The Social Good of Bubbles – Part II

Written by Tiffanie Bederman (LinkedIn profile)

In my last post I discussed the need for a concrete definition of “bubble” if we’re to use the concept for trading/investing (as opposed to cocktail party hyperbole) and listed a few famous bubbles. These so-called bubbles (here I’m using the term to imply a rapid increase in price and a subsequent, dramatic decline) can roughly be attributed to three sometimes concurrent causes:

New/Unexplored Frontier or Industry

  • South Sea Company
  • Railway Mania
  • Automobile Manufacturing
  • Tech Bubble/Dot-Com Boom

Enabling Financial Conditions or Innovation

  • Tulip Mania
  • Railway Mania
  • Beanie Babies
  • Subprime Mortgage Crisis

Fraud or Morally Questionable Business Practices

  • South Sea Company
  • Railway Mania
  • Black Tuesday
  • Tech Bubble/Dot-Com Boom
  • Subprime Mortgage Crisis

Good Bubbles

From this framework, we can see that some bubbles are the natural byproduct of an emerging industry. With the exception of the South Sea Company – who’s original intention was to reduce the British national debt under the pretense of exploring the new world – all of the bubbles in this category created or revolutionized an industry.

Railway Mania created a vast network of tracks across the UK. Automobile manufacturing created the industry we know today – you’d never drive a Duryea (the first company in the US to build gasoline fueled vehicles), but four years after they got their start, Oldsmobile started building cars as well. In the tech bubble, everyone loves to remember who’s IPO in 2000 raised $82.5mm, but let’s remember that Amazon’s* IPO had been just a few years earlier in 1997. At $18/share they had raised $54mm. One sold dog food over the internet. The other sold books.

In nascent markets, valuations must be based not just on a company’s future performance but also on estimates of the entire industry’s growth and the company’s ability to perform in turbulent, continuously evolving conditions. When looked at holistically these valuations can reach exorbitant levels that can perhaps be attributed to hubris – market participants all believing *their* horse is the winning horse.

Price > Intrinsic Value ≠ Bubble

According to Shiller, “Gold itself is a sequence of speculative bubbles, starting in ancient times, and still continuing after thousands of years.” Proponents of gold will likely want to argue with this assertion, but consider for a moment that less than 15% of gold mined goes towards fabricated products. Out of the ~$7.7 trillion of gold ever mined, over $6.5 trillion is either held as an investment by central banks, institutions, or individuals or held as jewelry, so let’s stop claiming that “gold has industrial applications” when estimating its value. Gold has value because people have decided that it has value.

For those who disagree with my gold analysis, consider the slightly more complicated diamond market. According to a 2011 report published by Bain, “Per carat, the cost of mining a natural colorless diamond runs about $40 to $60, and the cost to produce a synthetic, gem-quality colorless diamond is about $2,500.” Cutting a 1 karat stone costs between $10 and $100 (linked article provides a good breakdown of the market). Ultimately, these will sell for anywhere from $1k to over $20k, depending on the four C’s, GIA registration, retail outlet (Tiffany’s vs, etc.

Other examples of similar stores of value are gemstones, geological findings, baseball cards, collectible coins, antiques, classic cars, stamps… the list goes on.

No sane trader would short gold or diamonds or collectibles based solely on these analyses. As a post-barter society, we’ve agreed to use objects as stores of value, gold and diamonds included. Cash objects store agreed upon values directly translatable to dollars, euros, etc. History, though, reminds us that cash objects are not the equivalent of money – just ask anyone who has old lira or 500 rupee notes stashed under the floorboards. Bank accounts are arguably the most literal definition of stores of value. The bank gives its customers space in their databases. Customers give the bank money with the expectation of being able to get at least the same amount of money back in the future. But I digress.

Thoughts on Current Markets


As of January 23rd, 2018, there are 1,476 cryptocurrencies listed on for a total market cap of $526 billion. For traders who believe that cryptocurrencies are a bubble, the more interesting question they should be asking themselves is “what type of bubble is this?” Is the emerging industry the cryptocurrencies themselves or is it the much broader category of blockchain technology? More specifically, recalling P2P e-commerce, are cryptocurrencies simply the Beanie Babies of blockchain, or are they more like the tech bubble producing some huge winners and a plethora of losers? Which one(s) are Amazon and which ones are Additionally, will financial regulations enable the development of the market or will new regulations stifle cryptocurrencies?

