Mad Hedge Bitcoin Letter
July 7, 2022
Fiat Lux
Featured Trade:
(ANOTHER ONE BITES THE DUST)
(BTC), (VYGVF), (FTX)
Posts
FTX cryptocurrency exchange CEO Sam Bankman-Fried said he has more than $2 billion to backstop crypto industry if needed.
That’s a scary statement to issue that most likely assumes the worst scenarios are coming true for his beloved digital gold.
By the way, $2 billion is peanuts considering this industry used to be worth over $1 trillion just a little bit ago.
Not sure if his token $2 billion would make a dent at all, however, it might save a company or 2 if that is what Bankman-Fried is aiming for.
This small sum will do nothing if systemic risk goes from bad to worse and the industry falls apart which would happen if bitcoin dropped to $2,000 per coin.
Perhaps if he could scrounge up an extra $1 trillion or so to buy out the whole crypto industry then we would be in business – literally.
We need to look at the situation with more critical thinking than wishful.
The FTX CEO also said the worst appears to be over for the liquidity crunch in the cryptocurrency industry.
That could possibly be a sneaky way to say that the worst is yet to come.
Why would Bankman-Fried think the liquidity crunch will stop on a dime?
Isn’t that odd?
Well, of course, he has skin in the game, so his words are empty. It’s like a real estate agent telling someone they should buy a house.
Last time I checked, crypto was supposed to be a great hedge to hyperinflation and that has failed miserably.
Little did he know, Central Bank Governor Jerome Powell, in the Fed minutes revealed yesterday, say that the Fed is prepared to act more aggressively to tame inflation with bold rate rises.
If there are more rate rises which the Fed forecast implies, the Fed Fund’s rate is going to 3.75% by 2023, then crypto will be worth even less than it is today if the same dynamics and price behavior hold true.
The dynamics that were working for crypto during the bull cycle and are now working against them.
No doubt Bankman-Fried’s comments had to do with the timing of the newest bankruptcy in the industry of crypto brokerage Voyager Digital (VYGVF).
The trust in crypto infrastructure sinks yet again.
Account holders at now-bankrupt Voyager Digital shouldn’t expect to get all their crypto back as the company restructures.
The crypto brokerage and lender filed for Chapter 11 bankruptcy, creating unresolved legal questions about how digital assets will interact with US insolvency law.
Voyager appears to plan to just walk away from their obligation to return capital to account users.
The company’s plan to exit bankruptcy plainly says it expects account holders to be “impaired” by the Chapter 11 process, meaning they won’t be getting back exactly what they’re owed.
This could be the straw that breaks the camel’s back.
Legally, decentralization could be a farce and if Voyager is able to walk, it means Voyager and its platform is even more centralized than crypto industry’s criticism of fiat currency.
At least fiat currency on exchanges is insured and account holders get their money back in full upon bankruptcy.
Sure, the price of bitcoin is up incrementally today, but the industries’ health couldn’t be at a lower ebb.
There is a high probability that bitcoin will touch $12,000 first before it goes back to $30,000.
Mad Hedge Bitcoin Letter
July 5, 2022
Fiat Lux
Featured Trade:
(CRYPTO INFRASTRUCTURE HANGING BY A THREAD)
(COIN), (VAULD), (BTC)
Get your digital coins off Coinbase (COIN) asap. That’s the big takeaway of another crypto platform freezing.
I told you this could happen again, and it did.
This is yet more unwanted optics for the digital gold and its pitiful infrastructure whose bellwether coin crashing down to $19,500 has kicked up an avalanche of system risk.
This asset class simply will not have a future if crypto exchanges, lenders, middlemen, stablecoins, and the broad network just freezes after customers want their money back.
We need to put this under the category of not good enough.
Delivering back funds upon a requested withdrawal is the cornerstone of trust for any industry.
Crypto is failing miserably at basic safeguarding of funds and they have nobody to blame but themselves as crypto lender Vauld on Monday paused all withdrawals, trading, and deposits on its platform and is exploring potential restructuring options.
The shake-out is clearly not over and it’s really who’s guess to which crypto company is next.
Vauld CEO Darshan Bathija said on Independence Day that the company is facing “financial challenges” due to “volatile market conditions, the financial difficulties of our key business partners inevitably affecting us, and the current market climate” which has led to customers withdrawing more than $197.7 million from the platform since June 12.
Many future investors won’t invest in any crypto risk assets if the CEO says one day everything is perfect and a few days later the platform is down.
It’s flat out misleading.
This is certainly a black eye for the “decentralized” thesis that has morphed into a money confiscation operation which will damage long-term trust and accountability of the asset class.
In the next bull market, if there is another one, many investors will remember when multiple lenders and exchanges froze funds when Bitcoin went down in price.
So apparently these platforms only work for the customer if crypto is going up.
The ridiculousness then leads to investors to question at what percentage sell-off is their crypto broker going to pull the rug and screw them over.
This is why many conservative investors gravitate towards regulated market with cash flow which crypto certainly is not.
Also, insurance is another massive failure precisely because it’s unregulated.
This will ostensibly turn into a big negative feedback loop with systemic risk attracting government regulators causing Bitcoin to drop further and then inviting another wave of regulators on top of the first round of regulators.
Who wants to be a part of that circus?
Pushing the false narrative that regulation is akin to communism and that centralized money is the worst thing out there has really come back to bite the crypto community.
The industry was clearly overhyped when it didn’t need to be.
Crypto clearly needs a reset after many of the companies that surround the ecosystem are in panic mode because of insolvency issues.
It’s almost as if the only thing working is Bitcoin itself and nothing else.
Just like the health and military crises which really exposed the thoughts and values of individual people, the rise in interest rates has exposed crypto as not as good as first advertised.
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.
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.
