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>If I could buy a five-year put on every one of the cryptocurrencies, I’d be glad to do it but I would never short a dime’s worth.” Hmm, in that way you could

>If I could buy a five-year put on every one of the cryptocurrencies, I’d be glad to do it but I would never short a dime’s worth.” Hmm, in that way you could see it as the market around cryptocurrencies lacking the financial complexity that could bring their volatility back down to more normal levels.

cma 9y ago
The difference between a put and a short is a short has unlimited downside (the price you are shorting can go up far more than it can go down). This must mean Buffett thinks crypto has a good chance of exploding in value! Buy Kodak! /s
elhudy 9y ago
I thought there are exchanges which allow crypto options trading?
- pzs 9y ago
  Futures are certainly available. I haven't heard of options yet, but that may just be my ignorance.
  - jabujabu 9y ago
    Bitfinex, Bitmex
    - frgtpsswrdlame 9y ago
      I think the counterparty risk involved in buying a long-dated (and expensive) put from one of those exchanges overwhelms any possible profitability. If Bitcoin really did crash, who's going to pay up for it? Right now there's not a very good answer.
  - vasilipupkin 9y ago
    ledgerx
- cdjk 9y ago
  Not in the volumes Buffett is interested in. And they are quite sketchy compare to regulated US financial markets.
- JumpCrisscross 9y ago
  Why would you trust, in the event of a Bitcoin meltdown, which is the case where your put pays off, that those exchanges would be in a position to honor their contracts?
  - elhudy 9y ago
    I'm not sure what you mean. Unless I am completely ignorant of the way financial markets work, the exchange is exchanging between two parties, and skimming off the top. They do not care what the price of Bitcoin is, as long as there is trading volume. They do not lose money in the event of a meltdown. The people selling the put options do.
    - JumpCrisscross 9y ago
      > the exchange is exchanging between two parties, and skimming off the top Nobody wants to run a credit check every time they buy an option. That just turns the premium into a fancy loan. If you buy an option on an American options exchange, it is cleared by the OCC [1]. They are everyone's counterparty. There is a long chain of people who have to default for you not to get your money. (Basically, the financial system has to melt down in a nation-state ending way.) I have no idea how Bitcoin options are being handled, but suffice it to say, counterparty risk dominates any other component. [1] https://en.wikipedia.org/wiki/Options_Clearing_Corporation https://en.wikipedia.org/wiki/Options_Clearing_Corporation
      - elhudy 9y ago
        Thanks for the info, that makes a lot more sense. I suppose I was under the impression that bitcoin exchanges would be under the same regulations as regular exchanges, considering they are operated by the same large american companies (e.g. CME)
        UweSchmidt 9y ago
        Whoops, that couldn't be further from the truth. A lot of what these exchanges do would be super illegal in the real world!
panarky 9y ago
During the 2008 crisis Buffett bought a $5 billion stake in Goldman Sachs. He didn't buy shares on any exchange, he dealt directly with Goldman. Buffett doesn't need complex financial markets because he does custom transactions directly with companies. A Winklevoss could easily sell him a billion-dollar five-year put, but he wouldn't like the price.
- isolli 9y ago
  I think he would worry more about counterparty risk.
- JumpCrisscross 9y ago
  > he wouldn't like the price For fun, let's try pricing a Bitcoin put option using the Black-Scholes-Merton model [1]. This model is a simplified version of real-life options models, but our parameter uncertainty will dominate the model's anyway. I'll use the $14,400 Coinbase price [2] for both our S and K inputs, i.e. we're pricing a European put struck at spot. Term is 5 years. This site [3] says Bitcoin's historic 252-day volatility is 5.21%. Sure. We want the 5-year 365-day volatility, i.e. 14.0% [4]. The real shit show in this example is the rates component. If we use this 57% number [5], the put is worthless. We're using a Bitcoin-dollar price for the stock and strike, so let's assume U.S. dollar funding (since Bitcoin does not natively support rates in the way modern currencies do). The 5-year Treasury yields 2.25% [6]. BSM says...$1,037.01. (Rho dominates tau, or in English, the rates component is about 2.5x more meaningful than the volatility component.) Raising our rate to the call money rate [7] we get $792.84 with rates continuing to dominate volatility. [1] https://en.wikipedia.org/wiki/Black–Scholes_model https://en.wikipedia.org/wiki/Black–Scholes_model [2] https://www.coinbase.com/charts https://www.coinbase.com/charts [3] https://bitvol.info https://bitvol.info [4] sqrt([5 x 365] / 252) x 5.21 [5] https://www.bloomberg.com/news/articles/2017-11-09/keynes-worked-out-the-bitcoin-interest-rate-it-s-57 https://www.bloomberg.com/news/articles/2017-11-09/keynes-wo... [6] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i... [7] https://www.bankrate.com/rates/interest-rates/call-money.aspx https://www.bankrate.com/rates/interest-rates/call-money.asp...
csomar 9y ago
I'm pretty sure you can construct that instrument for the right amount. I'm afraid will be exorbitantly high that he'll have to "re-consider" it.

