Mad Hedge Bitcoin Letter
October 27, 2022
Fiat Lux
Featured Trade:
(SILVER LININGS)
(BTC), (GOOGL), (GENZ)
Posts
With all the Dr. Dooms out there and you know there are many – it might seem like a broken record.
With the barrage of criticism thrown at crypto lately, it almost seems as if there is no future for it, but I would not agree with that.
The future path of crypto is surrounded by silver linings that investors cannot ignore and I believe that is what we need to take away from 2022.
I found it interesting that in Google’s earnings report yesterday, they singled out crypto as an important source of advertising revenue.
Google’s management acknowledged that the crypto “winter” has sullied digital ad revenue and was viewed before as a handsomely generating growth asset.
Google posted its worst revenue growth since 2013 and blaming it on the crypto underperformance is a sign that there could be a future place for crypto.
Financial firms advertise relentlessly on mainstream media channels and big media need those dollars.
Even more important than just the pure digital ad revenue that crypto generates is its audience base.
Let’s not upsell this thing, many got burnt and will never come back.
However, several surveys have highlighted Gen Z and Millennial fervent appetite for this exotic asset class.
Charles Schwab, an asset manager, published its latest survey, illustrating the preference for Bitcoin and Crypto investment by a substantial portion of Gen Z and Millennials.
According to the study, 46% of Gen Z and 45% of Millennials wish to invest in cryptocurrencies to aid their retirement plans.
Additionally, the survey found that 43% of Gen Z and 47% of Millennials have begun investing in crypto outside their 401K.
After the arbitrary lockdowns and hyperinflation over the past few years, younger people are beginning to question the traditional paths to retirement if not the whole US financial system.
Some are straight-up cynical about it as the stock market got clobbered in 2022.
Bonds haven’t done much better and this year could be one of the first years to experience a scenario in which bonds and stocks went down together.
So take the classic investment strategy of 60/40 allocation.
By holding 60% of your portfolio in stocks and 40% in bonds, the thinking goes, you get the best of both worlds: high growth potential from your riskier stocks and protection from your more conservative bonds.
In this new world with new rules, traditional nostrums are thrown out the window.
The same goes for cookie-cutter ETF index funds.
A reset is needed.
The truth is that building wealth is a lot harder in a world where stocks and bonds go down substantially because of the massive overprinting of dollars by the federal government.
There is no free lunch anymore and many upper middle class families thought they were in the free-and-clear on an easy gondola ride to retirement.
Yet, they have been dragged back into the rat race legs screaming as products and services are up anywhere from 8%-50% depending on where you live.
Yes, crypto is on life support, but don’t count it out as once the Fed pivots, Bitcoin will stage a relentless rally and I view the biggest enemy of crypto are the participants themselves.
Sadly, the percentage of American families needing to finance an evasive retirement life is inching up and the young and old shouldn’t write off crypto yet.
Mad Hedge Technology Letter
October 26, 2022
Fiat Lux
Featured Trade:
(THE SHINE HAS BEEN WIPED OFF FOR NOW)
(GOOGL)
Google – it’s not what it used to be.
The sacred Silicon Valley behemoth of technology is finally showing weakness.
Crazier things have happened.
In fact, Google recorded the lowest growth since 2013 and that goes well back when the US economy was picking up steam after the Great Recession.
Revenue growth slowed to 6% from 41% a year earlier as the company suffers from a continued downdraft in online ad spending.
The ramifications are quite large as it essentially means that in the short-term, the digital ad industry is impotent as we head straight for a 2023 recession.
I would say the most surprising part of the whole report was to see Google’s “growth” asset, YouTube, floundering at just 2% growth.
It’s still a $7 billion standalone business but to see that much of a decline was somewhat surprising.
Philipp Schindler, chief business officer for Google, said the company saw a pullback in spend on search ads from certain areas such as insurance, loans, mortgage, and cryptocurrencies.
The underperformance in numbers is yet another bad omen for ad tech companies and Snap was the canary of the coal mine when the stock dropped 28%.
Considering the disappointing tone of the industry now, it’s not shocking to see the CEO of Meta Mark Zuckerberg just ignore his entire Facebook business for the metaverse.
It’s that bad selling digital ads now.
Google’s earnings per share (EPS) dropped by 24% year over year highlighting the challenges of running a large tech company during times of high interest rates and high inflation.
It’s a recipe for underperformance and we are seeing it in every part of Google’s business.
Maybe one of the only bright spots was the Google Cloud surging by 38%.
The cloud is one of the few growth drivers still left at Google.
The problem I have with Google is one that I have with many other big Silicon Valley tech firms.
They have become stagnated and too corporate.
They aren’t the leaders of innovation they once were and have pretty much juiced out the cash cow business they possess whether it be Apple’s iPhone or Google’s search engine or Meta’s Facebook.
