 1

Disclosure: No position in CYNK. Thankfully. This post is intended to discuss my reaction to a topical market situation. It has been edited to remove the details of trading activity in CYNK in order to avoid reference to the performance of a past specific recommendation. 

Last spring, before the Bitcoin mania had peaked and prior to starting Cable Car, I discovered a way to short BTC using a very sketchy online exchange. I briefly shorted a single Bitcoin in a personal account, covered after a small gain that almost made up for the transaction costs, and happily withdrew my balance with the learning experience as my reward. A part of me wanted to do it just to be able to say I had one day. Reasonable people may disagree over whether crypto-currencies ultimately have any value (I am not a believer), but I found the notion of shorting something truly worthless to be irresistible. Financial assets that appear to have no intrinsic value at all — pump-and-dump schemes, penny stocks, frauds, some bankruptcies — draw a certain type of value-oriented short-seller like moths to a flame. And it can be playing with fire.

The latest such sign of the apocalypse making the rounds is Cynk Technology Corp (CYNK), which I’ve seen mentioned by no less than half a dozen investors I respect. CYNK is a Belize-based pink sheets pump-and-dump, presumably, with negative shareholders’ equity, no revenue, and a vague intent to develop a social media business. Despite all that, it is a startlingly successful stock promotion scheme, with what appears to be a $4.3 billion market cap on paper after today’s 150% gain, up from $23 million a month ago. The usual pattern of such things is that after the price reaches stratospheric levels, promoters sell their shares, the share price craters, and the hordes of day traders who had helped run up the share price move on. The underlying promotion activity can be illegal, but it is very difficult for the SEC to police. I have no insight into whether any laws were broken to get CYNK to where it is today, but the outcome is the height of absurdity. The intrinsic value of CYNK, to any reasonable observer, is zero. And yet here we are, watching a bubble in action.

This post is in fact a bit of a confessional. Last Tuesday, I shorted a very small position in CYNK that I closed not long afterwards. I am embarrassed to have participated at all. At the time, CYNK was already down over 40% intraday, and it appeared to be following the classic pattern of a “dump”. The fact that a significant amount of borrowable shares had become available from my prime brokerage suggested that the float might have increased due to promoters dumping their shares. Yet when I started to think about shorting it again on the way back up this week, no shares were available. I don’t actually think it’s a deliberate policy on the part of the brokerage to withhold shares in a situation like this (that confuses cause and effect — the lack of available borrow may have actually been the cause of a squeeze), but I was willing to short CYNK at $6/share this morning, had there been shares available. Since there weren’t, I have no position, and I avoided a more than 100% intraday loss. Usually I’m not pleased when I can’t borrow a stock I want to short, but this time I am!

CYNK closed today at $14.71. Were I still short, I could have tolerated the loss, but I’d be on some level just as much of a victim as whatever gullible shareholders are buying at these prices and will ultimately be left holding the bag.

I may still short CYNK, in very small size, if shares are available when it inevitably starts to decline. That’s what I feel the need to confess! It is ineluctable, this desire to have some (very carefully sized and curated) short exposure to what David Einhorn recently called “silly prices,” while hoping they don’t get any sillier.

But there is one caveat! One thing that may just hold me back is a notion I haven’t seen any of the myriad commentators discuss: does CYNK really have the number of shares outstanding it claims? Dishonest people have falsified many many things in unaudited financial statements. Why not share count? Couldn’t that line in its filings be just as fraudulent as the business itself? According to the limited filings it makes with the OTC bulletin board, CYNK had 291.45 million shares outstanding as of March 31, 2014. Even the OTC website itself is very lackadaisical about the figure. It has a typo that misstates shares outstanding as 191.45 million, throwing the market cap off by a whopping $1.47 billion! Even if the 291.45 million figure is correct, 210 million of these are held by the founder and sole employee of CYNK, and they supposedly bear a restrictive legend (how restrictive, I wonder?) preventing them from being sold. To some extent, only the float of 81.45 million shares represents real capitalization, but even that would be pretty absurd by now at well over a billion dollars.

Instead, I question whether there really are 81 million shares floating around. Cumulative volume traded in the past 30 days, since all this nonsense began, is only 1.5 million shares. Today, despite the massive price increase, only 124,000 shares changed hands. It is not uncommon for the targets of pump-and-dump schemes to trade several times their float in a single day. Why should CYNK be different? Either there is an impressively patient group of promoters waiting to sell their shares, or an extraordinarily bullish group of long-term penny stock investors (do such people exist?) withholding millions of shares from the current frenzy, or CYNK does not actually have anywhere near 81 million shares outstanding.

I hate to rain on the parade of everyone else as excited as I was about the insanely high notional market cap, but I don’t think CYNK really has the capitalization it appears to. Based on the low trading volume, I’d guess fewer than 1 million shares are held by people not connected to the company or promoters, if they even exist at all. At, say, a $14 million market cap, CYNK no longer looks quite so appetizing as a short candidate, even with an intrinsic value of zero.