cma 9y ago

The difference between a put and a short is a short has unlimited downside (the price you are shorting can go up far more than it can go down). This must mean Buffett thinks crypto has a good chance of exploding in value! Buy Kodak! /s

elhudy 9y ago

I thought there are exchanges which allow crypto options trading?

pzs 9y ago
Futures are certainly available. I haven't heard of options yet, but that may just be my ignorance.
- jabujabu 9y ago
  Bitfinex, Bitmex
  - frgtpsswrdlame 9y ago
    I think the counterparty risk involved in buying a long-dated (and expensive) put from one of those exchanges overwhelms any possible profitability. If Bitcoin really did crash, who's going to pay up for it? Right now there's not a very good answer.
- vasilipupkin 9y ago
  ledgerx
cdjk 9y ago
Not in the volumes Buffett is interested in. And they are quite sketchy compare to regulated US financial markets.
JumpCrisscross 9y ago
Why would you trust, in the event of a Bitcoin meltdown, which is the case where your put pays off, that those exchanges would be in a position to honor their contracts?
- elhudy 9y ago
  I'm not sure what you mean. Unless I am completely ignorant of the way financial markets work, the exchange is exchanging between two parties, and skimming off the top. They do not care what the price of Bitcoin is, as long as there is trading volume. They do not lose money in the event of a meltdown. The people selling the put options do.
  - JumpCrisscross 9y ago
    > the exchange is exchanging between two parties, and skimming off the top Nobody wants to run a credit check every time they buy an option. That just turns the premium into a fancy loan. If you buy an option on an American options exchange, it is cleared by the OCC [1]. They are everyone's counterparty. There is a long chain of people who have to default for you not to get your money. (Basically, the financial system has to melt down in a nation-state ending way.) I have no idea how Bitcoin options are being handled, but suffice it to say, counterparty risk dominates any other component. [1] https://en.wikipedia.org/wiki/Options_Clearing_Corporation https://en.wikipedia.org/wiki/Options_Clearing_Corporation
    - elhudy 9y ago
      Thanks for the info, that makes a lot more sense. I suppose I was under the impression that bitcoin exchanges would be under the same regulations as regular exchanges, considering they are operated by the same large american companies (e.g. CME)
      - UweSchmidt 9y ago
        Whoops, that couldn't be further from the truth. A lot of what these exchanges do would be super illegal in the real world!

panarky 9y ago

During the 2008 crisis Buffett bought a $5 billion stake in Goldman Sachs. He didn't buy shares on any exchange, he dealt directly with Goldman. Buffett doesn't need complex financial markets because he does custom transactions directly with companies. A Winklevoss could easily sell him a billion-dollar five-year put, but he wouldn't like the price.

isolli 9y ago
I think he would worry more about counterparty risk.
JumpCrisscross 9y ago
> he wouldn't like the price For fun, let's try pricing a Bitcoin put option using the Black-Scholes-Merton model [1]. This model is a simplified version of real-life options models, but our parameter uncertainty will dominate the model's anyway. I'll use the $14,400 Coinbase price [2] for both our S and K inputs, i.e. we're pricing a European put struck at spot. Term is 5 years. This site [3] says Bitcoin's historic 252-day volatility is 5.21%. Sure. We want the 5-year 365-day volatility, i.e. 14.0% [4]. The real shit show in this example is the rates component. If we use this 57% number [5], the put is worthless. We're using a Bitcoin-dollar price for the stock and strike, so let's assume U.S. dollar funding (since Bitcoin does not natively support rates in the way modern currencies do). The 5-year Treasury yields 2.25% [6]. BSM says...$1,037.01. (Rho dominates tau, or in English, the rates component is about 2.5x more meaningful than the volatility component.) Raising our rate to the call money rate [7] we get $792.84 with rates continuing to dominate volatility. [1] https://en.wikipedia.org/wiki/Black–Scholes_model https://en.wikipedia.org/wiki/Black–Scholes_model [2] https://www.coinbase.com/charts https://www.coinbase.com/charts [3] https://bitvol.info https://bitvol.info [4] sqrt([5 x 365] / 252) x 5.21 [5] https://www.bloomberg.com/news/articles/2017-11-09/keynes-worked-out-the-bitcoin-interest-rate-it-s-57 https://www.bloomberg.com/news/articles/2017-11-09/keynes-wo... [6] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i... [7] https://www.bankrate.com/rates/interest-rates/call-money.aspx https://www.bankrate.com/rates/interest-rates/call-money.asp...

csomar 9y ago

I'm pretty sure you can construct that instrument for the right amount. I'm afraid will be exorbitantly high that he'll have to "re-consider" it.