By Matt Levine
Happy Bitcoin Whatever Day.
Yesterday was a big milestone for Money Stuff, and for me: It is perhaps the first time that I have ever made a market prediction that turned out to be right. Right-ish. Right enough. Yesterday morning, with the price of bitcoin a bit north of $15,000, I predicted that it would break $16,000 by that afternoon. In fact, I went even further and predicted $17,000. "Why not," I believe was my precise reasoning. Bitcoin then went ahead and crossed $18,000 on Coinbase before noon, so I was too conservative on both price and timing. But if you read Money Stuff and thought "hey this guy makes some good points" and bought bitcoin at $15,000 or so yesterday morning, you made some money. If you traded on the right exchange, that is, and sold quickly: Bitcoin fell back to a 15-handle by this morning. The lessons are:
- You're welcome.
- That will never happen again, and I extra-strength warn you that nothing you read here is ever investing advice.
- Ugh, bitcoin, will it never end?
So ... Happy Bitcoin ... 20,000 Day? 25,000? 50,000? Happy Bitcoin Is Whatever Price You Want Day. Happy External Reality Does Not Exist and Is Merely an Emanation of Human Consciousness Day. True story, last night I dreamed that I was discussing bitcoin market structure.
Speaking of bitcoin market structure: Are you excited for the launch of bitcoin futures next week? Both Cboe Global Markets Inc. and CME Group Inc. will have circuit breakers to stop trading if bitcoin moves more than 7 or 10 or 13 or 20 percent from the previous day's close. All of those circuit breakers would have triggered yesterday. That's not exactly what you want the week before you launch a futures product? I mean, it is, in a sense: Bitcoin's crazy ramp up this week is great publicity and will attract futures traders both long ("finally I can buy this thing that everyone wants!") and short ("finally I can short this bubble!"). But it also points to cracks in the futures: If bitcoin moves by more than 20 percent in a few hours, and the futures are designed not to, then they don't do a very good job of replicating bitcoin then do they?
Of course it points to cracks in everything. The actual bitcoin exchanges didn't cover themselves in glory in yesterday's trading: "Investors flocking to open new accounts or place orders Thursday left Coinbase, the largest U.S. exchange, warning of outages and slow transactions," and "Bitfinex, the largest bitcoin exchange in the world, said on Twitter that it has been under a denial of service attack for several days and that it recently got worse." And:
In one wild 20 minute period, the price of bitcoin soared $2,000 per coin to more than $19,000 only to drop to $15,000 on the Coinbase trading venue. The frenzied demand left other exchanges struggling to cope, and the difference in prices quoted on other venues for the same bitcoin asset was as much $4,000.
Late yesterday morning, you could have bought bitcoins on Bitstamp for less than $16,000 and sold them on Coinbase for more than $19,000, locking in an instant risk-free 20+ percent profit, if cross-market arbitrage was as easy and frictionless in bitcoin as it is in, you know, normal financial products. Clearly it is not. Perhaps the futures will help?
Elsewhere in bitcoin futures, here is a roundup of concerns (reputational risk, volatility, clearing risks, etc.) that big banks have about trading them. Here's a profile of Akuna Capital, a proprietary trading firm that "could well be the first to buy and sell bitcoin derivatives in Chicago when they go live on Sunday." Here is Izabella Kaminska with a theory that futures market makers may be "pre-hedging" and ramping up the bitcoin price now. (I don't buy it. "Pre-hedging" a week in advance in a product this volatile seems ... insane?) And here -- on Reddit, of course -- is the best bitcoin theory of them all: "Someone is close to building a real quantum computer" that will be able to crack bitcoin's encryption and make bitcoin worthless, and they are going to use it to make enormous profits by shorting bitcoin futures. So now they are manipulating the market up to increase their profits later when they short. I don't buy this either -- why buy bitcoins now? -- but it would be by far the funniest way for all of this to end.
Elsewhere in bitcoin, Nathaniel Popper notes that bitcoin's original dream of being an "electronic cash system" useful for money transfers and purchases has more or less evaporated. That leaves some of its original dreamers sad, but they have been replaced by bitcoin-as-a-store-of-value enthusiasts, who are ... enthusiastic. "The reason people own Bitcoin is because it’s a great store of value, possibly the greatest that has ever existed," says one of them, about an asset with an annualized volatility of more than 100 percent. "Today what Bitcoin is excellent at, and has mostly solved, is being your own bank," says another. A ... bank? I don't know, I mean, I have a checking account and a couple of savings accounts, and none of them are up 1,500 percent this year? Obviously this comparison makes bitcoin look better than a bank account, sure, but not better at being a bank account than a bank account. The thing you want, in a bank account, is certainty, not volatility. I continue to read and hear and nod sagely at the argument that "the reason people own bitcoin is because it's a great store of value," but I cannot yet distinguish that argument from "the reason people own bitcoin is because it keeps going up." Perhaps that distinction doesn't matter. It troubles me though.