The Silicon Valley bros aren’t immune from the rough times.
Long term, it’s hard to see Google becoming the growth engine they once were – a firm that consistently expanded 30% each quarter.
In fact, what I see clearer now than before is the cannibalization of Silicon Valley.
These big firms are starting to behave in a way an investor can understand as a scarcity mindset.
When the pie is perceived as shrinking, companies will step on their toes to get that extra piece of the pie.
Many of these moves illustrate this new entrenched mentality whether it be Apple’s sensitivity to others using the Apple store or the inability to offer stock-based compensation to new employees.
And that’s if a company is still hiring, last time I checked, many tech firms have either frozen hiring or are deleting big swaths of employees.
The new acquirer of Twitter also plans to fire 75% of Twitter’s staff on Day 1 removing the Chief Diversity Officer and many of the frothy positions that don’t add much value.
Big tech needs a reset and this is just more confirmation that restructuring is needed badly.
Bitcoin prices were volatile Thursday after a terrible CPI number.
The result means that a .75% rise in interest rates is 100% priced into the markets.
There was some fleeting hope that the US Central Bank wouldn’t have to raise it a full .75%, but those ideas were dashed as inflation has gone from terrible to abysmal in the United States.
Let me remind readers that the US Central Bank employs over 10,000 Ivy League-trained economists earning well over $150,000, yet they are following up a full-blown policy error with more questionable decisions.
The longer the Fed allows hyperinflation to gut the health of the US economy, it could be argued that we might be living in an America with only rich and poor people in the future.
How does this affect cryptocurrency?
In one word – devastating.
Crytpo is reliant on low rates to fuel overperformance.
High liquidity is necessary too.
However, we are diverging from those two pillars at an accelerating rate causing Bitcoin prices to falter.
Crypto like physical gold needs rates to be low to represent an attractive investment because of its speculative nature.
Even more pulsating, there is now the slight chance of a full 1% rise in the Fed Funds rates at the November 2nd meeting.
So what did the price of Bitcoin upon hearing this news?
Naturally, Bitcoin slid much lower by 4% initially to around $18,000 but rebounded later in the middle to a small loss as traders sniffed out that the .75% rate rise has been priced into the market.
Cryptocurrencies had been trading mostly sideways since the end of August, with bitcoin hovering within $19,000.
That’s been a key level and a clear move lower could lead to new lows below those hit in June when bitcoin fell below $17,800 and ether fell under $900.
Clearly, there is a lot to worry about for readers who are heavy crypto traders.
The accelerating nature of sustained high inflation means that the US economy is highly susceptible to additional higher inflation that could smack us in winter.
My guess is that the upcoming high inflation data will show up in the form of elevated utility bills, particularly in natural gas.
The sabotage of pipelines and cutting off Ukrainian energy through strategic demolition of infrastructure means that US natural gas might be allocated to the Ukraine market instead of Europe.
Removing energy from the global market just means higher energy prices for the rest of us. OPEC reducing oil supply was also another negative event for Bitcoin.
The negative events are just piling on top of each other at this point.
I just don’t see how Bitcoin sustains itself above $20,000 per coin in the short-term.
If it does surpass $20,000 per coin because of a bear market rally, traders will take profits yet again, rinse and repeat.
Although equity markets are rallying through the day, this was yet another reminder of the strategic failure of this alternative asset that offered so much hope.
Crypto has turned into nothing more than an ultra-speculative asset that when in a time of tight liquidity goes on life support.
It is indeed a poor store of value and it has failed almost every acid test badly.
Sell any rally over $20,000 because it won’t last there long.
Mad Hedge Bitcoin Letter
October 11, 2022
Fiat Lux
Featured Trade:
(KOWTOWS TO THE INSTITUTIONS)
(BTC), (ETH), (COIN), (GOOGL)
Google allowing crypto payments to its cloud services from Coinbase (COIN) doesn’t move the needle.
COIN is the crypto exchange platform that has run into a litany of problems recently from mass firing of staff to payment problems.
The news is a footnote to the carnage that is really happening front and center in the crypto market.
Funnily enough, why would a customer choose to pay for Google’s cloud services through Coinbase when an extortionate fee is levied on the Coinbase transaction?
Crypto isn’t cheap and it doesn’t pretend to be.
Ether (ETH) is infamous for its commission which they call “gas fees.”
In 2021, they charged an average of $63 for one transaction which is why it lags behind other cryptos like Bitcoin.
ACH transfers are free and so are debit and credit card purchases in most cases.
Even though El Salvador claims to be a crypto-first economy, most transactions are completed in cash which are US dollars.
At least crypto will now be allowed to transact on Google’s platform which is a victory in itself, but I don’t believe this will catch on like wildfire.
