Make Big Bucks on Bitcoin

How to make big money off Bitcoin and other virtual currencies?

Allow me to say some really obvious things that aren't said often. Some people will respond in the comments advocating for these currencies, but none will be able to contradict these claims:

1. These currencies are an investment mania.
2. Their primary exchange is for investment rather than as payment for goods and services.
3. Their value increase is driven by a pyramid effect. Returns of early investors are paid at inflated rates by present investors in hopes of future returns paid by future investors at even higher prices.
4. The majority of paper wealth invested in virtual currencies was created by price inflation and not conversion of real goods or other currencies.
5. A virtual currency isn't a business that can create wealth. When the mania ends there will have been a near net zero sum transfer of wealth from later investors and later exiters to early investors and those who time their exits near the top.

Now, some think that the way to make money from a currency mania is to short the currency. This is hard to do with current market structures, but even could it be done, it would be risky because the eventual price will not drop to zero and it requires timing the peak. Some think you can use Metcalfe's Law to do this. There will be interesting papers written about this afterward.

In any event, the risk of a collapse is in some sense priced in to the currency. So there isn't an inefficiency to exploit.

The solution is to short financial instruments that depend on virtual currencies. And the big bucks are if you can discover hidden dependencies. If people aren't thinking about these derivatives as being dependent on the value of virtual currencies, the risk of a collapse won't be priced in.

This was the play to win during the housing crisis of 2005-2007:

In 2003, housing prices were in a bubble, which was apparent at the time. Greenspan and other testified to this in 2003. If you'd shorted housing stocks, not only would you have needed to wait 6 years to get your money out, but you wouldn't have made a dime. This is why shorting requires timing the market.

The Solution

The way to make money off the housing bubble was actually to make money off the Collateralized Debt Obligation (CDO) bubble. CDOs, and multiple layers of CDOs, were how banks packaged subprime mortgages and made them look like traditionally less risky forms of corporate debt. The risk of these derivatives was not properly priced or hedged against, and thus we had the financial crisis as the market for these instruments functionally disappeared.

Whether they will admit it or not, everyone involved in ICOs and virtual currencies knows they are a bubble. They accept the risk and have priced it in. Just like the housing bubble made housing moguls and ruined others, so will the virtual currency bubble.

But the big winners will be those who identify the equivalent of the CDO: a security that is somehow tied to virtual currency value in a way that isn't recognized or priced by the market. This inefficiency is the place to make money.