Still elsewhere, my Bloomberg View colleague Elaine Ou points out that bitcoin's electricity use isn't as bad as you think: "Bitcoin miners will consume an estimated 8.27 terawatt-hours per year," versus 11 for "global production of cash and coins" and 132 for gold mining. And here is "the first time a distributed computer ledger has been employed to help a homeless population."
Fun with taxes.
I sometimes think I missed my calling as a tax lawyer. Tax lawyers, if they are any good, approach the world with a childlike sense of wonder. Someone (Congress) has given them a magical toy (the tax code) to play with, a toy whose possibilities are limited only by their imagination. And their job is to come up with new games to play with it, new combinations to try, new solutions to the riddles hidden in the code. You get to play all day, and then people give you money.
Anyway 13 tax lawyers and professors got together, presumably over drinks, and wrote this delightful paper describing the many "Tax Games, Roadblocks, and Glitches" that they found in the House and Senate tax plans. The ostensible purpose of the paper is to warn Congress of the unintended consequences of its legislation so that it can fix them in conference, but you cannot write a paper like this without a certain sense of glee. If Congress really fixed all of these glitches, without creating any new ones, tax lawyers would be pretty disappointed
So, for instance, yes, you should form a pass-through entity and try to turn your salary into business income, which will be taxed at a lower rate than ordinary income. You could even combine this with quasi-unionization: The authors give the example of a law firm's associates banding together to "be partners in Associates, LLC—a separate partnership paid to provide services to the original firm." Instead of the law firm paying 100 associates, say, $200,000 each in salary, it would contract with Associates, LLC to pay it $20 million a year (plus expenses) for its services, and the partners of Associates, LLC would split the profits. You could imagine trying this in other industries too, with the dual consequences of lower taxes and more employee camaraderie. Though realistically the final tax legislation will probably try to prevent professional-services pass-throughs from taking advantage of the lower tax rates. None of this is legal advice, and you should not hold Money Stuff Business Thing LLC, the entity that furnishes this newsletter to Bloomberg, responsible if you try it with disappointing results.
There are also some clever workarounds for the limitations on the state and local tax deduction. For instance, states should solicit charitable donations to pay for roads and schools, and make those donations fully creditable against state taxes. The rough idea is that if you have $50,000 of state tax liability, that is no longer deductible from your federal taxes -- but if you instead donate $50,000 to the state, that is deductible from your federal taxes as a charitable donation, and if the state reduces your taxes by the $50,000 donation then you come out ahead. This is the simplest and clearest of all regulatory arbitrages: Giving money to the state as taxes, and giving money to the state as a donation, are economically equivalent, but they will be treated differently by the federal tax code and so there will be incentives to shift from one to another.
My favorite idea might be to combine the solutions to those two problems: If you're a wage earner who can swing it, you form yourself into a pass-through entity to get the lower federal rate on business income, and then states impose a "franchise tax" on those pass-through entities:
The current bills are designed to benefit taxpayers who earn income through pass-throughs and, in all likelihood, will provide benefits to such taxpayers far beyond what has been anticipated. States can seek to recapture some of this benefit by imposing (or encouraging local governments to impose) business “franchise” taxes—taxes imposed on the business entity. Such taxes appear to remain deductible even if imposed on “pass-throughs” (and so ultimately deducted by the individual).
In rough numbers, imagine that you have $100 in income, a 35 percent federal tax rate and a 10 percent state tax rate. Under current law, you would pay $10 in state taxes, deduct that from your federal income, and pay $31.50 ($90 times 35 percent) in federal taxes, for a total of $41.50. Under the new law, you'd pay $10 in state taxes and $35 in federal taxes, for a total of $45. If you turn your income into pass-through income, though -- by forming Associates LLC, etc. -- then you'd pay a lower federal rate, call it 25 percent. So you'd pay $10 in state taxes and $25 in federal taxes, for a total of $35. But if the state tax changes from a personal income tax (not deductible) to a "franchise tax" on your business (deductible), then you'll pay $10 in state taxes and $22.50 in federal taxes, for a total of $32.50. This maximizes tax savings and is also how tax arbitrage is supposed to be done: Both sides of the deal -- here, the state and the taxpayer -- team up to extract value from the federal tax code. What's not to like? I mean right this is a glitch that Congress should definitely fix.
Yesterday the Long-Term Stock Exchange and IEX announced that they are teaming up to be the very nicest stock exchange, or subset of a stock exchange:
IEX’s recently approved listing standards are traditional and appeal to a broad set of public companies looking to switch from their current listings exchange to IEX. Under this new partnership, ‘LTSE Listings on IEX’ will provide a specialized set of standards designed for those private companies looking to go public while making a commitment to long-term value-creation. The LTSE will simultaneously continue pursuing regulatory approval to operate its own exchange marked by this differentiated approach. When the regulatory approval is received, qualified companies on ‘LTSE Listings on IEX’ will have the opportunity to seamlessly transfer to LTSE.
As I understand it:
- IEX is an actual stock exchange, with listings standards that mirror those of the New York Stock Exchange and Nasdaq.
- LTSE is a proposed but so far nonexistent stock exchange, which wants to have high disclosure standards but also tenure voting that will protect management teams from activist pressure.
