Too Early or Too Late?

Vol #25- February 12th, 2021

With a long horizon there are a wide range of possible outcomes.

We’ve talked before about how timing is everything with options. You can have a clear vision of the future, but not have an obvious trade to make. The questions of when and where are defined by the strike prices and expiration dates that set options apart from equities.

These additional features create bountiful opportunities to systematically define outcomes and capture specific risk premia. Black Scholes models update theoretical prices as time and price change to give dynamic calculations on future probabilities.

So where does Bitcoin go from here? When will the tech driven bull market run its course?

Bitcoin maximalists will say that we’re only in the early stages of this bull market, and that the finite quantity of satoshis will mean near infinite value to early investors. Bear market pessimists will point to “absurd” valuations relative to fundamentals, and scream how the market is irrational.

While it’s tempting to look towards the options markets to divine an answer, the solution is more behavioral.

It’s rare to be proven correct immediately in anything - particularly investing. Humans can’t control price action, they can only control their behavior. Timing the market is a very difficult game. Over the past two decades, missing the 10 best days in the market means your returns get cut by half.

If you think the price of a bitcoin will be higher in 5 years than it is today, it’s time to start buying some - regardless of price. The tick just before the all time high, is almost always also an all time high. Waiting for pullbacks and dollar cost averaging across tranches of your investment can help manage entry prices, but there’s so substitute for just starting to buy a little bit. (Bitcoin specifically, makes this even easier to do than stocks - a satoshi is the smallest unit at 1/100 millionth of a bitcoin.)

The same goes for trying to avoid a market pullback. Waking up one morning and hitting the sell button because Tesla’s stock price further dislocated from reality is likely to end in regret. Easing out of a position provides far less pain and future regret. A good place to start is selling covered calls to divest.

When markets are frothing, there is praise heaped on the diamond handed holders of meme stocks, and shame sown on the weak hands who sold early. There will be winners and losers on a trade, but when investing for long term wealth, consistency is rewarded.

When you have a hunch, try dabbling with the smallest increment. If you’re wrong, you won’t lose much. If you’re right, well there’s no better feeling than that, but it’s also an opportunity to compound. Test the waters, and lean into what works.

Getting off zero is the hardest part. Whether it’s the FOMO that concerns you by writing calls against a precious holding, or the risk of buying an asset that could crash 30% in one day, pushing off the dock requires overcoming that coefficient of friction.

You’ll almost certainly be both too early and too late, but now you’re in the game.