Big Number BS

Vol #211: January 23, 2025

This past week I cracked open an old Solana wallet. It was far too tempting to see what was happening with $TRUMP.

It seemed obvious how and when this would play out, but I had to watch for myself. Less than 24 hours later we top-ticked, and the only trade I made was cashing out the remainder of some $SOL I’d forgotten about. Even for the lolz, I wasn’t going to be this guy's exit liquidity.

The early news articles raged how the soon to be President’s net worth had grown by $50-$70B. This is absurd for many reasons. Beyond just the flagrant snubbing of securities laws, the simple math isn’t correct.

Crypto tokens are not like stocks. Stocks have a “market capitalization” that is the shares available times current price. While a company can’t always turn around and sell itself for exactly that price (sometimes it’s less, often it’s more), there are enough guardrails on the counting of shares and the prices they’re traded at to make that valuation meaningful.

Coins don’t have that infrastructure. That’s the whole point. It’s an explosion of market structure innovation, but it’s also polluted with a lot of anti-investor product design. The supply usually has a dilutive function, so 200 million TRUMP exist today, but something like 1 billion will exist in three years.

The net worth calculations are taking the current price times the total diluted share count and attributing the largest wallet(s) to Trump. The insider gauges suggest the first family controls between 80-90% of the token supply. Simple economics says as more shares are released the price will go down. There’s a three year vesting schedule, so even if they wanted to dump (“rug” in the parlance of our times), most of the “wealth” would be locked up.

There are also the vagaries of what price means in digital assets. With massive amounts of wash sales to paint the image of value, and dubious liquidity, the sale price of someone who held that kind of size would be fractions of pennies on the dollar.

And yet the bullshit persists. As of this writing the coin is trading at $35, down from a high of $70 but up from a low of absolute zero. The application of a traditional metric sounds very justifiable when the New York Times prints it, but is wildly misrepresentative of the actual value captured by the conspiracy.

Fraud is still fraud whether you make a million dollars or a billion dollars. But big numbers sound good in a headline and sway the court of public opinion. Just don’t use it to make an outrage or trading decision. Not only did DJT & Co. not make anywhere close to $50B, that’s definitely not an endorsement that you will too.

Extra commas sound like it’s where the action is, but it’s usually a lot of bluster. Or out of context. I see very little difference between saying there are 259,594 pieces of three quarter inch native stone in my driveway and the fact that there is $189M of AAPL stock to buy into the close. Scoop the calls!

You need to know how big my driveway is, or that $12B of AAPL trades every day and that 1.5% of the volume isn’t really a price mover. At the NYSE roughly 10% of volume trades on the close.

It’s hard to grasp orders of magnitude. Even if you have all the datapoints, the arithmetic demands you keep a very close eye on the trailing zeros. That’s why we say things like “if we swap $TRUMP for Greenland, we’ll get 12.7 Florida's worth of prime real estate.” It makes more sense that way.

Financial markets have large numbers abound. The companies whose products you see everywhere are the investment vehicles for the most significant pools of capital in the world. Grappling with the size of a roughly $60 trillion dollar US market makes surveying Danish territory seem like a cinch.

Track something with a very large base number, and the nominal figures will sound impressive. Capital flows and positioning are especially ripe for abuse here. Applying notional values to derivatives contracts is even more flagrant than misunderstanding crypto market caps.

“Fifty Cent” makes headlines in the VIX because this trader loves spreads that cost half a dollar, and does them in size. As fun as it is to speculate, knowing only that, it’s impossible to say what eventual PnL or even market outlook is.

Large trader or dealer positions are also frequently used as directional indicators for the underlying market. “If we break 6100, then there’s a blow off top with all these deltas to buy!” If you can count exposure and know how it’s hedged, predicting the next move sounds logical.

But there’s a lot of noise in how risk gets distributed and managed by individual silos. Let alone how it interplays between other products, or how the size relates to everything else trading in the markets. My size is not your size, and the fact that dealers are long a million vanna in a listed equity product is isolating the hex code of sky blue and expecting it to predict the weather.

The same extrapolation problem exists on the small side - if you want to obfuscate your returns, speak in basis points. While it’s fun to put on a monocle and quote with the precision of one hundredth of a percent, bps are just as deceiving as the 9 figure market on close volumes that get flashed to traders.

One basis point doesn’t make much of a difference unless you have a few commas. $100 for every million. A bip a day doesn’t quite get you to the current one year treasury yield of 4.5%. But 5 bps every calendar day would get you that coveted 20% a year. Things cool down if you’re only able to earn those bps on a trading day. Now we’re talking 13% a year. But if your returns are actually 2 basis points better, returns are back to 20/30% annualized. You get the point.

The danger of dealing in basis points is that there is a lot of room for error in converting this to more worldly terms. You don’t want to take your PnL from one day or week and pretend that’s how the rest of the year shakes out - good or bad. It’s an inappropriate matching of significance - there’s too much noise in the measurement. You can flip heads five times in a row even against the longest odds.

It’s a bit ironic to say that all these numbers don’t matter, when in fact finance is exactly about numbers. You just have to be certain about where that number is coming from, and why it matters.

The ones that do, sound boring, and are less of a secret than a truth. They’re not technical analysis of options greeks, or a tabulation of BIG TRADES. And open interest matters for a different reason than is popularized.

When the OCC is regularly putting up 50 million contracts a day - growing every year, that’s a big number that matters. More volume means more liquidity means better pricing. Open interest shows the level of activity and potential counterparties, not some vortex magnet signal to trade off.

The little numbers that matter are not the 14 basis points you earn from a weekly covered call in SPX. (An extra 7.5% a year!) What matters is the difference between selling something at $0.15 or $0.20 and how that dramatically changes the odds on a $1 spread.

Transaction costs are not completely a thing of the past, though now it’s as much about getting cheeky between the spread as it is about the fee to a broker. Saving a couple pennies fishing mid-market when you can afford to be patient does add up.

Headlines will always flash with big numbers because if it bleeds it leads. Increasing their compounding rate by a single percentage point could be the most significant thing someone does to their account, but those sleepy tricks are buried halfway back and below the fold.