No group of speculators was more notorious in the 1980s and 1990s than Stanley Druckenmiller, Paul Tudor Jones and George Soros. Druckenmiller famously bet $2 billion on the Deutsche mark when the Berlin Wall came down. Soros and Druckeniller together made billions betting against the British pound when its peg collapsed in 1992. And Jones profited from the 1987 stock market crash.

In 2020, two of these three traders – Druckenmiller and Jones – finally began to buy bitcoins.

This post is part of CoinDesk's 2020 Year in Review – a collection of op-eds, essays and interviews about the year in crypto and beyond. J.P. Koning, a CoinDesk columnist, 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 took them so long. The world has never seen a purer trading machine than Bitcoin. It was purpose-built to let professional speculators like Druckenmiller and Jones rapidly make, or lose, large amounts of money.

A look back at the 1987 stock market crash, probably the single craziest day in market history, provides a window into the thinking of these three speculators. It also hints at why, 33 years later, they’ve finally had their bitcoin conversion.

'One of the most exciting periods of my life'

To help guide his trading decisions in 1986, 33-year old hedge fund manager Paul Tudor Jones turned to the 1920s for inspiration. He did so by constructing an “analog model,” a simple visual overlay of the 1980s market over the 1920s market.

Jones mentions this analog model in an infamous documentary about him, “Trader.” He has reportedly tried to have “Trader” quashed many times over his career. 

Jones’s analog model suggested to him that the 1980s market would at some point collapse, much like it had in 1929. And so Jones’ hedge fund was heavily short the stock market (i.e., positioned to gain from a fall) going into Oct. 19, 1987, or “Black Monday.” Jones has described the week of the crash as “one of the most exciting periods of my life.”

Speculators are less concerned about reality, or the fundamentals, and care more about what is going on in people's heads.

Druckenmiller also has a war story about the 1987 crash. On the afternoon of Oct. 16 – the Friday before “Black Monday” – Druckenmiller remembers walking over to George Soros’ office. At the time, Druckenmiller, then 34 and managing his own hedge fund, was heavily invested in the stock market. Soros happened to pull out a copy of Jones’ analog model from a month or two earlier. 

After absorbing the implications of Jones’ chart, Druckenmiller recalls being “sick to my stomach when I went home that evening. 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 close, Druckenmiller sold his entire position and even managed to go short. The Dow would end up falling 508 points that day, or 22.6%, the largest one day decline in history.

Soros also lost money in the 1987 crash. “I was as badly caught as the next fellow. I was convinced the crash would start in Japan; that turned out to be an expensive mistake.”

Over 1% of my assets in bitcoin

Fast forward to 2020 and one wonders if Druckenmiller and Jones haven’t been exchanging trading ideas again. In May, Jones announced on CNBC that he has “just over 1% of my assets in bitcoin. Maybe it’s almost 2[%]. That seems like the right number right now.” In October, Jones noted that “I like bitcoin even more now than I did then.”

In November, Druckenmiller admitted to owning a “tiny bit of it.” He went on to say that bitcoin has “a lot of attraction as a store of value to both millennials and the new West Coast money 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 legendary speculators like Druckenmmiller and Jones are jumping into a relatively untried instrument. I’m shocked that it took them this long.

Keynesian beauty contests

Market participants like Soros, Druckenmiller and Jones are not investors. Investors evaluate a firm’s future cash flows in an effort to determine if its shares are underpriced. 

Speculators are less concerned about reality or the fundamentals and care more about what is going on in people’s heads. If they can figure out ahead of time what others are going to do they can buy (or sell) ahead of time and later unload on their targets at a much better price. 

Jones’ strategy in 1987 was a great example of speculation. He used the analog model to try and gauge the psychology of the markets, positioning himself to profit from others’ panic. 

Like beauty in Keynes’ contest, the price of bitcoin is purely a function of the market’s imagination.

The famous economist John Maynard Keynes once described speculation as akin to a beauty contest. Presented with a row of faces in a newspaper, competitors must pick not the face they find the most beautiful, but the one they believe other participants will find the prettiest. A deeply nested mind game emerges in which we “devote our intelligences to anticipating what average opinion expects the average opinion to be,” wrote Keynes. “And there are some, I believe, who practice the fourth, fifth and higher degrees.”

Playing the game to the fifth degree is what Paul Tudor Jones did in 1987. But in 2020, Jones has finally discovered the purest speculative instrument to ever trade on the face of the Earth. 

No fundamentals

Equities or commodities have a beauty contest element to them, but they aren’t pure beauty contests. There is a set of fixed underlying fundamentals involved. 

The price of oil, for instance, is battened down by the ability of industrial users to substitute away from oil into 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, dampening the rise.

Not bitcoin. Like beauty in Keynes’ contest, the price of bitcoin is purely a function of the market’s imagination. That is, unlike the prices of the S&P 500 or a commodity like crude oil, there is no set of fundamentals that gets in the way of what bitcoin’s price 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 demonstrates such incredibly fast and sustained price swings. It can double in a month, or rise by a factor of 10x in three months. Or it can fall 50% in a day. 

See also: JP Koning – The Dark Future Where Payments Are Politicized and Bitcoin Wins

Big psychology-driven swings like these are the bread and butter of professional speculators like Druckenmiller and Jones. Both have proven adept at playing beauty contests, burrowing deep into peoples’ minds to anticipate what they will buy or sell in the future. That skill allows them to make huge amounts of money, very quickly. For them, bitcoin is the perfect trading machine.

Speculators often talk up their positions. That is, they mention on TV they happen to be investing in something, hoping that they can create a bandwagon effect. Don’t confuse their words for true belief. Jones describes bitcoin as being in the “first inning.” But he’ll short bitcoin the moment the situation warrants it, much like how he shorted equities in 1987. 

Speculators love to play the game. Just don’t pin them down to a side.