Mad Hedge Bitcoin Letter
June 21, 2022
Fiat Lux
Featured Trade:
(SYSTEMIC RISK ACCELERATES)
(BTC), (SOL)
Posts
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.
Mad Hedge Bitcoin Letter
June 2, 2022
Fiat Lux
Featured Trade:
(OFFLINE CRYPTO)
(BTC), (ETH), (SOL), (ADA), (XRP)
One of the first requirements to be anointed as a major cryptocurrency is to not be off.
This might seem highly intuitive, but many cryptocurrencies haven’t solved this one yet.
When a whole coin network is offline then the incremental investors look over to the greener pastures on the other side of the fence and ponder if it’s worth paying a higher premium for something that stays on.
Bitcoin can’t be turned off. Invest accordingly.
According to the Bitcoin Uptime Tracker, the Bitcoin network has been functional for 99.98742319836% of its lifetime.
I would consider that quite positive, even more so when I look at just what happened to altcoin Solana (SOL) which has been bundled routinely into the top 5 cryptocurrency conversation.
The Solana network has been plagued by a number of outages and it's been estimated that the proof-of-stake (PoS) blockchain has been down a total of eight times.
Each of these 8 times, the network suffers a massive loss of trust and confidence.
When an investor can’t get in touch with its capital on a network, that’s when full stop panic mode occurs.
It dumps insult to injury as the price has already tanked from $260 to $40 today.
Solana’s blockchain lost operational activity for over seven hours.
Solana’s development team has formally acknowledged some of the issues it was dealing with and how it “degraded performance.”
The team blamed “high compute transactions, which is reducing network capacity to several thousand transactions per second.”
Like many of the cloud companies plan for higher data usage by integrating more cloud data centers, the developers at Solana aren’t pre-emptively planning for bottlenecks.
That screams amateurism.
An investor must ask if this is the type of coin or network you want to put significant amounts of money on, and the answer is clearly no.
Only a fool would touch Solana even with its lofty $14 billion market cap.
Of course, with Solana going down again, the backlash has been relentless.
Many have joked if this is another Terra/Luna bankruptcy debacle even if Solana isn’t a stable coin.
Meanwhile, this gives credence to why investors should look to other coins such as ETH, XRP, and cardano (ADA).
Then there is the pure asset depreciation from being offline and SOL lost 9.9% in value against the U.S. dollar.
Coinbase also reported on Solana’s latest outage and noted that the exchange had to disable send and receives on the network.
Following last month's outage, one of Solana's recent improvements was supposed to resolve the network's congestion difficulties.
It’s not a secret that instead of a significant network update, the inverse has happened, and the Solana network issues have gotten worse.
Even worse, the repeated solutions appear to be mere stopgap measures with a high possibility of happening again.
These are terrible optics for a beleaguered crypto coin at a time when the entire industry is on the back foot.
The bellwether crypto coin Bitcoin has lost over half of its value triggering talks of a crypto winter.
Then mix in various implosions, developer mistakes, and high energy costs making crypto unprofitable to miners and there is a lot of negativity coalescing inside the industry.
In short, stick with the strongest cryptocurrencies namely Bitcoin and Ethereum, and don’t stray much further than that unless you are prepared to take a zero.
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
November 23, 2021
Fiat Lux
Featured Trade:
(THE STRONG BREADTH OF CRYPTO)
(BTC), (ETH), (ADA), (SOL), (UUP)
The price of Bitcoin (BTC) trending lower to $57,000 is still an extension of the taproot upgrade that saw traders take profits recently.
An 18% pullback has already happened two times earlier this year, but each time Bitcoin came roaring back.
A clear uptrend on the chart means the price of Bitcoin is making higher highs and higher lows reinforcing that Bitcoin is still forcing itself in an upward direction.
So this isn’t that big of a deal in the bigger scheme of things.
Bitcoin, by its very nature, is a highly volatile asset to begin with, so we will see wild upswings and cruel selloffs.
In fact, bullish corrections are indicative of healthy behavior.
Many need to understand that Bitcoin won’t just go up in a straight line even if they want it to.
What’s more interesting is that even though Bitcoin has had a tough time lately, altcoin capital flow has been highly encouraging.
Various altcoins have done well this year with Ethereum (ETH) returning 600%, Solano (SOL) up 9,300%, and Cardano (ADA) up 1,050%, and these are just a few.
Many more have had great degrees of success.
What we are seeing is bitcoin starting to somewhat mature even if it is still in the early innings.
However, many of these altcoins are still at the top of the 1st inning and the lunging growth can be found at the inception of its growth phase.
Broad-based strength of secondary coins was just a pipedream a few years ago, even Bitcoin was a suspicious word, yet the participation of a wider swath of cryptocurrencies means that money which would have been earmarked for Bitcoin a few years ago has now gone into more obscure coins looking for a quick 10X bagger.
I still do believe there will be major buyers in the upper $50,000 levels unless a black swan really tanks crypto.
Another reason for the retracement of Bitcoin is the US dollar (UUP) rally that has taken many by surprise.
Traditional markets indicate potential for a deeper drawdown. The reappointment of Jerome Powell as Chairman of the Federal will get a lot of Fed speak for controlling inflation even if rates won’t go up soon.
The US dollar has been on fire with it strengthening across all currencies and even though Bitcoin is a digital currency, it’s still fighting for the same capital flow as the US dollar.
It’s plausible that Bitcoin traders with big profits, are skimming off profits and reducing their crypto positions, and spinning them into US dollar funds to take advantage of the more than bullish momentum.
The pullbacks in parts of the emerging world have been quite stark with the Turkish Lira falling as much as 15%, even in safer financial waters of Poland, the Polish Zloty is down 5%.
The last bit that could incite negative sentiment for investors is fears that creditors of the defunct Mt Gox exchange could finally liquidate their payments – seven years after the cryptocurrency exchange collapsed.
Trustee Nobuaki Kobayashi confirmed last week that 141,000 BTC ($8 billion) under custody would soon be distributed among those impacted by the Mt Gox fiasco.
Mt Gox coins represent more than 3% of the 4.2m bitcoins in constant circulation. If all of them were to be cashed in at once it would cause the price to crash, at least over the short term.
If these losses are to happen, it wouldn’t translate into a longer-term bear market, but it will deepen the current correction and delay the dip-buying.
I am still encouraged about bitcoin’s direction and the continued spread of adoption has been a massive feather in the cap for this asset.
Major corporations like Tesla and MicroStrategy continue to pour cash reserves into bitcoin, while several countries look set to join El Salvador by introducing bitcoin as legal tender.
I do believe that 2022 will generate a bountiful array of bitcoin and crypto bullish events in a year where stocks will have a hard time replicating the same gains as this year.
