Mad Hedge Bitcoin Letter
June 30, 2022
Fiat Lux
Featured Trade:
(MINERS HEAD FOR THE EXITS)
(HIVE), (CAN), (MARA)
They could only do so much to hang on.
I am talking about the miners – the crypto miners who were operating under sub-optimal conditions.
I could make a case for Bitcoin at $35,000 as it relates to miners staying in the game before they can sell their coin when it goes back up to $65,000.
However, at a pitiful $20,000 per one BTC, mining BTC is a big loss-maker which is setting off a tidal wave of pain in the mining industry.
What once would be considered a story of tenacity for Bitcoin miners has now turned into utter capitulation of bankruptcy.
Like many other businesses, the cost of producing products is important and when the cost of oil is low, crypto miners laugh all the way to the bank.
That hasn’t been the case lately.
It was only just at the end of 2019 that the price of Brent crude was $20 and fast forward to late June 2022, it settled around the $110 per barrel mark today.
There is also a plausible case that we haven’t even seen the inflation caused by the Easter military conflict because inflation and especially inflation comes with a 6-month lag.
It was no coincidence that Bitcoin’s most recent meteoric rise took place when the nominal cost of energy was half of what it is today.
The most glaring unintended consequence is the distressed nature of Bitcoin miners whom many have gone out of business because they simply aren’t profitable amid uncontrollable energy prices and hyperinflation.
To dig deeper in the weeds, electricity comprises 90-95% of Bitcoin mining costs.
Miners also sell coins once they produce them to pay back the energy cost and then pocket the difference. That operation makes no sense today and there’s simply not enough money to pay the electric bill after the coin is sold.
Who are the publicly traded miners?
HIVE (HIVE) is a Canadian miner that produced 278 BTC in March of 2022. The company also mines Ethereum with 2,549 produced, so that can diversify the company away from BTC. However, the company draws down on its ETH holdings to fund its strategic deal with Intel (INTC). The company sold 10,000 ETH to fund BTC rigs.
Ironically, the company has an ETH mining operation in Sweden which is the very nation leading the charge against Bitcoin operations in Europe.
Hive has access to 50MW of power and has an operating margin of 74% at present.
Marathon Digital (MARA) is focused on North American operations, which would shield it from European legislation. Marathon produced a Record 1,259 BTC in Q1 2022, up 556% Year-Over-Year and its total Bitcoin holdings increased to 9,374 BTC.
In the short-term, cost challenges handcuff the best of them and the share prices of stocks like Marathon, Canaan (CAN), Riot, and Marathon are down in the dumps.
When there is either a military peace solution or a recession, the price of energy might come down to bearable levels.
Until then, tough luck for the crypto miners and avoid buying the dip. There’s more pain to come until something meaningfully changes to the underlying situation.
“I have millions of dollars, 20% of my portfolio is now in cryptocurrencies and blockchain.” – Said Canadian Businessman Kevin O’Leary
Mad Hedge Bitcoin Letter
June 28, 2022
Fiat Lux
Featured Trade:
(COINBASE LICKS ITS WOUNDS)
(BTC), (COIN)
The crypto exchange Coinbase (COIN) which is one of the biggest in the market offers us a glimpse into the crypto world by default because of the earnings reports they deliver via the public markets.
Its stock price is down 75% since it came public mirroring the plight of its bellwether coin Bitcoin (BTC).
Many people I talk to get peeved at how stocks usually perform once they go public.
Going public for COIN has meant going ex-growth and a nasty drop in valuation for investors.
To say COIN has underperformed the market is an understatement.
They went public around the euphoria of the Bitcoin rise to $65,000 and the aftermath has been brutal.
COIN continues to be hit with rafts of analyst downgrades even after being down 75% and that’s how bad the analyst community views the stock.
No dead cat bounce or no reversion to the mean for COIN!
Not only are crypto prices down across every coin that is relevant, but crypto traders have thrown in the towel.
COIN doesn’t charge trading fees, but they do sell the customer order flow to high-frequency trading firms that profits from retail orders.
The spiral downwards is like a self-fulfilling prophecy with orders drying up resulting in staff layoffs and rescinding already agreed upon new hires resulting in low morale grappling with negative revenue growth.
Cost will need to come down fast because the market won’t be favorable to the guidance of next quarters’ earnings report.
COIN quickly became the equities market poster child for the boom in digital currency prices last year with the largest US cryptocurrency exchange seeing its value surge above $75 billion as Bitcoin hit a record high, but I do believe upcoming regulation will force their business model down the drain.
Also, when a company’s customers become impoverished by losing boatloads of money in the very market the company makes a market for, the future doesn’t sound too appealing to investors.
The once $75 billion company is most likely worth $5 billion today and if customer order flow is made illegal, which the SEC is trying to achieve, then the company is worth $100 million at best maybe not even that.
Heightened competition from other firms has also undermined the stock.
Earlier this month, Binance revealed that it would be offering zero-fee trading for Bitcoin and said it had plans to also eliminate fees on other tokens in the future.
COIN still has an expense outlay of $1.7 billion to shave down.
As Bitcoin hangs on for dear life at $20,000, it could be a death blow once Bitcoin sells off to $12,000.
Much of the synergies that triggered its meteoric rise are gone and the dip buyers have vanished.
I do believe that selling rallies is most likely the best strategy right now in Bitcoin.
The public reports from the exchanges couldn’t be worse and then one must question will COIN also institute a withdrawal freeze like others have if capital bleeds uncontrollably?
A withdrawal freeze is the antithesis of decentralized money and I do believe there are a lot of alienated folks out there who believe in crypto but were highly disappointed by the first 6 months in 2022.
