No group of speculators was more famous in the 1980s and 1990s than Stanley Druckenmiller, Paul Tudor Jones and George Soros. Druckenmiller famously was betting $ 2 billion on Deutsche’s mark when the Berlin Wall collapsed. Soros and Druckeniller together made billions betting on the British pound when its peg fell in 1992. And Jones benefited from the 1987 stock market crash.
In 2020, two of these three traders – Druckenmiller and Jones – finally started buying bitcoins.
This post is part of CoinDesk’s 2020 Year Review – a collection of editors, essays and interviews for the year in crypto and beyond. CoinDesk columnist JP Koning 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 it took them so long. The world has never seen a purer trading machine than Bitcoin. It is purpose-built to let professional speculators like Druckenmiller and Jones make, or lose, large sums of money quickly.
A look back at the 1987 stock market crash, probably the craziest day in market history, provides a window into the minds of these three speculators. It also suggests why, 33 years later, they have finally converted bitcoin.
‘One of the most exciting times of my life’
To help inform his trading decisions in 1986, 33-year-old hedge fund manager Paul Tudor Jones turned to the 1920s for inspiration. It did so by constructing an “analogue model,” a simple visual overlay of the 1980s market over the 1920s market.
Jones talks about this analogue model in a famous documentary about him, “Trader.” He has allegedly tried to remove “Trader” many times over his career.
Jones ‘analogue model suggested to him that the 1980s market would collapse at some point, much like in 1929. And so Jones’ hedge fund was short of the stock market (ie, in a position to benefit from a collapse) going October 19., 1987, or “Black Monday.” Jones has described accident week as “one of the most exciting times of my life.”
Speculators are less concerned with reality, or the fundamentals, and more concerned with what’s going on in people’s heads.
Druckenmiller also has a war story about the crash of 1987. On the afternoon of October 16 – the Friday before “Black Monday” – Druckenmiller remembers walking over to George Soros’ office. At that time, Druckenmiller, who at the time was 34 and managed his own hedge fund, was heavily invested in the stock market. Soros happened to pull out a copy of Jones’ analogue model a month or two earlier.
After absorbing the implications of Jones’ chart, Druckenmiller remembers being “sick to my stomach when I went home that night. I realized that I had blown it and that the market was about to crash. ”
When markets opened that Monday, 200 points lower than Friday’s end, Druckenmiller sold its entire position and even managed to fall short. The Dow would fall 508 points that day, or 22.6%, the largest one-day decline in history.
Soros also lost money in the accident in 1987. “I was caught as badly as the next comrade. I was convinced that the accident would start in Japan; that was an expensive mistake. “
Over 1% of my assets are bitcoin
Fast forward to 2020 and it’s a wonder if Druckenmiller and Jones haven’t been exchanging trading ideas yet. In May, Jones publish on CNBC said it had “just over 1% of my assets in bitcoin. He might be almost 2[%]. That seems like the right number right now. “In October, Jones noted” I like bitcoin even more now than I did then. “
In November, Druckenmiller admitted he owned “a small piece of it.” He went on to say bitcoin has “a lot of attraction as a store of value for new West Coast millennials and currencies 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 that legendary speculators like Druckenmmiller and Jones jump into a relatively relentless tool. I’m surprised it took so long.
Keynesian beauty contests
Market participants like Soros, Druckenmiller and Jones are not investors. Investors evaluate a company’s future cash flow in an effort to determine whether its shares are underpinned.
Speculators are less concerned with reality or the fundamentals and more concerned with what’s going on in people’s heads. If they can find out in advance what others are going to do they can buy (or sell) ahead of time and download their targets later for a much better price.
Jones’ strategy in 1987 was a great example of speculation. He used the analogue model to try to gauge the psychology of the markets, positioning himself to benefit from other panics.
As a beauty in Keynes’s competition, the price of bitcoin is merely a function of the market’s imagination.
Renowned economist John Maynard Keynes described a speculation once similar to a beauty contest. Presented with a row of faces in a newspaper, contestants must choose not the face they find most beautiful, but the one they believe other participants will find the most beautiful. A deep-rooted game of thought is emerging where we “devote our intelligence to anticipating what the average view expects the common view to be,” Keynes wrote. “And there are some, I think, who practice fourth, fifth grade and above.”
Playing the game to fifth grade is what Paul Tudor Jones did in 1987. But in 2020, Jones has finally discovered the purest speculative tool to ever trade on the surface of the Earth.
Equities or goods have a beauty competition element to them, but they are not pure beauty contests. Attached is a set of basic essentials.
The price of oil, for example, is reduced by the ability of industrial consumers to replace oil with natural gas or some other alternative. As for equities, when a company’s share price rises too high above its earnings potential, the company will issue shares, easing the rise.
Not bitcoin. As a beauty in Keynes’s competition, the price of bitcoin is merely a function of the market’s imagination. That is, unlike the prices of the S&P 500 or a commodity such as crude oil, there is no set of fundamentals that defy what the price of bitcoin can be. If enough people wake up in the morning thinking that the price of bitcoin should rise, and act on it, then it will rise.
This lack of fundamentals is why bitcoin shows price swings so quickly and continuously. It can double in a month, or rise by a factor of 10x in three months. Or it can drop by 50% in a day.
See also: JP Koning – The Dark Future Where Payments Are Politicalized and Bitcoin Wins
Big swings like these are the bread of butter of professional speculators like Druckenmiller and Jones. Both have proved adept at playing beauty contests, delving deep into people’s minds to predict what they will buy or sell in the future. That skill allows them to make huge sums of money, very quickly. For them, bitcoin is the perfect trading machine.
Speculators often talk about their jobs. That is, they mention on TV that they happen to invest in something, hoping that they can create a bandwagon effect. Do not confuse their words for true belief. Jones describes bitcoin as being in the “first inning.” But it will shorten bitcoin the moment it deserves it, much like how it shortened equity in 1987.
Speculators love to play the game. Do not pin them to the side.