Why Screwing Upward is Very Different than Failure

The contemporary falsehood that to fail is somehow glamorous

 If you are inside Silicon Valley or any other culturally contemporary place, you will hear things “fail fast, fail often!” or “failure is my muse!” which is the kind of thing you absolutely do not need to hear whatsoever. The tech world’s obsession with failure is innocently designed to incite greater innovation and incubation of new ideas. At small scale, failure makes a lot of sense within that particular context but for most people, failing is a pretty awful plan, on purpose or by accident — it should be avoided at great cost.

Because in the real world, to fail has real consequences, but not the kind one might think. The consequences of failure are psychological traumas that prevent forward progress. In its worst, it can be such an excruciatingly painful experience that it can cause one to fall into a toxic depression and/or provide the impetus for a solid bender. Then there are the examples in the crypto markets of “crypto kings” literally committing suicide after the markets dropped. For many, they went from barely able to pay the bills (but thinking they were millionaires) to barely able to pay the bills (and no longer thinking they were millionaires). Needless to say, failure can be pretty miserable.

Failure is not an objective obstacle, it all comes down to mindset and self actualization as to what effects the failure will have.Instead of pretending like we live in Startup Land, it seems wise to take the ancient Chinese proverbial route. Let’s face it, the ancient Chinese people, from what the History Channel tells us, were pretty solid at understanding life, particularly when it went badly; insofar as it was the Buddha who brought us the mantra “life is suffering”.

Avoid screwing up, to avoid being screwed

The reason this Chinese proverbial is the Aspirin for failure is simply that I hate to procrastinate. When your brain fires on a screw up, it knows exactly what the deal is. Your brain can’t help but to then fire all types of ‘you fucked up chemicals’ like cortisol et al and your productivity drops down to the floor. This is why screwing up will land you on your couch, and should be avoided.

When I have been able to listen to it, there is ancient Chinese proverb which has given me some useful perspective, that I have needed to re-frame my brain so the screw-ups did not keep me from figuring out next steps — because there are always next steps.

Screwing upward 101

The parable of an ancient Chinese farmer goes like this: a farmer loses his horse. His neighbor says its terrible, but the farmer responds inscrutably: maybe so, maybe not.  The horse comes back and has attracted other horses, so now the farmer has an entire ranch full of horses and he’s pretty basically farmer rich. Read the full story here.

The point is pretty straightforward but bares mentioning because mindset really does matter. There are absolutely no setbacks in your life at the time of them occurring, because you have no clue what will come next. If you hadn’t missed one thing, you wouldn’t have found the other thing, and so on and so forth. At the time it occurs, we have absolutely no clue what will happen and yet we think to the worst. Instead of all that let’s re-frame it at the time and say maybe so, maybe not.

The point

When bitcoin crashes or you lose your horse, just stop and re-frame yourself. Worrying about the future will only serve to throw you straight into the procrastination zone, which essentially means your life is stalled out from moving forward. On the other hand, re-framing each mistake as an opportunity for some unknown positive, is much preferred. Keep it positive and forward momentum follows.

What the buyers of Bitcoin futures seem to have missed about the nature of cryptocurrencies and futures contracts

I have made no secret of my general disinterest in cryptocurrencies. At best, they seem to serve as a surrogate arbitrage between electricity rates across distance insofar as they are “mined” using a fairly linear power consumption calculation. That said, the focus of this article is about why the CBOE Bitcoin futures contract has effectively ruined Bitcoin and underscored the fundamental lack of understanding of both cryptocurrencies and futures contracts.

The Value of Bitcoin

The value of Bitcoins are best described as being derived based upon the scarcity of Bitcoins insofar as they are created through mining (like Gold) at a self-stabilizing rate using the computational power of computers to solve specific math problems, which become more complex (and thus require more power) the more Bitcoins are mined. Moreover, and potentially more significantly, Bitcoins value are said to be derived based upon the fact that there can only ever be 21 Million (less 3 bitcoin cents) mined and thus there is a scarcity factor that creates value – like a currency that is not subject to a central monetary authority printing additional fiat.

The Structure of the Commodity Contract

The XBT-Cboe or the USD denominated Bitcoin futures contract is a futures contract that was created by the Chicago Board Options Exchange (CBOE) for the purpose allowing speculation and hedging on the future price of a Bitcoin at certain dates in the future. The CBOE are the wonderful people who brought us the ability to trade futures contracts on things like the S&P 500 and the VIX (the volatility index). Futures and to some degree options have been around since time immemorial as they allow asset holders to hedge their risk of a future price change and create an opportunity for speculators to take the other side of a hedge and earn substantially move (via leverage) than of they bought or sold the asset itself.

