Knowledge as a VIRUS metaphor

With the year winding down there is less to write on about pure trades, so here is some more from the general metaphor pile to slather onto your short VIX ideas and maybe even apply elsewhere...

Knowledge as ..... a VIRUS

What? Isn't knowledge a good thing? Isn't knowledge a cure/medicine/salve?  This sounds like the worse metaphor ever-

I may have mentioned this before as it applies to many fields like general econ (paradox of thrift), but it is really slapping me back over the head with the crypto action (but I'll bring it back to short VIX).  Lets think of the spectrum of crypto investors, almost as a 1-10 scale of knowledgeability/awareness.  At the low end we have 1st time coinbase users who are seeing tweets and facebook posts from Tai Lopez, old people who think I can buy bitcoin "shares", all the way up to pure traders who know the underlying asset means nothing and it is just a vessel for volatility/price action.  In between we have all levels of early adopters/true believers/libertarians, and people who read at least some about the pending transactions, transaction fees, tether, different exchange issues.
If we had to break this down though, what percentage of "investors" in the space do you think can actually articulate
1. the underlying blockchain technology- proof of work
2. the purpose of that technology (censorship resistance, decentralized consensus, digital scarcity, anonymity)
3. the market structure they are getting into (unregulated islands of exchanges, structurally difficult arb between them, shutdowns anytime there is volume/price action)
4. longest chain/network effect vs liquidity as the primary value of various cryptos- BTC vs BCH vs Monero for darknet
5. all scaling "solutions" eventually create a more centralized structure (Lightning network, block size increase- defeating the #2 the initial purpose)
6. the ultimate cost users take on by using less efficient structures (blockchain vs database)
7. ICOs as a fundraising regulatory workaround, if any of these projects had real value as a business, then what function does a unique token have besides revenue/marketing.

If I had to guess, I would put 95%+ of "investors" into this  (1) category, and here is where my virus metaphor begins...

If 100% of crypto investors could fully articulate these issues, especially the conflict between the original value proposition and the current centralizing structures, how would that change trade valuation and trading dynamics?  I would suspect that a massive realization that the current crypto ecosystem and future improvements all don't really do what they set out to and are a pure inefficiency for 99% of users would bring the wind out of the sails, as opposed to the current shared hallucination that this is the future of everything on the planet, Dubai as the 1st "blockchain city," etc.

As long as this realization is among 1-5% of the investors/ecosystem, then the entire crypto space is insulated from a massive pop, because the ICOs and possibly ETFs will just keep getting made and everyone will play along.  In this way, the 1-5% of knowledgeable participant are the VIRUS, and if that knowledge spreads to the rest of the organism, it is put at exponentially more risk.
When a population is 99% vaccinated, the risk of a virus spreading through and wiping them out is almost 0.  In a picture, this is called herd immunity:

 So to apply this to the crypto landscape, the red figures are the 5% that see the impending structural issues in the crypto space.  In a population of blue figures (reasonable people, not crypto cult worshipers), then these simple explanations spread, and most of the population then becomes red and understanding.
Compared to our current structure of a few red characters in a sea of yellow idiots (immunized), no amount of pointing out facts will sway the bulk of the population as long as a high percent are immunized.  I think this is the current state of crypto where as long as you see these idiots on CNBC, then the canary is still alive and well.
I would watch out for the middle case where the number of immunized people drop, at which point the population is susceptible to a sudden exponential explosion in understanding.  The herd immunity holds at a high % immunized, but at a certain point- 90%, 75%.. who knows, the virus has enough paths to run rampant through the cracks and kill everything, there is a massive nonlinear tipping point.

Ok ok, back to short VIX and econ-  just like the herd immunity we currently have in crypto, I could easily see arguing we have a similar immunity in normal markets and econ.  What would markets and the world look like if the whole population understood short VIX as an asset class? No one would care about tax votes, elections, hurricanes- binary events.  Would market makers even act as a counterparty?  There would be no long VIX left.  Similarly in a broader econ sense, stuff like the paradox of thrift could lead to systemic issues, what happens when people stop buying new iphones every year? Thats our global economy!

So I started out wanting to shake these people and say WAKE UP! Or at least "please at least try to articulate these crypto issues rather than blindly yelling to HODL."- but maybe now I'm thinking twice..
Maybe the herd immunity of stupidity/ignorance on certain topics is required for bigger structures to continue.  If I want crypto to blow up then maybe I'm really asking for the global economy to blow up next because its not all that different.  Its just people going around and buying stuff to feel good, maybe we should just chill and be happy with that.

