3 min read

Your Life as Financial Derivatives

Over the past several months, I’ve watched the price of Bitcoin increase 400%, the price of Ethereum increase 1,000%, and the price of Dogecoin increase 5,000% (in bubble driven, then deflated by Elon).

I’ve been kicking myself for standing on the sidelines through all of this. I’ve been researching crypto since 2013, work at a cryptocurrency analytics company, and made some money trading in the 2017 crypto bull run. Yet I’ve had a lot of FOMO as it seems like everyone except me is making money.[1]

To the Moon!
To the Moon!

However, there’s a strong argument to be made that I shouldn’t be investing in crypto at all. If you analyze the net present value of my future cash flows, by far my biggest portfolio position – my salary, stock options, and the expertise and personal capital I build through the work I do for 10 hours per day – is long cryptocurrency futures. If I get rich due to crypto, it will be because of TRM stock options, not because I made an early bet on Bitcoin or Ethereum.

This is the smart decision! I shouldn’t be investing in crypto for the same reason that you shouldn’t invest in your company’s stock. Sure, you may think that Apple stock will continue to increase in value (I do), but if a Black Swan event occurs and you’re laid off, you don’t want your retirement account to evaporate as well. See Enron.[2]

So how I spend the majority of my waking time can be represented as a call option on cryptocurrency and blockchain adoption.

What other areas of life also contain hidden derivatives?[3]

  1. Mortgages. When you take out a mortgage in order to buy a house, you are placing a levered bet on the future of the local labor market. Ask my family who lives in Detroit how that worked out when the auto companies left.
  2. Relationships. Staying single is holding a call option on your future attractiveness in the dating pool. Assuming a heterosexual relationship, theta is higher for women than for men. Conversely, being in a relationship is selling that call. You earn premium up front, but may miss out on gains.
  3. Learning. Being a lifelong learner and building a marketable skillset is a hedge against competition in the global labor market. If you’re not continually learning or building your comparative advantage, you have taken a short position on globalization and are not concerned with the risk of educated, motivated people in lower-cost countries abroad taking your job.
  4. Parties. Attending a cocktail party is spending your time on a far out-of-the-money call option. You may meet someone or be presented with an opportunity that changes your life.[4]
  5. Hobbies. Odds are that few will read this post. But each time I write and publish online, I pay a small premium (time) for a call option that my writing will lead to opportunities that I wouldn’t get otherwise. Any time spent creating as opposed to consuming is not only buying this call option, but also serves to increase the portfolio diversification of your future earning potential.
  6. Cryonics. Being cryogenically frozen is a call option on the future of science, as well as being a hedge against death. Pascal’s wager for the 21st Century.

  1. It’s especially humbling (and infuriating) when you understand something and know you’re smarter than people who are making money hand over fist in that area.

  2. If a significant portion of your compensation is in RSUs or stock grants, the same logic applies. You should sell immediately. ↩︎

  3. Many people intentionally pursue optionality in their careers, often to their own detriment. Here, I explicitly look for the inverse: areas where people don’t think they are placing bets, but nevertheless are. ↩︎

  4. I believe this idea comes from Nassim Taleb in The Black Swan. ↩︎