Mad Hedge Bitcoin Letter
February 8, 2022
Fiat Lux
Featured Trade:
(BITCOIN MOMENTUM PICKS UP)
(BTC), (ETH), (TSLA)
Posts
One might pontificate that the recent bullish price action in Bitcoin is because Bitcoin and other cryptocurrencies are finally starting to decouple from equities.
I don’t agree.
For the past few months, Bitcoin has been relegated to a status of just another lousy tech stock as the price movement mimicked the Nasdaq index but in a more exaggerated form.
I would argue that the decoupling moment hasn’t materialized yet and the industry needs to mature to exhibit more idiosyncratic characteristics.
Once they shake off that convenient moniker, it will allow the incremental investor to define it by its merit.
Defining it through the prism of its current strategic position relative to an entirely different industry just doesn’t make a whole lot of sense.
Bitcoin has roared back from the dead and it’s about time.
The bears can’t hold down the secular drivers underpinning the asset forever.
I believe the outperformance of late that has seen Bitcoin elevate into the mid-$40,000s is more of a result of interest rate expectations being pushed to the upper limit in the short-term and investors expecting a small reversion to the mean.
The U.S. 10-year Treasury yield is now a smidge below 2% after a pulsating move from 1.3% in the past 3 months.
The 35% move down had a funny way of distorting pretty much every asset class as consumers rushed into real estate, sold off technology stocks as fast as they could, and triggered a flight to safety.
No doubt that interest rates will most likely blow past the 2% threshold, but the reversal in bitcoin is signaling that the ensuing pace of yield appreciation will be orderly and smoother than what we just witnessed the past few months as the Fed tries to catch up.
If the Fed can wrestle back the narrative and actually do their jobs, Bitcoin is sitting pretty as we move forward.
The Fed has finally indicated they will finally act and that shakeout penalized crypto as the goalposts narrowed.
The sad fact is that in times of panic, high-risk assets are usually the first to be sold to supplement the losers or a cascade of stop-loss orders being dismantled can cause contagion that overflows into other areas.
As Bitcoin stabilizes and marks a short-term floor of $40,000, we could experience another buying wave as calm waters mean it's time to set sail aboard the crypto speed boat.
There are more green shoots occurring beneath the surface as more organizations are embracing bitcoin.
Earlier today, KPMG Canada, the Toronto-based branch of professional services firm KPMG, announced that it had purchased some Bitcoin and Ethereum.
Even more important, automaker Tesla (TSLA) revealed in a recently filed 10-K that it held almost $2 billion in bitcoin at the end of last year.
Tesla’s 10K SEC filing update was released yesterday, reaffirming notions that Tesla held onto their Bitcoin holdings amidst declines in Bitcoin’s price to the lower $30,000.
Combined with the news of KPMG Canada adding Bitcoin onto its balance sheet, encouraged a sharp rise in positive Bitcoin price sentiment.
These events mean that market confidence is coming back quickly, and people are realizing that we have finally arrived at an entry point.
These events are simply the latest sign of progress for cryptocurrencies.
On the legal front, I believe a huge source of momentum comes from Congress, with many members of the U.S. Senate speaking favorably on Bitcoin.
On Friday, Texas Sen. Ted Cruz disclosed that he invested in $50K worth of bitcoin during its dip back last month and spoke positively about Texas being the next bitcoin mining hub.
Sentiment has climbed back from the dead and we could experience short-term rapid upside price action in this highly volatile asset class.
Mad Hedge Bitcoin Letter
February 3, 2022
Fiat Lux
Featured Trade:
(DIVERSITY IS STILL KING)
(BTC), (ETH)
Most people here invest only in crypto, because they are already extremely successful or on a similar path and crypto, being an appreciating and depreciating asset, is a means to diversify a portfolio between many different types of investments.
In the unlikely event that a reader is scrounging up their last few dollars to bet on the next speculative crypto big thing, then I would say your prospects are dim.
The unfair narrative of crypto loosely follows one of a fly-by-night operation in which someone can get rich in one day.
That is a complete fallacy.
And sure, I am not saying that getting rich in one day has never happened before, it certainly has, and it will time and time again.
But the odds of that happening are miniscule in cryptocurrency.