So if knowledge really is the virus in all of these structures, then maybe as a planet we are getting more and more healthy and vaccinated.  Could this be what the next phase of evolution looks like?  If we were too smart for our own good the global economy could've blown up a long time ago because there would be no counterparties.

In summary, knowledge is the virus that that is currently held at bay by the vaccinated/herd immunity effect of idiots.  You might notice this in your groups of friends or at work, so for now we just need to sit tight and if structures don't change, maybe we need to mediate on why the human condition is set up like this.
 

2017 Recap

With 2017 winding down and my short VIX allocation dropping precipitously due to spot vix, /vx, and the looming shadow of the uvxy reverse split , I guess its a week or so early but good enough time to recap.

 So for big bulletpoints its looking like:
~22% YTD (including cash, hedge positions; short vix component is ~100% ROIC as with most short VIX strats)  This is a rough number based on net liq after fees, with some open positions having a wide spread deep in or out of the money.
Portfolio allocations, mentioned from previous articles:
~20-40% hedge position in TLT options/metals options, this was a large % of the portfolio and a small net winner overall, so this year it was better than just cash.
~30-50% cash for the whole year, basically more ready for a vol spike than other strategies, and only really saw one in August.  This was a conservative short vol strategy.

Overall it doesn't look insane given SPY action for the year, but I am very happy with the flexibility and cash reserves given the potential for a correction.  Again this is a hybrid of the Boglehead total market buy and hold, with the Tastytrade option/theta approach, giving a similar exposure to long SPY with only a fraction of the portfolio (~15-20%) getting the downside velocity risk.  I know there are short VIX traders posting 200-300% ROI/ ROIC on portfolio margin using all buying power all the time at this VIX range, but I'm still on the "conservative" short VIX side.
When you are picking your option deltas, % in or out of the money, you kind of have to model in advance.  In the first few months of the year I was hoping to get 10-15% in a flat market, and then pounce if we got a big VIX spike.  With VIX crushes coming so frequently, I was able to roll and compound quicker, but obviously you can't plan for a market year like this so it looks lackluster, whereas if S&Ps were only up 10%, I'd look like a genius.
Overall I equate the whole portfolio to the at-the-money covered call poker example, where if we are making way above market average with a large cash/ bond position, then that is the situation you want anyway, and looking forward I'd rather have 15% risk on going into some crazy overnight crash than 100% in S&Ps.

Thoughts for next year, Macro thoughts for the future-

Portfolio allocation:
Regrets? Obviously in hindsight I should have loaded up more in the August dips, but for that matter I should have just been long UVXY puts no spread all year, of course that's not how you should think of risk going forward.  As I said a few times in articles- I'm almost glad when there are the slightest pangs of regret "I could have gone bigger," because that means the nebulous greed is out there and it didn't grab me yet.  Having cash left is like the old saying about rather having a gun and not needing it than needing it and not having it.  (Investing and poker are ripe with "firing your bullets, load up, empty the clip" metaphors) 
In terms of actual changes I think I might drop the metals component altogether and keep it closer to just short VIX/ bond options, and experiment with other small positions going forward.  I have a further note on crypto in a bit but it is possible in the short term that crypto might take some of the place of metals as a hedge and I don't want my 'hedge' position to be losing any liquidity/ premium.  Past that I'm just always looking to simplify. 

Risk/ROI thoughts:
Again, I'll get to crypto in a second but this ties in with risk, ROI, and just seeing flat numbers.  If I say I made 20% and an all-in short VIX trader made 100%+, then I'm the idiot. If he posts his YTD, then a 'crypto trader' is up 1000%, then the 2nd VIX trader is the idiot.  No one cares about risk management when they see the number at the end of the year (if it worked), they don't care about your cash %, hedge% and mechanics.  As a trader/investor only you can look out for that and you have to be the main person that truly cares about Sharpe and tail risk.  For that reason you should really ignore this whole blogpost or any twitter post on YTD but the one of you that made it this far is already this deep into the rambling.