The problem with the XBT-Cboe Structure

The Bitcoin futures contract has one major and fatal flaw: it is a cash settled contract. This may not seem like a problem given that the CBOE options are generally cash settled. The value of the index is derived from the Gemini (a Bitcoin exchange company owned by the Winklevoss Twins) reported auction price in USD.  By being cash settled, this means that the contracts can be created with cash (as opposed to having to actually deliver a Bitcoin) which means that you can trade them without the hassle of ever having to go find one.

Without the risk of having to locate a Bitcoin, it would be almost impossible to short squeeze a Bitcoin futures contract as you can keep shorting it (with more and more cash) until the market gets tired soaking up the supply of additional (synthetic) Bitcoins created by shorting the Bitcoin futures contract.

Shorting a Bitcoin future basically creates more Bitcoins

Yes. Every time you short a contract, you are borrowing the contract from someone and selling it. When you close out of the position, you have to settle out the contract; which traditionally meant delivering one of the thing you previously sold. Without the requirement of ever having to go find a Bitcoin, market participants can continue to create additional Bitcoins through short contracts without ever having to decrease the supply by delivering them. As such, every short side of a Bitcoin futures contract takes away a would-be buyer of an actual Bitcoin because they own a futures contract tied to a Bitcoin and therefore do not need to duplicate their position with a Bitcoin.

How Bitcoins are different from Gold, S&P contracts and US Dollars

A Bitcoin enthusiast might see this and think that such an argument would equally apply to futures contracts in Gold or the S&P or the trading of any currency such as the US Dollar. The problem is that for all of these Futures contracts there are fundamentally extrinsic reasons why investors purchase them.

For example, Gold is used in things such as jewelry and electronics and therefore if the price of Gold were to get too cheap, given that Gold futures require physical delivery of the Gold, end users of Gold would continue to purchase them until the price returned to its otherwise equilibrium price as they are consuming Gold (by using it and taking it out of circulation in the markets). There is a finite amount of Gold and so the creation of synthetic speculation in Gold will incent the users of Gold to buy up any irrationally excess inventory, which will force the short-sellers to ultimately have to deliver the Gold in the contracts, thus necessitating that they buy actual Gold to cover their positions – bringing everything full circle.

S&P contracts are cash settled because they can be constructed and deconstructed from the actual basket of 500 companies for which there are extrinsic buyers (those interested in the shares of the underlying companies).

If the price of the S&P futures contracts were to drive imbalanced short interest versus the actual value of the underlying shares of the companies, equity investors would simply take the other side of the contract and at settlement receive the equivalent price of the companies as their rate is established based upon the individual share prices, which themselves are derived by assets and profits.

Bitcoin will never have the delivery problem because the nature of a Bitcoin itself is synthetic. The owner of a Futures contract (created through a short seller betting against the future price of Bitcoin) derives the same utility from owning the Futures contract as they do from owning the actual Bitcoin itself.

The reason for this is that there is nothing you can really do with a Bitcoin in and of itself. You cannot eat it, use it in jewelry, burn it for energy, deconstruct it into a basket of other assets, or in any way benefit from it as a method of exchange.

Finally, fans of Bitcoin resort to the argument that Bitcoin is not really like a commodity or an index of equities it is more like a currency as a means of stored value like the US Dollar or the Euro. Again the problem here is that currencies are created by governments which are also known as taxing authorities. Taxes have the interesting effect of creating a level of extrinsic demand in the currencies insofar as the citizens subject to taxation are required to deliver (think physical settlement) the currency to the government, which is the issuer of the currency, thus effectively removing it from market circulation.

The penalty for failure to deliver here is frequently jail. As Bitcoin is not the creation of a taxing authority who can compel its citizens to physically deliver (which would create a short squeeze) there is a structural and unbalanced short bias against the Bitcoin future.

What kind of asset is a Bitcoin?

Bitcoins, if not commodities, indexes or currencies are actually much more like a Baseball card. Baseball cards have their value in excess of the cost of printing by virtue of the fact that there are people who want to own them and have some form of attachment to them (see “think they are cool”) and others who based upon historic trends buy them on the blind assumption that they will be worth more in the future because they have gone up so much in the past (see “irrational stupid investors).