My opinion: the intrinsic value of cryptocurrencies is not dependent on traders or investors watching financial markets from the comfort of their home or office. It also should not be dependent on Silicon Valley trying to circumvent financial regulations. The value of cryptocurrencies lies in their ability to store value when surreptitiously crossing borders or when compared to currencies going through phases of hyperinflation (would you rather own Venezuelan bolívares or Bitcoin** for the next 30 days?). It’s for travelers who’d rather pay exchange rates and transaction costs than carry large sums of cash, it’s for refugees, it’s for criminals, it’s for individuals who want to electronically send money immediately when the Fed wire is closed. Perhaps someday we’ll be able to get rid of our bank accounts and buy a car at a dealership with Bitcoin but for an immediate investment thesis rather than a science fiction novella I have to assume this isn’t the primary use case.

The Stock Market and Credit

With financial news labeling the stock market a bubble one has to wonder what type of bubble we’re in. Given the known universe of stocks, it can’t be a new or unexplored industry. With no major changes in regulations regarding leverage and no immediately perceptible financial innovations the second category seems unlikely as well. This leaves fraud or morally questionable business practices, which have no reason to have increased in recent history. While I believe a correction would be a reasonable market action (especially if/when inflation starts to tick up), I’m not anticipating Great Recession 2.0 anytime soon.*** The most likely driver of inflated asset prices in the current environment is central bank activity (ZIRP, asset purchases, etc), the effects of which are far more widespread than just the stock market. Barring any dramatic changes on the horizon in other asset classes or inflation, the freely available information regarding the nature of policies, and central bankers penchant for deliberate and widely telegraphed actions, it’s hard to believe there will be a dramatic devaluation.


While we can all acknowledge that Beanie Babies aren’t worth much more than their sale price regardless of their rarity, to this day they still sell for thousands of dollars. Money laundering? Some other nefarious scheme? The world may never know. The point is that they still retain at least some value. At the end of bubbles, all assets return to a widely accepted fair value.




Disclosures (23 Jan 2018):

* I’m long Amazon stock.

** I don’t currently have any positions in cryptocurrencies.

*** I’m long stocks in general. This is my opinion and not investment advice obviously.



Featured Image by Vita Marija Murenaite on Unsplash

The Social Good of Bubbles – Part I

Written by Tiffanie Bederman (LinkedIn profile)

Dot Com Stocks. Tulips. Beanie Babies. Railway Mania.

Cryptocurrencies. Canadian Cannabis Stocks*. Credit. Stocks.

Did the bubble just pop? Where are we going (and who’s driving this bus)? The word “bubble” gets thrown around a lot but not a lot of people have a good, working definition of what exactly a bubble is. A sound investment thesis requires a rational framework for valuing the asset in question, a timeframe for the reconciliation of the difference between price and value if any, and a sound understanding of the economic ecosystem that produces different types of price action.

So let’s explore bubbles.

What is a bubble?

“An economic bubble or asset bubble… is trade in an asset at a price or price range that strongly exceeds the asset’s intrinsic value. It could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future.”

Wikipedia – Economic Bubble

“A speculative bubble [is] a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases, and bringing in a larger and larger class of investors who, despite doubts about the real value of an investment, are drawn to it partly by envy of others’ successes and partly through a gamblers’ excitement.”

– Robert Shiller, Irrational Exuberance

Combining these two definitions, we can think of a “bubble” as a period of time in markets when price significantly exceeds intrinsic value for reasons driven by cultural dynamics and/or emotions.

Price vs. Value: Going back to Finance 101, intrinsic value is the sum of the present value of all future cash flows. For securities like bonds, this is straightforward – take the present value of all of the coupons, add the present value of the principal to be paid back at maturity to get the expected current price of the bond. A similar calculation can be applied to dividend-paying stocks by calculating the present value of expected dividends, but one in six companies currently in the S&p 500 don’t actually pay a dividend (you didn’t think this was all about Bitcoin, did you?). These are companies like Google, Amazon, and Facebook (with market caps of $750B, $580B, and $530B respectively) so investors presumably think they’ll gain some sort of value in the future by owning shares.** There exists a grey area in estimating these future cash flows – this grey area is what creates a market. Some participants estimate that the price of the asset will go up, others estimate it will go down – otherwise no trading would occur. An even grayer area exists when the fundamental nature of the contract changes, as occurred in some of the bubbles listed below.

