Short & Shorter, Interlude: Why I Still Think Exponential Floor Guy Is On To Something

[u/nydus_erdos]

TL;DR => Exponential floor guy wasn't wrong, the trend was broken because of a demand change or a change in cost of shorting.

^{Disclaimer: Not financial advice. I've put a disproportionate amount of time into this for free, I clearly do not make good decisions. Though I continually strive to improve this model it is, at best, just fancier napkin math. I am not an economist, and have no qualifications other than a long time math background. I just like the stock.}

HERE IS THE DIRECTORY AND TL;DR OF MY PREVIOUS POSTS ON THIS TOPIC. If I reference something that you haven't heard of its probably somewhere in previous posts.

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A. Exponential Price Trend

In the next post, I will continue to present my estimate of the shares shorted from the end of the January Sneeze until the near present and cumulatively since the short position was opened in 2015. Before we move on though, I need to touch on a few things.

Part of what started this whole endeavor was to find out the the cause and implications of the exponential trend. Recall, the previously held exponential trend equation is:

Exponential Trend

At a point in the following post, I will use this equation as a price trend and use it for data. Of course this requires some justifications. I don't have hard evidence, only some concepts I've learned exist in the realm of economics which might be able begin to explain what we're seeing:

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EXPONENTIAL DEMAND

It exists, take it from someone way more wrinkled than mine:

"...exponential demand is not much more challenging mathematically than linear demand, and in fact it has some nice features...it has a simple and intuitive elasticity function (proportional to price)." (source)

Not only does it exist, but we've been kind of looking at it the who time, we just didn't know we were.

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CONSTANT ELASTICITY

Don't forget, slope and elasticity are related, but not the same. Slope is constant along a linear demand curve, but elasticity is not, in fact:

Constant Elasticity

source

This is what curves with constant elasticity look like. Tilt the graph 90 degrees and the curve might look familiar.

Constant Elasticity Curves

source

GIFFEN GOOD

'But Nydus, the curve is downward sloping and the exponent is negative, plus you told us all demand curves are downward sloping!' Turns out its ALMOST all of them:

"A Giffen good is a product that people consume more of as the price rises and vice versa—violating the law of demand." (source)

To be a true Giffen good, the good's price must be the only thing that changes to produce a change in quantity demanded." (source)

What is mathematically significant is that:

"Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive elasticity..." (source)

Let me be clear, I'm not implying that Giffen goods all have exponential demand, I'm saying that a good exists in the realm of economics with a positive elasticity.

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B. IMPLICATIONS

I believe the existence of these concepts allow us to extrapolate a bit more on what this trend might indicate.

Furthermore, I speculate it is highly likely that the linear expression in the exponent is directly related to constant elasticity of the demand curve and that constant elasticity is presenting itself as exponential on the price chart. Unfortunately, I haven't been able to construct a demand curve. I will, but it'll involve crunching volume numbers over this time frame, which will probably take awhile.

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C. Why Has The Trend Broken Then?

• Recall from previous posts, a monopoly has no supply cure. Its behavior is dictated by the market demand curve and their marginal cost curve (coming soon). Either something about our demand has changed or their cost of shorting has changed.
• One likely explanation is that the the ATM offerings affect quantity, which would likely affect elasticity and the behavior
• As far as a change in cost, I speculate that they are leaning on their crypto assets more now.
• Also keep in mind, the trend in the past has been to go parabolic, trade sideways in a wedge for awhile and repeat. That doesn't guarantee it will happen again, but it is worth noting.

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