Take the case of a Mickey Mantle baseball card. Mickey Mantle was a top notch baseball player who was (and still is) beloved by countless baseball fans. There are people who buy Mickey Mantle baseball cards on the basis of their love for Mickey Mantle and their belief that more people in the future will love him even more. Right now, a quick search on eBay shows Mickey Mantle baseball cards selling for about $250.

Except in this universe of Bitcoin, when you buy it on eBay you never actually get mailed the card. You are told the card exists in a safety deposit box somewhere and you are never allowed to visit it. You receive a picture of Mickey Mantle that you can tell all of your friends about and get a certificate saying that you’re entitled to one Mickey Mantle baseball card provided that you agree to never take it out of the safety deposit box and never go visit it.

You are free to resell it in the future but since nobody can ever go visit it there are an infinite number of other sellers on eBay who are selling the right to borrow their certificate to claim that you own one of these super cool baseball cards at some point in the future. Since the right to borrow the certificate looks and feels identical to the actual right to claim you own one of the certificates, many would-be buyers are just buying those and thus more futures contracts continue to be created and suck buyers out of a finite pool of people who love Mickey Mantle.

When the craze of Mickey Mantle buyers has its run because people all the sudden decide that actually Lou Gehrig is much cooler to be a fan of (true story I actually own a Lou Gehrig baseball card because the man was a legend), then all of the speculators rush to get their money out of the Mickey Mantle cards crushing the price of both the actual certificates and the right to get the certificates in the future (from short sellers repurchasing those rights and locking in their profit).

Mortimer, We’re Back.

Please feel free to take a look at some of my other articles here.

My Ode to Sous Vide Cooking — A Love Affair Without Any Air

Hello Sous Vide: dear friend to me

You cook my food, oh ever so slowly

Trapped in the bag, yearning to be free

Soon we feast on the results of my recipe

 

Sous Vide, Sous Vide, damn tasty

Unnatural textures make’th thee

From Reverse Sear Steak to Chicken Fricassee

You fill my mouth with joy and glee

 

My Sous Vide is a stick mighty

It sits on the counter-top for all to see

To many a novice cook, it appears scary

But how easy to use is its secret irony

What Is A Venture Capitalist

How does the job of venture capitalist work?

The question of what is a Venture Capitalist (“VC”) is one that I get asked somewhat frequently. The question is typically in the form of a very blank stare when I tell someone that I am a Venture Capitalist. Almost everyone has heard of the term Venture Capitalist, although many outside of finance and industries traditionally  supported by Venture Capital (notably tech) cannot tell you what a VC does. Generally, my response to the blank stare is to immediately offer that my job is very much like that of the old guy (John Hammond) in the film Jurassic Park.

Being John Hammond

This is intended to be a relatively glib remark, although there is more than a bit of truth in the statement. In Jurassic Park (particularly the book), John Hammond is actually referred to as a Venture Capitalist. For those of you who may have somehow missed Jurassic Park (for shame), John Hammond creates an island off of Costa Rica where he builds a theme park with the main attraction being dinosaurs that his team have cloned from DNA trapped inside prehistoric mosquitos locked in amber. The point is that Hammond did not create the technology, he merely brought together the idea with the financing, the team and with ceaseless enthusiasm drove the project to completion.

Working With Innovators

In my work as a Venture Capitalist, I have the humbling opportunity to work with talented innovators and management teams to bring game changing ideas to the world. As a VC, my job exists at the intersection between empowering the creation and expansion of companies and developing and managing disproportionately attractive risk-adjusted returns for the venture capital fund. Often times, this is best done through ensuring that there is a pure alignment of interest across all of the stakeholders and that when the right things happen – everyone wins.

I have hard venture capitalists described as “people who tell stories through money”. While the financing of the ideas is an integral part of venture capital, insofar as venture capitalists manage Venture Capital funds (private investment funds where investors own a piece of the companies that the venture capitalists invest their money), it is not the end-all-be-all of venture capital. A good venture capitalist is as much a source of information, advice, and occasionally an agent of change, as a source of investment.