Even if someone who could be classified as middle class in the U.S. is now being advised to add crypto, the smart only put a small portion of their savings into it.
High net worth people often say they don’t need to get rich twice in their life.
Allocating small portions complements the diversity in one’s personal finance between crypto, precious metals, 401k or IRA, savings, stocks, and real estate.
This is the base case from which I analyze crypto prices and I am not assuming readers are putting 100% of their net wealth into some altcoin even if they are free to do so.
And when talked about through the prism of just another asset that is part of a bigger portfolio, then crypto and its existence is completely justified and important.
I mean honestly, it is surprising that it took until 2012 to create it, and it’s been a long time coming for the world to have something more advanced than the paper dollar.
I would argue that we are years late on this one and crypto should have been created in conjunction with the internet and computers.
To think it took this long to figure out a digital money that defies international borders and regulation makes me believe that innovation isn’t as fast as it needs to be in the digital ecosystem.
Much of the mainstream media appears to cater towards the delusional retail trader urging people who have $200, $1000, or even $10000 to buy crypto at any price.
Participating in stocks is still attractive to the average person, but the issue here as it relates to its value versus crypto, stocks are unattractive in a rising interest rate environment where the Fed has promised to curtail its balance sheet purchases.
Crypto is just another asset where the price is determined by supply and demand, it is not a magic bullet.
Even though fiscal policy isn’t accommodating in the short-term to crypto price appreciation, crypto will benefit long term as a hedge to inflation which the government has allowed to spiral out of control.
The priority right now for money is the safety of it and that won’t always be the case especially if the pace of rate hikes becomes orderly and manageable so much so that investors feel comfortable putting new money to work in high volatility assets.
So if crypto is the Hail Mary investment that will drag you out of a life of mediocrity then I would say you are poorly informed.
Investors need to treat it without emotion, a price that is set by supply, demand, and a series of evolving external factors.
This is the right way to go about it in order to absorb those massive 10% drawdowns when you’re sleeping at night.
You should be able to sleep at night with a 5% crypto allocation, maybe even up to 10%.
Diversification is for the investors who have accrued some modicum of partial success and want to keep their portfolios more stable.
Remember this is not a sprint, but a marathon.
At the beginning of your journey diversification is more of a problem than real help. Try to learn more about crypto and being an above-average crypto investor will be better than being an average investor in a few different types of investments.
Mad Hedge Bitcoin Letter
February 1, 2022
Fiat Lux
Featured Trade:
(BITCOIN THE BELLWETHER SHINES BRIGHTEST)
(BTC), (DOT), (DOGE), (SOL)
Caught up in the euphoria of crypto’s rise, all sorts of new altcoins were issuing their denominations as soon as they could figure out how to get to market.
Perhaps a moral hazard but certainly a sign of the speculative times of 2020.
Thousands of coins using thousands of celebrities came out of the woodwork to claim their coin was the best.
Of course, they weren’t.
Now, the crypto climate has drastically shifted to risk-off sentiment and the knock-on effect is hitting the obscure altcoins the most.
Sometimes, a clean palate is needed to really taste the quality of food and that’s what is happening in the crypto industry as we speak.
The “competitors” are falling by the wayside as the likes of Solana and Polkadot to Litecoin and Dogecoin promised to recapture the imagination of the crypto ecosystem.
Some even suggested an imminent rapid fragmentation of the crypto market into silos with different currencies dominating different areas like a Mongolian warlord in their prime.
But things haven’t worked out like that.
Bitcoin has cut its loss of market share this month and begun to regain ground, as baffled investors seek the relative safety of the biggest crypto coin while they grapple with an aggressive Fed and inflation shooting through the roof.
Bitcoin's share of the $1.68 trillion crypto market has risen to about 42%, from 39% two weeks ago - the first time it has registered an increase since dropping from a peak of 46% in mid-October, according to data from CoinMarketCap which tracks 17,225 cryptocurrencies across 458 exchanges.
Bitcoin has outperformed the industry at a time when the entire crypto market has fallen this month.
Nonetheless, the bellwether Bitcoin could continue to outperform its crypto rivals from the more hesitant investment climate.
