in the last video you guys have roasted
me in the comment section where i made a
case about how bitcoin
could go to zero or to a million but it
doesn't matter because
at the end of the day bitcoin is a tiny
part of the blockchain whether bitcoin
succeeds or not
blockchain will still be the technology
that will govern in the future
but it seems like a big chunk of you
disagrees with me
but it doesn't matter because today we
are going to discuss
the mother of all crushes as michael
barry calls it
some people don't like michael barry
because he believes that the entire
crypto is in a bubble and it is going to
crush
together with meme stocks if it was a
random person like me
then you can call him dumb stupid and
whatever you want
but this guy is so smart that hollywood
made an entire movie about him
the fact that hollywood made a movie
about him doesn't make him smart
but since he has predicted precisely the
2008 crush
and earned hundreds of millions of
dollars in the process
has gained him the reputation of a
financial genius who can predict crashes
isn't that awesome if you can know for
sure that
what will crash and what will rise
you're destined to make millions
while hedge funds who shorted tesla lost
millions of dollars
guess who profited by shorting tesla yes
the man himself
michael barry barry shorted over 800
000 shares or 534 million dollars by the
end of the first quarter
of this year and tweeted about it guess
what happened to tesla stock
it dropped to around 600 dollars since
he started his hedge fund in the 2000s
he immediately made extraordinary
profits in his first
full year in the 2001 the s p 500
fell 11.88 sign was
up 55 percent barry achieved these
returns by shorting overvalued tech
stocks
at the peak of the internet bubble the
next year the s p 500 fell again by 22
percent
and its sign was up again 16
the next year in 2003 the stock market
finally turned around and rose
28.7 but mike barry
beat it again his investment rose by 50
percent
by the end of the 2004 mike barry was
managing
600 million dollars and turning money
away
in 2005 barry started to focus on the
subprime market
throughout his analysis of mortgage
lending practices in 2003 and 2004
he predicted that the real estate bubble
would collapse as early as 2007.
eventually he was right the market
crushed
he earned a personal profit of a hundred
million dollars
and earned another 700 million dollars
for his investors
just imagine how happy his investors
were
everyone lost money well they made an
incredible return
of almost 500 he also
predicted that bitcoin price is too high
before it crashed
to around 30 000 in fact he specifically
said that
if you don't know how much leverage is
involved in the run up
you might not know enough to own it many
of you are going to dislike this video
because
of what i'm about to say but instead if
all of you are going to give this video
a thumbs up
i'm going to explain why leverage is so
important in understanding bitcoin
why exactly michael barry thinks that
the mother of all crushes is coming
and whether we should trust him or not
to understand the problem with modern
economy you have to understand
leverage we have created so many
creative forms of dead stats
no one really knows how big is that that
and warren buffett even called it
financial weapons of mass distractions
it's a ticking bomb
when it explodes it can take down the
entire economy
but why do we use leverage in the first
place because
leverage turns good deals into great
deals
imagine you certainly believe that stock
a is going to rise by 50
the next day you can use your 10 000 to
buy stock
a and let's assume you are right and the
stock price
rises by fifty percent congrats you have
made
five thousand dollars but if you have
used leverage
let's say ten to one you would have
purchased a hundred thousand dollars
worth of stock a
and would have earned fifty thousand
dollars after returning
the borrowed ninety thousand dollars
once it rises by fifty percent
but that's a simple example because most
of the leverage
is in form of derivatives a derivative
is basically a contract between two
parties betting on the change of a price
of an asset this contract derives its
value from underlying assets such as
gold oil stocks or pretty much anything
literally anything and that's why it's
called a derivative
if we bet on the price of the oil for
example and create a derivative
as the oil price changes due to
geopolitical factors
the price of that derivative changes
accordingly
let's say your friend wants to sell his
pokemon card six months from now
and you desperately want that card you
tell your friends
i will buy your card for a hundred
dollars if you promise me
that you will sell it only to me you
create a contract
sign it and congrats you have created a
derivative
but it's not as simple as that because
guys in fancy studios in wall street
have complicated the matter let's say
five months passes and some famous
youtubers start making videos about
their
pokemon cards and the price of that
pokemon card
shoots to a thousand dollars but he
already promised to sell it to you for a
hundred dollars
since you're not sure whether a month
