Mad Hedge Bitcoin Letter
May 12, 2022
Fiat Lux
Featured Trade:
(LUNA BLOWS UP)
(BTC), (ETH), (LUNA), (UST), (MSTR)
Posts
Altcoins won’t age well and 99% of them will vanish before our eyes. The way in which they exit also may or may not cause financial contagion.
We need to stop the arrogance already.
Let’s just default quickly to Occam's razor and back of the envelope math shows that we can’t have 1,000’s of these crappy digital currencies masquerading as real ones.
We need a few good ones and that’s it.
Sure, we have tried and tested Bitcoin (BTC) and Ethereum (ETC), but these other worthless pieces of code are hawked by mostly snake oil salesmen who are looking for a quick buck by preying on the naïve.
So don’t get greedy.
I hear many crypto enthusiasts tell me their strategy is to buy the cheapest and most obscure crypto possible and hope for a moonshot.
That’s a fools’ strategy and the money is better donated to cure world poverty.
So what am I really talking about?
The supposed stable coin UST and LUNA which was supposed to peg its value to the US dollar broke in a severe way as the algorithmic that was intended to uphold this balanced ratio went haywire.
10’s of billions of real dollars were wiped out from investors as the genius algorithms messed up in a big way.
This contagion has had the knock-on effect of dragging the price of Bitcoin and Ether down as many might assume a UST or LUNA holders might need to sell BTC to get some liquid currency.
It’s been a giant risk-off move for crypto in every nook of the asset class and even worse, a massive loss of confidence for the industry as a whole.
This was a gift to the detractors who say that crypto is run by a bunch of idiots or charlatans or something of that ilk.
The value of LUNA plunged on Wednesday as Terraform Labs creator Do Kwon laid out a plan to save its sister token, the stablecoin TerraUSD (UST).
In the last 24 hours, roughly $10 billion have been drained from LUNA. Its price has fallen 93% in that time from $32 to $2.25 per coin, with the price changing rapidly each minute. After skidding to a low of 30 cents per coin, UST has ratcheted up more than a quarter to 64 cents.
Down 30% in the last day after breaking its essential $1 peg over the weekend, UST trades at above 64 cents per coin while Terra’s LUNA token rebounded 61% to $2.25 after dipping below $1 at 9 a.m. New York time Wednesday.
In the first sniff of market turmoil, stablecoins have failed miserably and it also incentivizes government regulation to shut them down.
This of course gives ammunition to SEC Chairman Gary Gensler to move stablecoins under his jurisdiction.
He would kill the development in a second by pelting it with so many fees, bureaucracy, delays, hidden regulations, and obstructions that stablecoins will be swept into the dustbin of history.
The contagion has led to Bitcoin falling lower than $29,000 and we are getting dangerously closer to the $21,000 threshold where MicroStrategy (MSTR) will get a margin call.
Sell every and any rally in Bitcoin, this loss of confidence can’t be understated and crypto has failed miserably to attract the incremental buyer in a rising rate environment.
Don’t catch a falling knife.
Mad Hedge Bitcoin Letter
May 10, 2022
Fiat Lux
Featured Trade:
(ROCKING THE BOAT AT MICROSTRATEGY)
(MSTR), (BTC)
If Bitcoin (BTC) drops to $21,000 hold tight for a tsunami of forced selling that will cause BTC to crash.
There is a high likelihood of that happening as the bitcoin proxy traded on the NYSE software company MicroStrategy told us about this stunning news during their earnings call.
MicroStrategy CFO Phong Le admitted the company will be forced to pony up more Bitcoin to back its loan with Silvergate Bank.
CEO Michael Saylor looked like a genius when BTC was roaring, but not so much now as investors head for cover as indiscriminate selling takes hold of all risk assets.
Shares of MSTR are down around 75% in the past 6 months.
Ironically, the company shares are underperforming BTC but that is the least of the company’s concerns as they head for uncharted territory and could be forced to tap the debt market at a time when borrowing costs have shot through the roof.
Part of the quagmire here is that the CFO has been financing these Bitcoin purchases with borrowed money and the CFO will need to calculate how much more debt they can handle while accommodating the interest payments for the debt already borrowed.