Crypto thoughts-
I was going off in a previous article on the mechanics of BTC to USD on/off ramps and hardware/logistical issues.  Fortunately since then, the BTC transaction fees and pending transactions have gone through the roof, new market manipulation mechanics have surged,  and the spot price has naturally decoupled from any possible fear.  (I specifically wanted to discuss the logistical issues and not just the "mania" of the spot quote, so in that sense everything is going according to plan).
But Robert, when will you admit defeat and change your mind?
Very simple, when any pro blockchain person can actually articulate the efficiency without somehow doubling back and turning the whole thing back into a centralized structure. (hint: a truly decentralized blockchain is by design a less efficient database, so I'll be waiting a long time.) The real "correct" answer is regulatory arb where you can't use USD for a transaction and will pay the inefficiency in using crypto because it's your only option. Lightning network, centralized altcoins, Bcash under Roger Ver, straight up centralized databases that companies are calling "blockchain" for marketing value- I'm looking at you Microsoft- are the "answers" which all fall insanely short. While I'm at it asking the genie for more wishes, bring me a shark that outruns a cheetah, really hot air conditioning,  or pick your own better metaphor.
Again this is no price commentary because it will keep going up until it explodes, assuming at some point people will resume being rational actors in a game theory sense and won't want to 2- 10x their transaction times and fees for services.  I was recently mentioning BTC spot as a derivative on stupidity which you could get long on, which now given "institutional" interest I'm coming to the generalized case that it's a pure Keynesian beauty contest.


Well, there you have it, a year of trials and tribulations and petty bickering on twitter and in hindsight even I will only remember it as a number, if at all.  Perhaps next year will be even more fleeting.
As an aside, thank you to the 1-5 readers that actually see this, I was surprised to get to over 400 followers on twitter since the beginning of the voyage this year, most of that I'm assuming were misclicks.  This rambling is all I've got in my life right now, besides waking up to see some angry red numbers on the trading platform.  

So thank you all, and to all a good night!

Wisdom arb, BTC, everything as a derivative

I guess this is an unofficial pt.2 rambling on BTC etc, but at least trying to have a broader short VIX/ econ perspective.

What is a scam but wisdom arbitrage?
As a preface and reminder, I have no real issue with the core BTC protocol, most of my issues are with when BTC overlaps with USD- at exchanges, centralized businesses, price for electricity effecting mining priority/fees, and now even cash settled futures.   

"Scam" is just a classification described by regulators, bears, people who know more or less about something, so how does that even help?  Rather than think of structures as a binary 'scam' or 'legit/not scam', I try to think more broadly as levels/spreads of wisdom arbitrage.

"The stock market is a device for transferring money from the impatient to the patient."  

Is any wealth transfer a scam? Could Buffet have said "transferring from the ignorant to the informed"?  From the same idea could he say "fake IRS phone scams are a device for transferring from the ignorant to the informed?"  This is expressed with another classic: 
 
“When a man with money meets a man with experience, the man with experience leaves with money and the man with money leaves with experience.”  
 
Does this case always represent what you think of as a scam?  Is a first time trader setting a market order instead of a limit order being scammed by their broker, or are they exchanging some money now for experience later?  This is a tiny wisdom arb between the new trader and the broker- now the broker has a little more money and the trader has a little more wisdom, the spread on the arb has collapsed just as any normal arb functions; eventually that specific divergence dries up.  

One of my goals is not to 'point to how things should be,' as I'm not advocating a Mad Max Ancap unregulated wasteland, I just try to point out how things are and how we can better emotionlessly perceive them through the short VIX lens.  Whether you love or hate regulators, there will always be a place for them because people will always cry when they get wisdom arb'd. Then arb opportunities disappear and in time new ones will arrive.  The cycle goes on and on, so its important to recognize the structure that will always exist. When people cooperate, at a very basic level that is what government is.  When it gets more and more bloated then we call those decisions regulations, its an unavoidable part of the human condition.

Getting back to BTC and thinking about cases for further upside/downside, I was thinking broadly if you can consider BTC as a derivative of an underlying being stupidity/hope/etc.  While SPY options are very precise where you can fully calculate your exact delta exposure due to 1 tick changes,  BTC is a little more nebulous but if you think of a recreational buyer coming in at all time highs hoping it goes up (greater fool theory, etc), then a case to be long there is that BTC itself becomes long exposure to human stupidity, so its kind of a derivative of that, creating a further feedback loop.  This isn't really touching on the liquidity/market depth issues of crypto exchanges specifically, which would constitute another 4 hours of rambling.

Back to short VIX, given the Buffet quote and my previous discussions on short VIX=long SPY, I really think we can add short VIX to the list of wisdom arb areas.  My fear from that is that like all arbs, the well will eventually dry up, but at the same time if you picture that world, that would mean all future risk premium is 'correctly priced' which is hard to even make sense of conceptually.  If future risk/unknown didn't have a premium, that would shockwave into insurance and other markets.  

Takeaway:

Next time you see a "scam", just think of it as a transaction, how much money vs wisdom is going in which direction, and how fast will this trade/spread contract, as if it was any other kind of arbitrage/convergence trade.