JP Koning: Bitcoin, the Perfect Trading Machine, Hooks Icons

 JP Koning: Bitcoin, the Perfect Trading Machine, Hooks Icons


No group of speculators was more notorious in the 1980s and 1990s than Stanley Druckenmiller, Paul Tudor Jones and George Soros. Druckenmiller famously bet $2 billion on the Deutsche mark when the Berlin Wall came down. Soros and Druckeniller together made billions betting against the British pound when its peg collapsed in 1992. And Jones profited from the 1987 stock market crash.

In 2020, two of these three traders – Druckenmiller and Jones – finally began to buy bitcoins.

This post is part of CoinDesk’s 2020 Year in Review – a collection of op-eds, essays and interviews about the year in crypto and beyond. J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and is a financial writer at a large Canadian bank. He runs the popular Moneyness blog.

One wonders what took them so long. The world has never seen a purer trading machine than Bitcoin. It was purpose-built to let professional speculators like Druckenmiller and Jones rapidly make, or lose, large amounts of money.

A look back at the 1987 stock market crash, probably the single craziest day in market history, provides a window into the thinking of these three speculators. It also hints at why, 33 years later, they’ve finally had their bitcoin conversion.

‘One of the most exciting periods of my life’

To help guide his trading decisions in 1986, 33-year old hedge fund manager Paul Tudor Jones turned to the 1920s for inspiration. He did so by constructing an “analog model,” a simple visual overlay of the 1980s market over the 1920s market.

Jones mentions this analog model in an infamous documentary about him, “Trader.” He has reportedly tried to have “Trader” quashed many times over his career. 

Jones’s analog model suggested to him that the 1980s market would at some point collapse, much like it had in 1929. And so Jones’ hedge fund was heavily short the stock market (i.e., positioned to gain from a fall) going into Oct. 19, 1987, or “Black Monday.” Jones has described the week of the crash as “one of the most exciting periods of my life.”

Speculators are less concerned about reality, or the fundamentals, and care more about what is going on in people’s heads.

announced on CNBC that he has “just over 1% of my assets in bitcoin. Maybe it’s almost 2[%]. That seems like the right number right now.” In October, Jones noted that “I like bitcoin even more now than I did then.”

In November, Druckenmiller admitted to owning a “tiny bit of it.” He went on to say that bitcoin has “a lot of attraction as a store of value to both millennials and the new West Coast money and, as you know, they have a lot of it.”

See also: Legendary Investor Stan Druckenmiller Turns Bitcoin Bull (podcast)

Soros, for his part, has been mum on the question of whether he owns bitcoin.

Some people are surprised legendary speculators like Druckenmmiller and Jones are jumping into a relatively untried instrument. I’m shocked that it took them this long.

Keynesian beauty contests

Market participants like Soros, Druckenmiller and Jones are not investors. Investors evaluate a firm’s future cash flows in an effort to determine if its shares are underpriced. 

Speculators are less concerned about reality or the fundamentals and care more about what is going on in people’s heads. If they can figure out ahead of time what others are going to do they can buy (or sell) ahead of time and later unload on their targets at a much better price. 

Jones’ strategy in 1987 was a great example of speculation. He used the analog model to try and gauge the psychology of the markets, positioning himself to profit from others’ panic. 

Like beauty in Keynes’ contest, the price of bitcoin is purely a function of the market’s imagination.

The Dark Future Where Payments Are Politicized and Bitcoin Wins

Big psychology-driven swings like these are the bread and butter of professional speculators like Druckenmiller and Jones. Both have proven adept at playing beauty contests, burrowing deep into peoples’ minds to anticipate what they will buy or sell in the future. That skill allows them to make huge amounts of money, very quickly. For them, bitcoin is the perfect trading machine.

Speculators often talk up their positions. That is, they mention on TV they happen to be investing in something, hoping that they can create a bandwagon effect. Don’t confuse their words for true belief. Jones describes bitcoin as being in the “first inning.” But he’ll short bitcoin the moment the situation warrants it, much like how he shorted equities in 1987. 

Speculators love to play the game. Just don’t pin them down to a side.





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