Crypto is up against a Sisyphean task.
The Google Cloud Platform infrastructure service will initially accept cryptocurrency payments from a handful of customers.
Over time, Google will allow many more customers to make payments with cryptocurrency.
Coinbase will earn a percentage of transactions that go through it.
It is high risk to hold crypto on the balance sheet.
Coinbase announced a $377 million impairment charge tied to a decline in the value of its cryptocurrency holdings in August.
Therefore, I expect Google to charge a fee to convert the crypto back to dollars once they accept the payment.
From the outside, this really does look like a marketing gimmick.
Blockchain technologies such as nonfungible tokens, or NFTs, have become a bigger focus for Google’s cloud division.
Previously, Google has pushed for growth in major industries such as media and retail. This year it announced the formation of teams to drum up blockchain business and build tools that third-party developers can draw on to run blockchain applications.
However, I thought that crypto was going at its lone-wolf style hoping to create a parallel system to the fiat money system which they despise.
Apparently not.
Tying up with a mega tech corporate firm sounds like they are giving up to me.
Seems as if the founding investors are ready to cash out and leave the die-hard crypto believers for a more stable income stream.
Annuity like income stream is something many crypto firms lack and locating one is a hard sell.
Crypto was supposed to be “decentralized” but this appears to be a move that will offer Google the keys to Coinbase’s data while limiting them to lateral moves.
In short, this is a move that allows more centralization to the biggest crypto platform in the United States.
Growth was crypto’s calling card and that means parabolic growth possibilities are over.
Integrating with Google also means Google will have a deep insight into how they can use Coinbase to profit from digital currencies since Coinbase has agreed to onboard their data onto Google’s cloud infrastructure.
Honestly, this is a bonehead strategic move for Coinbase and my inclination would be to buy Google’s stock if one believes in crypto.
Desperation can trigger some unusual moves and we are seeing that in real-time, but analyzing the bleak short-term prospects for crypto, this might be a move for survival than anything else.
Mad Hedge Technology Letter
September 19, 2022
Fiat Lux
Featured Trade:
(READING THE TECH TEA LEAVES)
(GOOGL), (FDX), (META), (SNAP)
Logistics company FedEx, although not a tech company, offers a fascinating insight into the health of the economy and the current state of the tech world.
Unfortunately for tech readers, the shipping company rang the alarm on the rapidly deteriorating state of the economy in August.
It’s my job to tell you how it will shake out for tech stocks.
FedEx’s earnings report disappointed signaling that tech stocks too, could be on the chopping block. I would agree with that too.
This debunks the myth of the “soft landing” that the US Central Bank likes to refer to with their challenge of high inflation. I believe the soft landing is priced into tech stocks, but not a hard landing yet.
The result is possibly more downside price action to tech stocks.
CEO Raj Subramaniam painted a gloomy picture of what to expect in terms of lower volumes.
FedEx could be the canary in the coal mine signaling ugly earnings for other large tech companies that do business around the world.
The tech companies that come to mind are Apple, Google, Facebook or Meta (META), and Snapchat (SNAP).
Raj is not the only executive who is spooking the tech market.
CEO of Alphabet or Google Sundar Pichai had his own gloomy opinion that adds insult to injury to the already negative sentiment prevailing in trader sentiment.
He said he feels “very uncertain” about the macroeconomic backdrop, and he is one of the few who has deep insight into the different layers of this complicated US economy.
He also warned that layoffs could be in the cards as the company seeks to boost its efficiency by 20% while staving off fierce economic headwinds and antitrust investigations.
A large element of such downbeat forecasts by executives is the roaring price hikes from everything like diapers to salami.
The one ironic tidbit that I took away from the last inflation report was that the recent explosion in inflation has been in rental housing.
If this is the case, then high-income individuals, who mostly own rental real estate, are passing on inflationary costs to their tenants who are strapped with a worse financial profile.
This means that high-income individuals still harness the resources to spend, spend, spend.
Why not go lease a new Maserati or Aston Martin?
If that’s the case, we could see this group pick up the slack and power spending all the way until Christmas which is a net negative for tech stocks because it delays the Fed pivot.
Warnings from Subramaniam and Pichai indeed have weight to them, but keep in mind that these businesses are optimized for scale and reflect the general situation of Americans, not just rich people.
High net worth individuals reloading the consumer bazookas don’t move the needle for the entire US economy, but they do have enough gunpowder to trigger another bout of inflation or rental increases to build on the already high inflation existing in US prices.
Short-term traders should focus on selling rallies in poor tech stocks as upside momentum cannot be sustained in the face of anticipated interest rate rises.
Mad Hedge Technology Letter
September 2, 2022
Fiat Lux
Featured Trade:
(DON’T COMPROMISE)
(AAPL), (GOOGL)