Psychology: Economics assumes that all market participants act in a way to maximize their individual utility. For better or for worse, reality is far messier. A discussion of the underlying reasons behind bubbles is outside of the scope of this article, but some interesting areas for further study include crowd psychology, mass hysteria, and the greater fool theory. As Peter M. Garber points out in Famous First Bubbles, “[p]sychological state of mind is not a measurable concept, especially years after an event. It does, however, provide a convenient way of explaining some phenomena in the market that cannot otherwise be explained” (p.4).

When the financial media talks about bubbles, they are usually using the term to imply an impending collapse in price as well. This can be a collapse in an individual entity, an industry, or an entire economy. More on this in the next post.

Famous Bubbles

Tulip Mania

Tulips, a luxury item, were traded in futures transactions conducted mainly at taverns. After speculators suffered losses in 1636, government officials change the contracts to benefit buyers. Some academics argue this was not a bubble.
Era/Economic Environment
Dutch Golden Age, Middle of the Thirty Years War
Peak Early 1637
Where Netherlands
Ground Zero Speculators
Widest scope
Wealthy merchants and craftsmen
Enabling Financial Condition(s)
The conversion of all futures contracts to options contracts in late 1636
Trigger (if any)
Buyers did not show to a routine auction
no critical influence on the prosperity of the Dutch Republic


South Sea Company

A scandalous, kleptocratic scheme devised by Tory leader Robert Harley to reduce British national debt.
Era/Economic Environment
“a time of prosperity and opulence”; end of the War of the Spanish Succession; heavy IPO issuance across Europe
Peak Aug 1720
Where Great Britain
Ground Zero Politicians
Widest scope
Unknown – presumably limited to speculators/investors who had access to London’s stock trading activities (mostly held at Jonathan’s Coffee-House at the time)
Enabling Financial Condition(s)
Rumor mongering, bribery, national pride, New World trade excitement, subscription share model of purchasing stock (leverage)
Trigger (if any)
SSC management selling shares, a decline in all stocks in London and internationally, first payment date for shares purchased on installment plans
Impeachment/imprisonment of some of the government officials and company officers involved; financial ruin for many speculators


Railway Mania

Economic expansion fuels speculative investments in both legitimate and illegitimate railroad endeavors.
Era/Economic Environment
Booming British economy with a literate middle class looking for investment opportunities after the Bubble Act (created after the South Sea Bubble) was repealed in 1825
Peak 1846
Where Great Britain
Ground Zero Industrialists
Widest scope Unknown
Enabling Financial Condition(s)
Lax regulatory environment (“laissez faire capitalism”), new investors seeking dividends (“dumb money”), subscription shares (leverage)
Trigger (if any)
Rapidly decaying economic environment (for more information look up the Irish Potato Famine)
“A giant and very speculative undertaking that succeeded”. Many households lost their investments/savings, but the UK gained over 6k miles (approx 10k km) of track.


Black Tuesday

Excessive (leveraged) speculation, now-criminal banking practices, and fraudulent investment schemes in a time of great economic prosperity leads to spectacular market crash and the Great Depression.
Era/Economic Environment
Roaring 20s – economic prosperity in the Western world
Peak Oct 1929
Where US
Ground Zero Stock Market
Widest scope World
Enabling Financial Condition(s)
Economic and technological booms
Trigger (if any)
Lackluster economic data, LSE crash triggered by the incarceration of key investors, unstable trading activity, margin calls on highly levered positions, tightening Fed policy, Hawley–Smoot Tariff Act
the Great Depression


Automobile Manufacturing

By 1930, according to wikipedia over 1,800 automobile companies had been created and subsequently disbanded in the United States alone. Not a bubble, per se, but an example of many investors chasing innovation and returns.
Era/Economic Environment
Early 20th Century
Peak Arguable
Where US
Ground Zero N/A
Widest scope N/A
Enabling Financial Condition(s)
See Black Tuesday
Trigger (if any)
Great Depression
Industry consolidation leaving “the Big Three” major companies in the US