It's easy to see this going from bad to worse as high-interest debt on top of crushing debt is a recipe for disaster and lenders would have sniffed this out.
I mention this $205 million loan from Silvergate Bank to buy more Bitcoin because the loan was and still is INTEREST ONLY.
Saylor has greenlighted this highly risky strategy and if MSTR continues down this terrible vein of form, they might not have the money to pay back the principal at the end of the loan.
Le claimed that the company holds “quite a bit” of uncollateralized Bitcoin that it can use to support its loan should the need arise. He also noted that Bitcoin is highly unlikely to touch $21,000, a level that was last seen in late 2020.
In the first quarter of the year, Microstrategy purchased $215 million worth of Bitcoin at an average purchase price of $44,645 per coin, bringing its total holdings to 129,218 Bitcoins acquired at an average price of $30,700 per coin, or for $3.97 billion, according to SEC filings. At current rates, the company’s Bitcoin stash is worth over $4.2 billion.
Le likes to say we are nowhere near $21,000 but it's slowly muddling itself down as the macro conditions are the worst in a generation forcing investors to ditch speculative assets like Bitcoin.
Unfortunately, many of these events came too early for BTC and BTC needed time to develop.
Our unfavorable backdrop includes items such as 2 unforced policy errors by the US Central Bank, military conflict, hyperinflation, spiking energy costs, and supply chain problems.
None have been solved and any or all could get many times worse.
The big winner here has obviously been the US dollar, short Bond traders, and energy stocks.
At the end of the day, BTC only goes up when fiat is poured into its asset, and the challenges we face now make BTC not as attractive as it was when the Central Bank printed $10 trillion and a good chunk of that went into Bitcoin.
That’s why we saw Bitcoin at $65,000 in November 2021.
The intense tightening of liquidity we are experiencing now means those spigots have run dry and BTC is the main loser.
BTC is down to $31,000 and the drop from $10,000 was rapid, if that happens again, BTC will be at $21,000.
MSTR could be forced to dump their BTC which would take the digital gold to $15,000.
Mad Hedge Bitcoin Letter
May 5, 2022
Fiat Lux
Featured Trade:
(COSTS SPIKE FOR NEW CRYPTO-SUPPORTED INTERNET)
(BTC), (NFT), (FB), (DAPP)
Advanced technologies such as cryptocurrencies and (non-fungible) tokens will play a leading role in Web 3.0, since they reflect a sense of ownership in decentralized blockchain networks.
Much of this is totally new and the programming and design behind it won’t be able to mesh well with what happened before.
Think of the latest hype of NFTs, or non-fungible tokens, which shifts the ownership of a certain form of money, which is the case with cryptocurrencies, to the ownership of many other digital assets, from artworks to memes and tweets.
Internet 2.0 programmers won’t be able to just seamlessly integrate into this new language and help develop this new world.
Web 3.0 enables the spread of cooperative governance frameworks for formerly centralized products.
There are few qualified Web 3.0 developers and they are able to ask for astronomical compensation for their service.
This won’t stop anytime soon as companies like Meta (FB), who have cash, are willing to throw money at this limited pool of developers.
There are many costs involved in being a Web 3.0 developer. The initial start-up cost is typically high, but this is offset by the increased flexibility it affords. As you build your portfolio of Web 3.0 projects, the costs will gradually decrease.
This technology would make the web more transparent and user-centric, while also opening the door for the blockchain. In the future, websites and apps could trade cryptocurrencies and other coins.
Becoming a Web 3.0 developer is not easy, but the rewards are well worth it. Those who have mastered the basics of the new framework can build an excellent website.
The cost of learning to become a Web 3.0 developer varies, but can be extremely high. After all, it takes a lot of time to build a successful business on this technology. There are also plenty of challenges involved with it.
The technology is not yet mainstream, but a handful of projects are attempting to build channels through the interoperability of blockchain networks.
You must have an understanding of web development, understand the trade-offs between different types of technologies, and be able to see trends and future directions in the industry.
A free course on Blockchain and cryptocurrencies can help you master the skills you need. Harvard University’s CS50 course will teach you the basics of computer programming, including data handling and Blockchain. Blockchain is crucial for Web3.0 developers because it is not only related to crypto coins, but can also run cutting-edge DApps and full backends.