Often times entrepreneurs will view VCs as the gatekeeper to limitless wealth. For these naïve founders, they believe that we operate as a sort of club bouncer, and all they have to do is tell a good story and we will shower them with money and invite them into some elite circle of being a “VC backed company”. Unfortunately, this is not actually how VC works. For example, at my firm we do not accept unsolicited proposals for investments. Instead, we seek out great ideas ourselves and also work through our network who connect us with interesting opportunities. I have linked to an article that goes into detail about why we do not accept unsolicited pitches.

I hope that this helps clarify what it is that I do, if you have any specific questions about the work of a venture capitalist, please feel free to reach out to me via the Contact page.

High-tech “Frankenstein booze” aged without the barrels

Alexander Burns’ rum distillery featured on the CBS This Morning Show.

Fans of aged alcohol may want to celebrate a big disruption in the spirits industry. Bottles of older scotch, bourbon or rum can cost hundreds or even thousands of dollars, but one man is changing all that with an invention he claims can produce the equivalent of a 20-year-old spirit in less than a week.

Charleston, South Carolina, is a town that likes its carriages horse-drawn, its streets cobble-stoned and its rum barrel-aged.

So when Alexander Burns recently opened the Rational Spirits distillery in Charleston, his business plan seemed a little — well, irrational: make rum that tastes old, but without any barrels, reports CBS News correspondent Ben Tracy.

“The reason [there are] no barrels is because you have this,” Tracy pointed out.

ctm0426distilleryreactor.jpg

“This machine, this is our science fair project,” Burns said.

He’s talking about a reactor, which looks like something you might find in a bio-tech lab, not a rum factory.

“I came across this article that says, ‘Guy claims he can create 20-year-old rum in six days,’ and I thought to myself ‘Wow, that would solve a lot of problems! Lemme check it out!'” Alexander Burns said.

The guy making that claim is Silicon Valley entrepreneur Bryan Davis. He said he can make rum that tastes 20 years old in six days.

“That sounds too good to be true,” Tracy said.

“Yeah! Yeah,” Davis said, smiling. “Cool, huh?”

Alexander Burns featured on the CBS This Morning show at his distillery
Alexander Burns tasting rum at the Rational Spirits distillery.

Rational Spirits’ Alexander Burns (left) and Silicon Valley entrepreneur Bryan Davis

When alcohol is put into a barrel, molecules in the barrel’s wood called polymers break down over time. This causes a series of chemical reactions that help give spirits such as rum, whiskey and bourbon complex flavors like smoke, leather and honey.

“The challenge was figuring out how to make those polymers degrade more rapidly. … If we can put a man on the moon, right? We can figure out how to hack a piece of wood. I mean, it can’t be that hard, right?” Davis said, laughing.

The answer was enlightening. Davis built this reactor where wood chips soaking in rum are blasted with high intensity light, doing in six days what would take years in a barrel — and without any artificial ingredients. The end product matches the chemical composition of a decades-old spirit.

“Is this kind of Frankenstein booze?” Tracy asked.

“Absolutely! Yeah,” Davis said.

“You don’t mind the phrase?” Tracy asked.

“No! I embrace that one,” Davis responded, laughing.

And it’s not just rum. Davis is also using his invention to improve rye whiskey, a spirit so popular with modern mixologists that there’s now a serious shortage. Bottles of aged rye routinely cost well over $1,000.

“So the idea is that everybody can get a better bottle of a booze at a better price tag,” Davis said. “For the booze aging business, this technology’s a tectonic shift. Everything just changed under their feet. They may not realize it yet, but it just did.”

Traditionally, only large corporations could afford the millions of dollars it costs to age booze in barrels. Now, three smaller distilleries are using Davis’ reactors to get similar results, and he said 75 more want to do the same.

When Rational Spirits became his first client it named its rum Santeria. It attracted leaders of the Santeria religion, which uses rum in its rituals. This trio of high priests recently blessed the operation.

But it’s also become popular with rum aficionados like chef Paul Yellin, who plans to offer Santeria at his about-to-open rum bar in Charleston. It’s the only rum less than three years old he will allow on his shelves.

“Rums are very much like human beings. Age and maturity are two different things,” Yellin said.

He said even if Santeria doesn’t quite taste 20 years old, it is certainly wise beyond its years.

“Immediately very good,” Yellin said after a taste test. “I find this very similar to about an eight-year-old rum.”

In a business where waiting is the hardest part, that’s a shortcut worth drinking to.

https://www.cbsnews.com/news/rational-spirits-distillery-charleston-south-carolina-aged-alcohol/