Have you “made” a ton of money in Crypto this past year. 🤑 Awesome. Hope it has upgraded your financial station in life. You've got yourself a sweet new ride🚙 and you booked a $15k holiday in Bali later this year.🏖️ Nice 🥳.
Then you don’t need to read this article. Pop a beer 🍺 and enjoy your day.
Still, reading? Hmmm, 🤔 that must mean you still have exposure? Oh, you haven’t taken any profits yet? You’re still all in and you’re eating Ramen with Sriracha every meal!
Oh shit, we need to talk.
I did a couple of sentiment checks, polls on Twitter recently. Granted it’s only a small sample size. But nonetheless, market sentiment data is still valuable.
Bitcoin’s meteoric price appreciation feels normal to market participants. Spring? Seems later in the cycle to me. Maybe more like Autumn? I don’t truly know, I would wager not many do. Otherwise, no one would be making bets on the future if they did as the Bitcoin price would already reflect the future known value, right?
BONDS, U.S. STIMMY CHECKS & “STIMULUS”
The ECB upped the pace of PEPP purchases sending yields on the German 10-year Treasurys plummeting. When the economy is stagnant. That’s what Central Banks do. Controlling rates and providing liquidity backstops, are its two main Tools in its toolbelt.
So they try to push the cost of debt down, which in turn devalues its own currency. The Fed has to bring down the rates on the longer end, as they are currently going up. A lot!
The graph to the left shows the Yield Curve. The cost of money, across a time range of 30 years. Plotted through the rates of Treasury notes/bonds. The grey lines, show the recent trailing rates. These may seem insignificant, but they are big moves. Post covid crash when everything tanked, rates were on the floor.
The stimulus package will give the Fed plenty of additional capital with which to bring yields down (the more debt that the government accumulates over time, the more monetary ammunition the Fed has as through its balance sheet). This concept is hard to fully understand. But boiled down, FIAT is created through debt creation. The fed being the Debt creator and holder of those IOU’s creates an asset on its own balance sheet.
Monetary Alchemy. Ingenious or Devilish depending on your worldview.
The stimulus is inflationary. Helicopter money airdrops are more effective in meeting central banks' objective to stoke price inflation, rather than just asset price inflation. Smart money invests, Plebs spend (usually just to meet daily needs, rather than wants or desires) — although we have seen a phenomenon of normies, even under 25’s using that money to speculate with!
In summation, as bond yields on the longer end of the curve continue to trend higher. This will put pressure on stocks first, then assets later. The FED Put as many economists have warned for decades, actually may finally not be giving the “Hit” that assets need. Or in reality, confidence to market participants.
Being the Owner of a Casino, you control how many Poker chips are available to play with and potentially win.
If players know, that the Casino is increasing the stack of chips, it provides price support by emboldening the players, to gamble. Even going all in and then some (leverage). Yup, money attracts money. Because money wants to grow.
Inflows of organic capital, greater than outflows. That is what normal functioning markets need to give positive price performance. But if a Trader knows, the FED will come to the aid in downturns, it generates an abundance of confidence in the player. Displayed through margin and leverage of capital. Because outsized bets yield outsized returns. FOMO.
FED watching seems an obsession for many. Because they are driving the market at this point. But as in life, look at what they do. Not what they say.
Recent Fedspeak has been voiced about being behind the inflation curve. This is a yellow flag that the Fed may raise rates sooner than expected. But when Powell starts to take a more hawkish stance (aka stingy with the money) threatening to take away the punch bowl, he reverses his position, putting the punchbowl back in place, with even more punch than before! Clearly not a man of his word, or conviction in his plan. Data-driven, long-term decision-making or panicking like a little girl, at every 10% drop in stocks? You decide.
The real problem with a rising Bond Yield. In my opinion, which I don’t hear many speak of. Is that a higher-yielding Treasury bond will attract, yield-hungry investors. Which is nearly everyone. Imagine a treasury bond yielding 6–10%. It would attract a huge amount of capital. Capital from the stock market potentially.
I’ve seen operation twist being touted. Some analysts have said Operation Twist is needed because it raises rates on the short end of the curve and provides stability on the back end, while not expanding the balance sheet.
“We believe no other Fed balance sheet option can address each of these issues as effectively. To be clear the Fed will twist to deal with market functioning issues, not economic problems.” ~ Mark Cabana, rates strategist at Bank of America Global Research
Not a fan, there I said it, now let’s continue.