The Web3.0 technology is a fast-growing field, and it is much like the dot-com era in the early 2000s.
A career as a Web3.0 developer is highly likely the best type of career to focus on for anyone getting into tech these days.
The risk-reward is skewed so much to the reward that many “full-time” developers are setting their workweeks at only a maximum of 24 hours per week or three days.
Not only that, web 3.0 developers are asking for starting salaries of $200,000 per year and if a company is interested in adding a 4th day of work, then that starting salary spikes to $300,000.
Remember these sums aren’t just it, these developers require a good amount of stock options.
Lastly, these web developers are refusing any job as “independent contractors” and won’t look at any offers that are anything other than a full-time employee with those implied rights.
Even under these terms, these web 3.0 developers have a line outside the door of companies willing to pay this type of compensation to get them in the door.
Web 3.0 is proposed to become the next iteration of the internet, but right now, the only people winning in this race are the people putting it together.
Until this new version of the internet comes online, companies won’t be able to fully monetize or onboard consumers.
This of course is important because crypto will be the medium of payment in this internet 3.0.
The lead up to that moment means that companies will need billions just to get a seat at the table.
Mad Hedge Bitcoin Letter
April 28, 2022
Fiat Lux
Featured Trade:
(AFRICA ADOPTS)
(BTC)
The Central African Republic has adopted bitcoin as legal tender which makes it the second country to absorb it as the official state currency after Central American country El Salvador.
Lawmakers unanimously adopted a bill that made bitcoin legal tender alongside the CFA franc and legalized the use of cryptocurrencies.
This makes The CAR the first African nation to use Bitcoin as their national currency.
Many Bitcoin deniers proclaimed insanity when El Salvador adopted Bitcoin as the national currency and to be frank, the experiment hasn’t gone as smoothly as it could have.
Many merchants still prefer hard US dollar bills to Bitcoin, but I would argue, that there are growing pains to go along with it.
There is honestly no playbook for this type of visionary legislation.
The landlocked state is one of the planet's poorest and most troubled nations, with an economy that is heavily dependent on mining.
The introduction was heavily criticized by the International Monetary Fund (IMF).
It warned of "large risks associated with the use of bitcoin on financial stability, financial integrity, and consumer protection" and with issuing bitcoin-backed bonds.
CAR has made this drastic decision in an aggressive way to attract venture capitalists and hedge funds.
For all those investors who have the privilege of spending dollars and euros, not everyone is from a country where they trust their own currency.
Just look at the Turkish lira.
I have some friends who bought luxury seaside villas in Ankara, Turkey because they thought that it was a guaranteed asset appreciation tool along with the added benefit of being able to take vacations to a gorgeous seaside resort.
In hindsight, the investment has been an utter failure.
Since they bought the property, the local currency has depreciated by 400% meaning they could have waited today and used only 25% of what they paid a few years ago.
I don’t want to sound arrogant, but much of the world still measures their wealth in US dollars and if a country has no access to US dollars in real-time, then why not adopt Bitcoin as an alternative?
Bitcoin is a guaranteed better store of value than the Central African Republic Franc and it is not even close.
Some of the emerging currencies have depreciated by 500% or 600% like the Turkish Lira or the Kazakh Tenge.
Bitcoin will definitely outperform the bulk of these marginal fiat regimes.
In fact, most people have never even heard of these sub-Saharan African republics.
Many are landlocked and are limited economically.
So I would argue that from a risk reward basis, it’s a great bet to make considering their local currency is worth less than the money it is printed on.
Not only that, I would fully expect other poor African countries like Botswana, Eritrea, South Sudan, and Chad to ship on the Bitcoin wagon as well.
The Central African Republic, which has gold and diamond reserves, is one of the world’s poorest nations. Years of violent conflict and a political crisis in the lead-up to presidential elections in December 2020 have had a severe impact on the economy and damaged relations with its international partners, leading to delays in the distribution of aid and some partners suspending budget support.
For many of these countries wrenched by years of war and strife, one might argue that Bitcoin could represent a beacon of financial stability along with a massive incentive to join the internet which only 11% of CAR citizens can claim.