Beanie Babies

Stuffed bears retailing for $20 were valued at hundreds of thousands of dollars in the 90s.
Era/Economic Environment
90s Economic Boom
Peak 1999
Where US
Ground Zero
Teachers and Housewives in Chicago
Widest scope Unknown
Enabling Financial Condition(s)
Ebay – the emergence of P2P commerce
Trigger (if any)
Prices did not increase as expected after a routine retirement announcement
No widespread economic impact; the current value of the stuffed animals is unclear. Recent eBay auctions show “Princess Bears” still selling for as much as $15k. Presumably these are fraudulent transactions or naive buyers.


Tech Bubble / Dot-Com Boom

Description Excited about the internet, investors piled cash into anything claiming to be even remotely related to technology.
Era/Economic Environment 90s Economic Boom
Peak 2001/2002
Where US
Ground Zero Silicon Valley
Widest scope Investors worldwide
Enabling Financial Condition(s) The internet
Trigger (if any) Arguable – possibilities include high real interest rates, telecom crash, the September 11th attacks, and the slowing/stopping of venture capital.
Result/Aftermath Trillions of dollars lost, “nearly 5,000 Internet companies [were] either… acquired or shut down in a massive sector consolidation.”


Housing Bubble (US) / Subprime Mortgage Crisis

Description Mistrusting stocks after the tech bubble, investors pile into real investments. Securitization and lax lending standards fueled the fire.
Era/Economic Environment Strong economic growth
Peak 2007
Where US (similar bubbles happened worldwide)
Ground Zero Housing Market
Widest scope Anyone with a real estate investment
Enabling Financial Condition(s) ABS/MBS
Trigger (if any) Weak economic growth, unservicable debts (e. g. option ARMs)
Result/Aftermath The Great Recession




A note to Bitcoin investors:

Sorry about the timing of this article. I’ve been working on it for quite awhile.


Disclosures (15 Jan 2018):

* shoutout to The Options Insider Radio Network for talking about this one – I felt like I was the only one trading this stuff. I currently have no position in Canadian cannabis stocks.

** I’m long all three.

*** I occasionally trade cryptocurrencies but have no position at this time.


Further Reading and References:

2017 in Review

Happy New Year, hope you had a good holiday.

A few questions for 2018:

  • Will equities continue to rally?
  • Similarly, will the yield curve invert and herald the next recession?
  • Whatever happened to inflation?
  • What forces will dominate oil prices in the upcoming year – Saudia Arabia/OPEC, shale production, alternative energy, or something else?
  • What effect will tax reforms really have on the market?
  • What will end the credit rally?
  • Bitcoin?
  • More broadly, which cryptocurrency will become dominant?


When looking to the future it helps to sum up the past. We’ve put together a selection of broad market visualizations for you to peruse. Volatility was predictably low (see distributions below correlation matrix). Equities went gangbusters. The curve flattened.

Securities included * :

SP500 – S&P 500 index (not total returns)
WTI – West Texas Intermediate Crude Oil
Brent – Brent Crude Oil
Gold – Gold, Fixing Price in London Bullion Market
HH NG – Henry Hub Natural Gas
Bitcoin – Bitcoin Prices from Kraken
VIX – CBOE Volatility Index
LIBOR – 3-Month London Interbank Offer Rate

* Unless otherwise noted, data is from FRED



S&P 500, WTI, Brent, Gold, HH NG, Bitcoin

Data is daily percent change for the given year with 2017 in green and 2016 in grey. All graphs are normalized; axes are the same scale for comparison. Extreme values are binned into the outermost values (visible in Nat Gas and Bitcoin).


Data is daily change for the given year with 2017 in eggplant and 2016 in grey.

Fixed Income

Data is daily change in yield (basis points) for the given year with 2017 in blue and 2016 in grey. All graphs are normalized; axes are the same scale for comparison. Extreme y-values near the middle (zero) are cutoff for dramatic effect.

Bantix Adds Bitcoin Trading Analytics Capabilities to QuikStrike




CHICAGO, IL, USA – 12 December 2017  Bantix Technologies, the industry leader in futures and options analytics, announced Tuesday that it will expand its trading analysis capabilities in QuikStrike to include cryptocurrencies. The new features will launch on December 17th, 2017 coinciding with the initial listing of bitcoin futures at the CME.