The concept of the path of least resistance means that investors hideout in Bitcoin and spurn the Dogecoins and Shiba Inu coins of the world for now.
While most cryptocurrencies still take their price signaling from bitcoin, these currencies that were hyped up and marketed to the hills could find bids drying up quickly.
Pockets of strength will periodically emerge, and catching a few of those shifts will be incredibly important for performance this year.
Bitcoin has taken the bullets but hasn’t outright crashed and it shouldn’t, but I can’t say the same about these smaller coins.
Cryptocurrencies hyped for their blockchain application used to build decentralized finance applications have underperformed greatly to Bitcoin lately.
Solana, which jumped 100-fold in 2021, is down 47%, while Polkadot is down 41%.
The selloff that began in December has however been less volatile and seen lower volumes transacted than bitcoin's previous rout in May 2021, when it halved in nine days.
We are range-bound now and that’s a far cry from the crypto “winter” many have been calling for.
If another monster risk-off moment does come, the last place an investor wants to be exposed is the crypto minnows.
If Bitcoin does retrace 5%, it certainly will be felt more in the altcoins sub-genre.
Once we do recover and find some footing, we will look back at this moment and realize it was a time when we separated the wheat from the chaff in the crypto industry.
I believe that Bitcoin will continue to consolidate its position at the top of the crypto pecking order.
Mad Hedge Bitcoin Letter
January 27, 2022
Fiat Lux
Featured Trade:
(AVOID SOLANA LIKE THE PLAGUE)
(BTC), (SOL), (ETH)
The eighth biggest crypto by market cap and once hyped to the stars, Solana’s (SOL) repeated run-ins with bots, outages, and frustrated traders during the recent market crash could turn off many potential investors.
Emerging crypto are suffering more than Bitcoin (BTC) and Ethereum (ETH) in the recent selloff while Bitcoin is down 50% over this period, many of these smaller cryptos are down 50% in a week.
Then adding gas on the fire, structural bottlenecks have arisen.
Solano suffered its sixth serious outage of more than eight hours this month over the weekend, which a notice on its website attributed to excessive duplicate transactions causing a high level of network congestion.
It’s not shocking that these smaller networks can’t handle the trade flow.
Many are cobbled together on a shoestring budget.
Solana Labs co-founder Anatoly Yakovenko also pointed to an explanation on Twitter that cited market volatility as causing downtime, as bots rushed to earn bounties on leveraged positions eligible for liquidation.
Citing volatility as to why your product is down is an excuse because other networks were going through the same headwinds and managed gracefully.
A 10% decline in the Nasdaq won’t shut it down and this doesn’t help the naysayers who say that crypto is a bush-league operation.
To an extent, many of the smaller currencies are amateur and heightened volatility in an ecosystem that is already flooded with high volatility cannot be used as a reason for failure.
To not be able to absorb the volatility in stride augurs poorly for Solano and I would tell investors to avoid these crypto’s who can’t crack the top 5 or can’t stay online!
There will be growing pains and avoid them until they can figure out how to run a platform.
During these periods of network instability, crypto traders are often left unable to sell off their positions as transactions fail to complete on Solana’s network, yet another sign of how unreliable this emerging technology can be during times of stress.
When combined with a market-wide crash in crypto prices, investors rushed to offload their tokens are left to figure out other routes while their portfolios rapidly decline.
Remember that these networks don’t have a customer service number and you are sitting in your office chair pondering how to get access to your assets.
That’s exactly what you don’t want your investors to feel.
The founders of the currency attributed the structural issues to a “function of Solana’s success.”
However, I would say that the inability to anticipate higher data loads during selloffs doesn’t help these non-Bitcoin currencies.
Bitcoin certainly didn’t have problems handling the recent volatility.
Having so many transactions meaning it’s an attractive platform for developers and users isn’t the right way to look at it, because a certain level of functionality needs to happen otherwise this attractiveness reverses into a minus.
The bodes poorly for Solano to combat future problems because of the lack of vision at the management level.
An all-time peak of $259 recorded in November represented growth of almost 14,000% since the start of 2021—but following its continued issues, Solano retraced 4,800%.