Why not hit 2 birds with one stone.
Like Chinese citizens jumped from cash, bypassed plastic credit cards, to deploy a digital payment system on their smartphone called Wepay.
Why not go from the CAR Franc and skip any sort of solid fiat currency and go straight to Bitcoin.
Many sovereign countries without access to strong fiat currencies are coming to the same conclusion that it’s foundational to go the Bitcoin route than presiding over a currency that nobody in the world has ever heard about and wouldn’t touch with a 10-foot pole.
Welcome CAR to the Bitcoin club.
In 10 years, there will be a paradigm shift in which the consolidation of currencies will most likely leave us with a handful of Western currencies, the Chinese yuan, Russian Ruble, and crypto.
Mad Hedge Bitcoin Letter
April 26, 2022
Fiat Lux
Featured Trade:
(THE DOGE EFFECT)
(DOGE), (TWTR), (TSLA), (ETH), (BTC)
One of the more outsized second order effects occurring in the risk markets right now is the boost Dogecoin (DOGE) is receiving from the carnival atmosphere that is Elon Musk buying Twitter (TWTR).
DOGE is up 30% in the past week but down 500% from last May when DOGE experienced a euphoric ride up only to come crashing down.
It’s no surprise that Musk, through his EV company Tesla (TSLA), owns Bitcoin on its balance sheet and he’s on record lately admitting that Bitcoin is the only cryptocurrency that Tesla owns, and they haven’t sold any.
Personally, he owns Ethereum (ETH) and Dogecoin (DOGE) and he specifically mentions the reason for owning Dogecoin is because he likes dogs.
On the surface, it sounds ridiculous that Musk would speculate on an altcoin just because he likes dogs, but people also thought it was crazy he would buy Twitter for $44 billion.
Musk explained he arrived at the conclusion to buy DOGE through a well-known principle called Occam's razor.
That is a philosophical principle that states the simplest variant is usually the best choice.
He then goes on to explain that he subscribes to a variant of Occam’s razor where the most entertaining variant is usually the best choice.
He is entertained by Shiba Inu dogs so he buys Shiba Inu Alt Coins represented as DOGE coin.
Either way, his association with Dogecoin and Bitcoin has done wonders for its short-term price action with Bitcoin and other cryptocurrencies surging.
Perhaps this could be the reason for the short-term stabilization of crypto.
Other factors that could be lifting crypto are U.S. dollar holders looking for alternative assets during the highest inflation in decades; some buying after the American mid-April tax deadline passing; the war in Ukraine and the U.S.’s OFAC sanctioning of Russian bitcoin miners and the ongoing uncertainty about whether the Securities and Exchange Commission (SEC) might approve spot Bitcoin ETFs in the U.S.
Musk also said last month that he wouldn’t sell his dogecoin, and would also continue to hold bitcoin and ether.
Earlier this year, Tesla began accepting dogecoin for merchandise purchases on its website. DOGE holders could be hoping that Twitter under Musk’s leadership may see more of the same — a use case for the token. Late last year Twitter unveiled a tipping function allowing users to send creators bitcoin.
The way DOGE achieves higher price discovery is for the potential for dogecoin to be given more utility on one of the biggest social media networks once Elon has official control of the company.
Every incremental bit helps.
Imagine DOGE freely mingling in and out of Twitter accounts that highly entertain or Musk floating the idea that for $3, every account can get a blue checkmark which has traditionally signaled a large and influential account.
Paying this $3 using DOGE could be the way that Musk integrates DOGE is onboarded onto the Twitter ecosystem.
Other use cases could also find their way into the DOGE coin ecosystem such as a $5 vanilla Twitter registration fee and with a total addressable market like Twitter and the chance to monetize the platform in a different way, I wouldn’t put it past Musk that he has some sort of plan for DOGE, BTC, or ETH.
Musk has been a huge proponent of free speech and during a Ted Talk interview he said buying Twitter “had nothing to do with economics.”
That thought right there could lead to a one-way avalanche of crypto payments embedded all over his new social media company.
Don’t write off DOGE, the richest man in the world might keep pushing it to the public and we already know that every associated Tweet about it results in a higher price.
