“markets vs democracies” in the wild

On Nov 26th, Imran asked his followers would what more likely to double in the next year — gold or BTC?

I looked at the result of the poll just a few hours after it was posted and it was BTC 52% to gold 48%.

By the time the poll closed with 750 votes, BTC had garnered 2/3 of the votes.

I don’t know if me a jerk had anything to do with this but when I saw that the vote was almost a coin flip I chimed in.

Focus on the last part.

The poll should be nowhere near 50/50 because you would be able to lock in a great trade by selling gold in this proposition, buying gold call spreads financed by even more expensive BTC call spreads.

This is a classic difference between markets and democracy. It’s a perfect example of the Dinosaur Markets post in real life. The markets in the options reflect the volatility and the cost of replicating these bets. Money-weighted votes are interested in the truth where opinions are cheap as sand.

It’s very difficult to have opinions that are above replacement value about liquid assets. If you’re truly good at this, then being Scrooge McDuck rich based on consistently betting on these fantastic opinions is the only proof of such a skill. Few people are rich because of a crystal ball.

A good way to make a living in finance is to find the people that voted for gold in this poll and offer to trade with them. You need to do this in the dark because if you tried to do it on a public exchange, you’d be undercut by traders competing to sell the gold proposition to these opinionated people and it would drive the price down to a non-arbitrageable price.

Public markets protect overconfident people with arbitrageable opinions from their own ignorance and stupidity. Private or non-transparent markets are nice ways to shove a vacuum hose into their bank account.

There are many places where there’s alpha in projecting your opinion. This is the stuff you spend your time on in life. Where you have self-knowledge, private info, competitive advantage, skills, taste and so on.

But when it comes to markets, remember what we learned here just a few weeks ago:

the arbitrage reflex is more profitable than the opinion reflex