Rival coins promising to reinvent the capabilities of blockchain technology are also targeting Solano. The value of Terraform Labs’ Luna token, which runs on the Terra protocol for algorithmic, fiat-pegged stable coins, has skyrocketed in the last year, rising more than 7,000% in value over the last 12 months.
I believe we will shortly see Solano developer activity and transaction activity significantly slowing with another haircut in price.
I don’t believe now is the time to call for a crypto “winter.”
Once crypto can elbow through a higher rate paradigm and that becomes priced into the asset class, the debasement of currency among other factors will take crypto higher.
Mad Hedge Bitcoin Letter
January 25, 2022
Fiat Lux
Featured Trade:
(SELL THE SHORT TERM RALLIES)
(BTC), (ETH), (SHIB), (DOGE), (ADA)
Bitcoin must be treated as a sell-the-rally asset at this point.
I am not giving up on crypto, but I must acknowledge what is happening in the markets.
Suffering from a broad-based risk aversion move with investors dumping literally everything is something that happens when investors need to meet margin calls.
It’s not about Bitcoin at this point, it’s just caught up in the wash, as asset prices around the world readjust to the new Central Bank policies.
The market is looking through the tailwinds crypto possesses from store of value, inflation hedge, limited supply, and an alternative asset to the US dollar.
It doesn’t matter in the heat of the battle and when everything sells off.
Bitcoin hitting the very lower limit of $30,000 means that investors aren’t ready to ditch the dollar for this high-flying digital currency.
In fact, the US dollar has held up quite strongly in the face of trillions of debt issuance.
Look around the globe and the US dollar has absorbed the Fed’s action in stride reflecting little depreciation stemming from the decision to pump massive amounts of liquidity into the system.
The dollars’ strength means that the transition into digital currencies will take longer than first estimated.
Bitcoin won’t take over in one day, but it will experience a gradual adoption phase with the bruises to show for it.
With Russia's move to ban crypto assets lighting the fuse of the latest plunge, Bitcoin's price moves have become closely linked to technology shares, which have slumped on rate hike fears.
The culmination of Netflix warnings of sagging growth triggered another wave of risk aversion in the markets hitting crypto again to knock it down deep into the lower $30,000 range.
In the short term, traders need to play Bitcoin from the $40,000 level and sell rallies until conditions change.
Ethereum, one of the hottest digital coin trades that have soared in popularity thanks to the non-fungible token (NFT) boom, has halved down to the mid-$2,000 level.
Bitcoin, even with its massive underperformance, is still outperforming the minnows of cryptocurrency.
On the horizon, sadly, plans of 4 rates hikes is generally going to cause more pain for risk-on assets, and especially crypto as investors have been conditioned to sell crypto at the first sight of trouble.
On the derivatives side, about 200,000 positions were liquidated in the last 24 hours, totaling more than $800 million in losses and growing according to Coinglass.
Forced liquidations enhanced the selloff and there have been few dip buyers who are waiting out for healthier macro signaling.
For the past two weeks, most of the funding rates in crypto futures have leaned to the short-seller side according to data from The Block Research.
Many retail traders that got into Bitcoin at the peak are now rushing to sell everything and even institutional money are looking at raising cash through the sale of Bitcoin.
I do believe that Bitcoin is still in the midst of a secular bull market, but sentiment and conditions must settle before we reignite the bull case.
Inflation is still a secular tailwind for Bitcoin and other crypto’s, but not in an environment of a panicking Fed who has made a policy misstep.
The altcoin picture is gloomy with Ethereum sidechain Polygon’s (MATIC) token down 36% and Cardano’s (ADA) token is down 61% since their all-time highs in September, when the latter project announced the launch of their smart contracts.
Altcoins suffered drawdowns as steep as 90-99% during the 2017-2018 crypto cycle and the same could happen as investors rush to safer assets.
Naturally, the biggest category of altcoin losers is meme coins.
Dogecoin (DOGE) is now nearly 80% down from its all-time high last May, despite a recent tweet from Tesla CEO Elon Musk that temporarily sent DOGE up as much as 33%.
Shiba Inu (SHIB), another dog-themed coin that gained 1,607% last year, is down 71% from its all-time high.
Sell the rallies at $40,000.