QuikStrike will now include the ability to chart futures and futures spreads data with plans to calculate realized volatility measures in the near future. Currently, both free and premium users have access to one week of the the Bitcoin Real Time Index (BRTI)* and one year, as data is generated, of the Bitcoin Reference Rate (BRR)*.

“We’ve always tried to be responsive to our customers’ needs in terms of data, functionality or new product additions,” says Nick Howard, founder and CEO of Bantix. “With the rise of the cryptocurrency market, we have a chance to address all three at the same time. Outside of our typical exchange coverage, we will be adding data from various crypto sources – like TeraExchange as well as other exchanges and index generating resources. We are looking forward to introducing new QuikStrike tools as this market inevitably moves towards our sweet spot of options pricing and analysis.”

To register for QuikStrike Essentials, visit For premium editions of QuikStrike, contact us directly.


About Bantix Technologies
Founded in 2000, Bantix Technologies is the industry leader in listed futures and options analytics. Its flagship offering, QuikStrike, is a web-based pricing and analysis software suite that was originally developed for floor brokers. It’s now used internationally on trading desks at major investment banks, hedge funds, and brokerage houses. Bantix Technologies is based out of Glen Ellyn, IL, USA and is privately owned and operated.



* BRTI and BRR: The BRTI is an intraday (updated continuously), US dollar denominated reference rate for Bitcoin transactions that is calculated from consolidated order book data rather than trade prices. It is similar to a real-time index or spot price. The BRR is an end-of-day, US dollar denominated reference rate for Bitcoin transactions based on trade data collected from various exchanges. Similar to a closing price.


What Comes After Bitcoin Futures?

CBOE and CME are both listing Bitcoin futures products in the upcoming couple of weeks (see below for a few differences or go to our blog post for a more robust contract comparison and how to view bitcoin in QuikStrike). Established exchanges are better positioned to handle large volumes of trading like those that have presumable hobbled the major cryptocurrency exchanges today.

Financial market exchanges have the unenviable job of saving traders from themselves (by not allowing the financial ecosystem to take on undue risk that could cause a systemic market meltdown – ahem – Lehman/Bear/et al.) while trying to get enough market participants to trade their product(s) so that they have liquidity. Not too hot, and not too cold, but hot enough to earn profits from fees. Historically, only one exchange at a time has been able to effectively list any given product so we expect a dominant contract/exchange to emerge in the next year or so.

After the battle for bitcoin futures plays out, though, one can’t help but wonder what comes next? Here are some possibilities that we consider likely –

Medium Term:
– Options on futures (stay tuned for our bitcoin options analysis)
– Options on calendar spreads

Longer Term:
– E-mini contracts for CME (the original listing will be for 5 bitcoins)
– Weekly options
– Additional contracts in the term structure for the dominant exchange
– ETFs on the futures for retail customers


Perhaps as a result of the distributed nature of cryptocurrencies, until now, bitcoins have traded on a multitude of cryptocurrency platforms of varying repute and quality forcing the more traditional exchanges to get creative with determining the “true” exchange rate of bitcoin.

The most important difference between the exchanges contracts will be how the price of bitcoin is determined. CBOE’s futures will be based on Gemini’s auction price for BTC/USD. Auctions take place daily at 3pm CT and endeavor to “foster moments of elevated liquidity.” Gemini was founded by the Winklevoss Twins – famous for suing Mark Zuckerberg over the creation of Facebook – who have been some of the most public, early advocates of bitcoin.

CME is taking a more democratic route using price and volume data from “a geographically diverse set of bitcoin trading venues” to “reflect global bitcoin trading activity in a representative and unbiased manner.” For bitcoin historians, their methodology is similar to the first CFTC approved index created by TeraExchange in 2014. The current constituent exchanges for the CME are the following:

What are your thoughts on cryptocurrencies? Just another bubble or the wave of the future? Drop us a line.

Bitcoin in QuikStrike

Did you know you can view Bitcoin in QuikStrike? Under the Benchmark Summary section click on “BRTI Chart” in the left hand navigation:

BRTI – CME CF Bitcoin Real Time Index

An intraday (updated continuously), USD denominated reference rate for Bitcoin transactions calculated from consolidated order book data rather than trade prices. Similar to a real-time index or spot price. Full methodology available here.

