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
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.
Mad Hedge Bitcoin Letter
January 13, 2022
Fiat Lux
Featured Trade:
(THE TURKISH LIRA AND THE DEATH CROSS COME INTO PLAY)
(BTC), (LIRA), (ETH), (USD)
The infamous Death Cross is just around the corner again staring us in the face as another potential liquidity event could drive us lower or higher.
Even if you don’t fancy dealing with this phenomenon, algorithms lap it up and these technical events signal short-term price momentum and the direction of it.
To get even more exact, the death cross is the situation in which an asset's average price over the last 50 days drops below that of its 200-day moving average, an indication that its momentum is toast.
And this event is even more scrutinized after Bitcoin’s disgusting start to the year that has left it languishing in the lower $40,000s.
Not exactly the start we wanted and lots of complaints about the dufus called Fed Chair Jerome Powell and his handling of monetary policy.
Now, we should zone in on the big whales — the ones that hold massive amounts of Bitcoin and by that, I don’t mean 1 BTC or 1.2333 BTC.
All eyes are on them, many have said they will hold until infinity, but that’s easier when you bought BTC 10 years ago and not at $60,000 per unit which is what many retail traders did last year.
As we inch towards the vaunted death cross, will this trigger a 10% escape hatch that deadens the asset?
So far in 2022, Bitcoin has outperformed for just a few days and has been under relentless selling pressure.
To make matters worse, Ethereum appears to be forming a death cross as well.
The macro turning putrid has had a meaningful effect on the drop of Bitcoin prices, and if BTC can get through this death cross quagmire by holding onto the $40,000 level, then that could signal greener pastures ahead in the mid-term.
Speculative investments like Bitcoin are being abandoned under such aggressive tightening. Reports show only 5% of the clients surveyed by JPMorgan Chase expect Bitcoin to reach $100,000 per piece by the end of 2022.
Although the "death cross" is a bearish indicator, Bitcoin's historical record surrounding the indicator remains unclear. When the metric appeared last June, Bitcoin’s performance was dismal. But when the metric appeared last March, Bitcoin’s performance was strong. The emergence of this indicator in November 2019 sent Bitcoin lower.
As the U.S. economy is grappling with rip-roaring inflationary prices searing through the consumer prices to home prices, emerging countries are doing so bad with inflation that some are already completely giving up their own fiat currency.
Sure, El Salvador sucked up all the headlines for nationalizing Bitcoin as the de-facto medium of exchange for their citizens, but Turkey and its massive population of 84 million straddling the European continent have comprehensively pivoted towards Bitcoin as hyperinflation wrecks the purchasing power of the Turkish Lira.
The situation in Turkey is what crypto fanatics want to happen in the United States and it also represents what could unfold if the US Federal Reserve neglect doing their job.
Luckily, we are nowhere near that yet.
The Turkish lira has become so unpredictable that bakeries are closing down by the thousands citing a local currency that has lost most of its value.
In Turkey, cryptocurrency trading volumes using the lira exploded to an average of $1.8 billion a day across three exchanges, according to blockchain analytics firm Chainalysis.
Turks favor stable coin tether, whose value is pegged to the dollar.
The rise of cryptocurrencies in recent years has presented a unique tool kit in which to store wealth, albeit far more volatile, and the shortage of US dollars circulating has forced the hand of the average Turk.
The Turkish lira has lost 40% of its value against the U.S. dollar in the past 5 months.
In the capital Istanbul, on the ground level, the local bazaars are accepting Bitcoin as standard currency over their own Turkish Lira.
This trend could mirror the future for some of these marginal economies that are run into the ground by renegade dictators.
Although the U.S. Federal Reserve has been irresponsible, the degree of policy mistake in Washington is nowhere near as atrocious as the events in Turkey.
There are numerous countries whose population could resort to crypto as a store of wealth including every ex-Soviet republic, big swaths of the Middle East, and major areas of Central and South America along with all of Africa.
My guess is that over time Bitcoin gets elevated as the de facto third currency behind the U.S. dollar and Euro. At this point, Bitcoin is too big to fail and too big to get rid of.
In a time of desperate need and no access to dollars and euros, Bitcoin is giving hope to large parts of the world as the pandemic and omicron inches closer to their shores.
Wait out this sideways correction then we march higher.