- Until LTSE is approved as an actual stock exchange, you can get an LTSE listing on IEX.
It's like a synthetic listing: You list on IEX, but it's as though you had listed on LTSE. As a fan of synthetic things, of course I like this. But I am also a fan of choice and diversity in corporate governance, and an admirer of IEX's and LTSE's work at convincing people that they are the nice guys who are working on behalf of long-term investors. In fact, I have been pushing something like this -- LTSE-like listing standards on IEX -- for a while.
The synergies are obvious: If you are a certain type of corporate chief executive officer, you want to raise money from public markets, but you are afraid of the predators who live in those markets. Those predators are ill-defined, but they include activist investors who will pressure you to focus on the short term and high-frequency traders who will manipulate your stock price. IEX positions itself as an exchange that protects real investors from predatory HFTs; LTSE positions itself as an exchange that protects companies from short-term activists. I am a bit skeptical, but who cares what I think; I am clearly more pro-HFT and pro-activist than the average corporate CEO. The point is that both IEX and LTSE are good at convincing people that they are exchanges for long-term investors, and both tell stories that appeal to large and overlapping sets of CEOs. Of course they should team up.
Yesterday we talked about AlphaZero, the DeepMind artificial intelligence program that learned chess flawlessly in a day. I wrote:
It feels like special pleading to say that just because markets change over time, only human intelligence can really master them. It’s not like humans have any obvious innate talent for spotting market inflection points or whatever. They have just played the game a lot and learned from their experience some rough ways of spotting patterns. That’s what the computers would do too, except maybe better.
I take it all back! Here is an article about the Los Angeles fires that mentions:
The Los Angeles Police Department asked drivers to avoid navigation apps, which are steering users onto more open routes — in this case, streets in the neighborhoods that are on fire.
That is what you would call a regime change, and the AI missed it. Similarly, if your algorithm is telling you to buy a stock because it looks cheap, that might be because it is on fire.
People are worried about unicorns.
Here is Maya Kosoff on "The Toxic Backlash of Silicon Valley's Boys' Club." "Of more than 800 start-up founders polled," she notes, "19 percent believe the issue of sexual harassment in tech has been overblown by the media, a sentiment men were four times more likely than women to agree with."
Local modeling agencies, which work with Facebook- and Google-size companies as well as much smaller businesses and the occasional wealthy individual, say a record number of tech companies are quietly paying $50 to $200 an hour for each model hired solely to chat up attendees. For a typical party, scheduled for the weekend of Dec. 8, Cre8 Agency LLC is sending 25 women and 5 men, all good-looking, to hang out with “pretty much all men” who work for a large gaming company in San Francisco, says Cre8 President Farnaz Kermaani. The company, which she wouldn’t name, has handpicked the models based on photos, made them sign nondisclosure agreements, and given them names of employees to pretend they’re friends with, in case anyone asks why he’s never seen them around the foosball table.
“The companies don’t want their staff to be talking to someone and think, Oh, this person was hired to socialize with me,” says Kermaani.
What old-fashioned thinking! The transformation of economic capital (I have money) into social capital (pretty people want to socialize with me) has been a central feature of human life for at least the last couple of hundred years, but -- just like in this story -- it has always been a bit shameful and indirect. People want to get money so that pretty people will want to socialize them, but they don't want the pretty people to want to socialize with them because of the money. They want to get the money and then be loved for themselves. But surely Silicon Valley, with its transformation of subtle human social interactions into explicit algorithms, should have moved past that fuzzy thinking. I bet there are people at Uber who do want to think "Oh, this person was hired to socialize with me." That's how you know you won!
A 20-year-old Florida man was responsible for the large data breach at Uber Technologies Inc last year and was paid by Uber to destroy the data through a so-called “bug bounty” program normally used to identify small code vulnerabilities, three people familiar with the events have told Reuters.
When news of the Uber hack broke, I suggested that being hacked by a hacker would be a bad and disclosable event, but being hacked by an employee would be fine. The trick is to pay the hacker and retroactively employ him. Paying him and calling it a "bug bounty" -- just part of the ordinary course of business! nothing to see here! -- is pretty close.
People are worried about stock buybacks.
Cliff Asness and his colleagues at AQR Capital Management are not worried about stock buybacks:
We address four myths related to aggregate share repurchase activity. First, while total dollars spent to repurchase shares is high today relative to history, companies are not “self-liquidating” as some claim since repurchases have largely been financed by debt issuance. Inferences on aggregate repurchase activity are heavily dependent on the source of funds but this source is often completely ignored. Second, there is no obvious link between aggregate repurchase activity and a decline in aggregate investment activity. Third, aggregate repurchase activity is not, and cannot be, responsible for the strong equity market returns over the last 8 years. Therefore, more prosaically, share repurchasers are not “propping up the market.” Fourth, aggregate repurchase activity is not associated with mechanical or automatic Earnings-Per-Share (EPS) growth as is often claimed.
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(Corrects ninth paragraph to indicate that bitcoin has gained about 1,500 percent this year, not 15,000.)
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