$12,000 appears as the natural reversion point as $20,000 has gone from support to resistance on a technical level.
Mad Hedge Bitcoin Letter
June 23, 2022
Fiat Lux
Featured Trade:
(EASIEST WAY TO SHORT BITCOIN)
(BTC), (BITI)
The ticker symbol is BITI – write it down in your journal.
What’s that?
That’s the new ProShares Short Bitcoin ETF that just started trading on the New York Stock Exchange 2 days ago.
It’s been a long time coming.
Crypto ETFs have had an arduous journey to finally join other assets trading publicly.
Handcuffed by regulation behind the scenes, crypto has been roadblocked.
The really underscored the enormity of situation and how difficult it is to get approved in America, much like building an oil refinery in the United States.
It only took eight months after first creating the initial U.S. bitcoin futures ETF.
What does this mean?
Instead of executing some type of exotic trade exposing an investor to a short Bitcoin position on some alternative market, investors can now just click and buy a product that bets against an appreciating price of Bitcoin.
In short, if Bitcoin goes down, profit is accrued.
This makes it even easier to hate crypto if the gateways to bet against it have enlarged.
Before this, the best way to really expose oneself in an insured marketplace was to sell short MicroStrategy (MSTR).
However, MSTR never correlated 1:1 with Bitcoin and it was something closer to 85% correction.
The fall to $17,000 for Bitcoin means that it has not participated in the latest bear market rally but only participated in the selloffs.
That’s never something you want to hear if you are interested in buying into an asset class.
Considering that traditional brokerage accounts can now bet against Bitcoin will result in more short sellers and not less.
BITI will be the first ETF of its kind in the U.S. Horizons ETFs has a short bitcoin ETF listed on the Toronto Stock Exchange.
ProShares said BITI is designed to deliver the opposite of the performance of the S&P CME Bitcoin Futures Index and that it seeks to obtain exposure through bitcoin futures contracts.
How well-timed the launch remains to be seen? Markets remain fraught with uncertainty, and I do believe Bitcoin will trend towards $12,000 per coin in the short-term.
I know there's a ton of people who had massive FOMO from missing the rise of Bitcoin and they have been even happier that they missed the elevator down as well.
I've taken calls from friends and even family asking if they should buy the dip and the answer is no.
Bitcoin is bereft of dip buyers as small and large buyers have gone AWOL for different reasons.
Much of the new incremental capital has gone into shorting interest rates and buying commodities.
Other institutional capital like Ray Dalio’s Bridgewater hedge fund just doubled their bet against Europeans stocks to $10.5 billion.
Bitcoin, as it exists in its current form, just isn’t attractive to the incremental buyer.
As Bitcoin gets cheaper, one might say it’s on sale, but sales can be lowered and that’s the path of least resistance unless something changes.
“There’s no shortage of remarkable ideas, what’s missing is the will to execute them.” – Said American Author Seth Godin
Mad Hedge Bitcoin Letter
June 21, 2022
Fiat Lux
Featured Trade:
(SYSTEMIC RISK ACCELERATES)
(BTC), (SOL)
The CEO of MicroStrategy and Bitcoin evangelist Michael Saylor has already lost $2 billion on his bitcoin investments signaling that all is not smooth for the wider crypto industry.
Much like in the fiat money world, once extremely unlikely events start to occur, we usually see a cascade of odd unintended consequences that push the network or system to the brink.
Many are calling crypto lender Celsius’ freezing of withdrawals a “Lehman” type moment.
We have entered a phase of crypto systematic risk rearing its ugly head.
Investors are waiting for the complete capitulation which could materialize into another potential ugly event on top of the mini disasters of late.
This bodes poorly for crypto in the short-term.
A large wallet at the center of the fiasco at Solana lending protocol Solend started to move millions of dollars of cryptocurrencies.
The move potentially averts the risk of contagion in case of a liquidation that could have caused up to a billion of dollars in losses.
The anonymous wallet had deposited 95% of Solend’s pool of SOL tokens and represented 88% of USDC borrowing, yet came close to a margin call last week as the SOL price dropped more than 40% to as low as $27.
The protocol would have automatically liquidated up to 20% of the big account’s collateral if SOL hit $22.30, and potentially lead to damage in the broader Solana ecosystem.
A governance vote was floated by protocol developers to take control of the account and take adequate risk management steps.
One of the hidden risks about crypto and particularly the smaller and more artisanal altcoin is that they are dominated by a few big accounts.
Before these secondary coins exploded, big accounts would get in at paltry prices and these are the accounts that currently corner the market.
Many algorithms had $20,000 marked as the line in the sand and once breached, look out below.
I personally know a few traders that have inputted orders to sell limit orders as psychologically sensitive levels.
The Solano debacle spiraling out of control leading to an internal stakeholder vote is a shocking turn of events.
This wrecks any notion that this network is decentralized and is the exact opposite of what crypto advertises itself as a non-centralized system.
For the developers to “takeover” a big account because it could take down the coin’s network is even worse than what’s happening in the fiat world.
This is another massive thumbs-down event for crypto infrastructure and another kick in the sternum for dip buyers.
To be honest, there are no dip buyers in crypto and each day validates this thesis.
Trust in crypto, crypto momentum, crypto liquidity, and the supposed bullish crypto narrative as a store of value or inflation hedge are all trending towards generational lows with no end in sight.
The surge above $20,000 per Bitcoin is a dead cat bounce triggered by short coverers.
Investors are selling all the crypto they can before the next down leg takes us lower before the next area of system risk crops up.