from now this card will be valued
at a thousand dollars you decide to sell
your part of the contract
to someone who's more desperate for 200
now your friend is obligated to sell his
card
to him since he has purchased your part
of the contract
and you earned 200 and that is called
a forward contract it's a zero-sum game
your friend could have earned an extra
hundred dollars
but instead he's stuck in a contract
with you to sell it
for a hundred dollars that's why we have
options
your friend will give you five dollars
when signing the contract
for giving him the right to cancel this
contract
he doesn't have to cancel the contract
but he has the right
to exercise that option that's why it's
called
option because you have an option the
price of the card rises to a thousand
dollars
your friend cancels the contract with
you and sells it for a thousand dollars
instead of a hundred dollars to you but
you have earned at least
five dollars for taking that risk but if
it doesn't
you're still obligated to buy that card
for a hundred dollars that sounds unfair
that's why we have call options your
friend is obligated to sell the car to
you no matter what
but you have the option to cancel the
contracts at any moment
but in return you have to pay your
friend five dollars for having that
option
simple right in order to save time
most derivatives use standardized terms
they're called futures 587 buyers of oil
at 50 dollars per barrel
that expires at this stage if oil prices
rise to 60 dollars
your future becomes more valuable and
vice versa
oil prices drop to 40 your future
becomes
less valuable you may wonder why on
earth do we have so many complicated
contracts
let's say you run an airline in order to
keep your airline profitable
you need to budget and with oil prices
jumping every day
you can do that but using options you
can secure the price for an entire year
for a little fee if oil prices rise they
can even make a profit
but that's one use for it the other is
that you can profit by speculating
and the best part of it is that you
don't even need to have the money to do
that since all you need to do is to buy
put options on top of that this market
is not even
regulated because of the commodity
futures modernization act of the 2000
that bill clinton signed that's why this
market has grown
to 1.2 quadrillion dollars
in comparison the world gdp is just 84
trillion dollars
we can't even regulate the market now
because it's simply
too big any regulations could result in
a collapse
of the world economy in fact the 2008
crash
was caused by derivatives wait a second
how derivatives caused the 2008 crash
here is the story in short the fact that
millions of people couldn't pay their
mortgages
was just the tip of the iceberg when
giving mortgages
banks bundled these loans together and
sold them as securities to investors
which is not a problem but then
companies like aig started betting on
these
mortgage-backed securities they insured
those securities by creating derivatives
that say if the borrowers would default
on their mortgages
we're going to reimburse you which made
this mortgage-backed securities
risk-free but in return you will pay aig
a small premium
for taking that risk aig believed that
house prices will keep rising
so it was a great investment so aig
together with other
financial institutions created
derivatives insuring
all other mortgage-backed securities in
the market
on the other side there were people who
created derivatives that bid against
these mortgage-backed securities
in fact there were even derivatives that
bet against derivatives
that bets for mortgage-backed securities
and companies that believe that home
prices will keep rising
did accept this contract since they
would earn money out of nothing
but the moment house prices started
declining financial institutions
suddenly had to pay everyone they
promised but didn't have the money to do
that
all the companies that bet against the
housing market didn't even need the
money to bid against the market
all they needed is to afford to pay the
premiums and they could bet tens of
billions of dollars
and that's the problem with derivatives
you can make a deal without having the
money to package
and that's what led this market to worth
1.2
quadrillion dollars if it collapses it
will get
way worse than the 2008 crash since back
in 2008
this market was only worth 600 trillion
dollars
that's why it's not enough to understand
the asset but you should know how much
leverage
is used in the case of crypto for
example
traders are using up to a hundred to one
leverage ratios
which means with just a thousand dollars
they're taking positions
worth a hundred thousand dollars which
means
if something slightly goes wrong the
entire thing could collapse no matter
how loudly you say the words
decentralized
theoretically it could happen but
theoretically it might not
but if it happens at least you will not
freak out because
now you know how derivatives work if you
want to learn more about stock market
then check out my course on skillshare
and don't forget to get your two free
stocks from wiibold
thanks for watching and until next time
you