BRR – CME CF Bitcoin Reference Rate

An end-of-day, USD denominated reference rate for Bitcoin transactions based on data collected from various exchanges. Similar to a closing price. Full methodology available here.


Don’t have QuikStrike yet? Register here.

Spotlight on Oil

Unrest in the Saudi Arabian political sphere over the weekend drove oil up more than 3% in Monday’s trading session with Brent above $64 and WTI above $57 – highs not seen since summer 2015. After nearly a year and a half of rangebound trading, global geopolitical uncertainty seems to be giving an already bullish market the confidence to run.

ATM volatility predictably jumped as well with a larger jump in WTI than in Brent:

And here are the vol curves compared to a week ago:

For non-oil traders, here’s a short breakdown of Brent vs WTI:

Brent – light sweet crude oil extracted from one of four oil fields in the North Sea. Typically refined in Northwest Europe. Contracts are listed on the ICE.
WTI – light(er) sweet(er) crude oil produced in the United States, price settled at Cushing, Oklahoma. Typically refined in the midwest and gulf coast regions. Contracts are listed on the NYMEX (part of CMEGroup).

(Both contracts are quoted in USD. Contract sizes are 1,000 barrels with a tick ($0.01) worth $10.)

Oil and Gold Update

Friday’s 3% drop in crude oil definitively broke below $50/barrel with open interest for WTI (as reported in the COT Report) at all time highs. Headlines cite lessening concerns regarding Tropical Storm Nate and oversupply issues. Volatility remains subdued though ahead of OPEC’s Monthly Oil Market Report on Weds followed by the IEA’s report on Thurs.

The WTI COT Report also shows that Producers – who have a natural bias to be short – haven’t been net short this little since Jan 2015 (AKA their net position, while still short, is the longest it’s been in awhile). In Brent, the Money Mangers’ net position is the shortest it’s been in our data’s history (dating back to 2008).

Funny trade in gold on Friday as well – expiring over a year from now the following trade was blocked – all new positioning:

– 7,500 Dec18 2000 calls @ 3
– 7,500 Dec18 2600 calls @ 0.15
– 15,000 Dec18 3000 calls @ 0.1

The sizes make it look like a call spread stupid (the 2000-3000 call spread WITH the 2600-3000 call spread) for when the SHTF – but that far out both in strike and expiry, who knows.

QuikStrike In The News

QuikStrike got a mention in the WSJ’s article “How Traders Are Making Money as Oil Prices Go Nowhere” [paywall] by Stephanie Yang. In the article she points out that oil traders have been focused on mean-reverting (rangebound) strategies in this low-volatility environment.

She notes: “Recently, traders have been fixated on the $45-to-$55 range, where options positions are the most concentrated, according to data provider QuikStrike.” You can see this for yourself by going to Market Reports –> OI & Volume Heat Map (or OI & Settle Detail if you want a specific expiry). Paid versions can generate PDF links like this one to send to colleagues or clients.

Happy trading.

A Survey of Wartime Volatility

This (US) holiday weekend brings headlines from North Korea – the sabers have been rattled and markets are on edge – so we decided to put together a long dated history of volatility in relation to historical events for you to ponder.

A Brief History of Volatility

WARNING: READ THE METHODOLOGY CAREFULLY. THE VOLATILITY SHOWN BELOW IS NOT ANALOGOUS TO TRADABLE SECURITIES. The VIX index, started in 1993, is shown in turquoise for comparison. “The market can stay irrational longer than you can stay solvent.”
The data above is based off of Robert Shiller’s monthly analysis of S&P returns. It’s the annualized (realized) volatility of the monthly data (and therefore does not incorporate the severity of single day events). Recessions are highlighted in red and selected wars are highlighted in green. Historical dates are marked with dotted lines and labeled.

As you can see realized vol spikes much more dramatically during economic crises than wartime events (perhaps an obvious observation, but an interesting one to keep in mind in the given environment). That being said, volatility can be low after a dramatic, wealth destroying sell offs, so here are the YoY returns:
Something to ponder. Thoughts and feedback are always welcome. Enjoy the rest of the holiday.