The Treasury’s balance sits at about $1.43 trillion. That’s less than the $1.9 trillion bill which means more debt, not to mention the Biden Administration is set on a massive multi-trillion $ infrastructure bill. The FED hasn’t stepped in yet, and the U.S. needs buyers of its debt.
But in the meantime, Powell’s words suggest tightening sooner than expected as reflected by the CME Fed Fund Futures, though odds are still at a very low 4% for their April meeting.
I’m not calling for doom, just headwinds, a market gyration, and Jerome Powell to do what he always does. Once COVID abates, life normalizes, and people start spending again given all the helicopter airdrops instead of hoarding what they can, we may get a significant spike in CPI which the Fed will have little control over. 1920s Germany is the obvious example where citizens at first hoarded capital so deflation first set in, but once consumer confidence rebounded and spending normalized, inflation soared. I’m not calling for a Weimar republic that’s ludicrous. But with the increasing digitization of our dollars, an unlikely escape valve has been created through the inception and maturation of Bitcoin, and the other Alts. That may in effect, tamper real inflation of consumer goods.
That scenario, that I outlined above of rising rates, attracting capital flows. Now has an alternative safe haven decentralized place to flow into.
A small to medium percentage of that capital, could yet still flow into Bitcoin. The funny thing with Bitcoin, these massive Booms and crashes are what has it enabled to reach a trillion-dollar market capitalization, in a rapid fashion. Certainly quicker than any of the FAANG stocks. those took about 15–20 years. But reaching 1 trillion dollars, and smashing through 1 trillion dollars are two different things entirely.
This indicates to me, higher prices are more likely than not. The question is how much higher this cycle. The answer is, that no one knows! And why having a wider economic viewpoint helps in predicting this number.
Because Bitcoin and the old legacy markets are getting more intertwined by the day. This is good news if you want capital to be siphoned off into Crypto. Pipes need to be put in place. Confidence of where and how that money flows is needed before Equity and Bond Whales fully open up the taps. I believe they would rather not, have their dollars leave, the regulated markets in size. This makes a regulated ETF very likely, the question is when and by whom. I would wager Goldman Sachs, rather than Van Eck.
Managing Sharp Corrections in BTC
Dollar-cost averaging or pyramiding the trending coins during bull cycles is optimal, as bitcoin goes through its inevitable 25–40% corrections. We already had a couple of corrections in bitcoin so far this year.
All bubbles rhyme in terms of price/volume action alone. The South Sea Bubble, Dutch tulipmania, the roaring 20s, the dot-com boom, and prior crypto bubbles in bitcoin and in Alts & shitcoins. All give market participants, a reference to Human psychology. Because at the end of the day Humans press the buy and sell buttons (okay, algorithmic trading is an attempt to limit our emotional reactions to price movements. But even those, are written by… Humans)
Bitcoin Market Tops
How do you predict a market top, with great difficulty if you are emotionally invested, in seeing a higher number. Therein lies the great difficulty. It is often better to be out of the game before a parabola starts. Catching the meat of the move is enough, why do you need any more?
But let me try and highlight a few indicators. I don’t own any Bitcoin, so I am not emotionally invested.
The Price performance of major leading cryptocurrencies, excluding BTC & ETH. As with stocks, tracking the price performance of crypto leaders with a fundamental and technical basis provides insight into buying and selling pressures.
Fundamental metrics:- disruptive potential, competitors, ability to meet milestones, and consumer touchpoints. Data metrics such as TVL (total value locked) apply to protocols in the DeFi world.
Network indicators include:- new user growth, Grayscale unlocking, is BTC & ETH being added or subtracted from major exchanges, futures funding rates, number of active addresses, hash rate, Network Value to Transactions Ratio among others. BTC Thermocap, which is the Bitcoin value on a given day divided by the cumulative block subsidy, or all rewards earned by miners from day one! Jfc, it’s a lot to factor in. This is why people tend to revert to looking at the chart alone and drawing conclusions from the price. And maybe throwing one or two network factors into the mix.
Early 2013 Top
December 2013 Top. A major top!
December 2017 BTC Top. ALTS topped Jan 2018
Major tops tend to include increased levels of volatility and excitement. A climatic run tends to be almost vertical on the chart. As the price can often double or even triple in a matter of weeks.
Blockchain brings transparency in the form of verifiable data which meter the price trends in bitcoin quite well. This helps predict the extent of the bull run to some extent as well as the potential market tops. As overbought metrics, will starting issuing red alerts near market tops. Of course, the next market top will have a different reason for topping, but the rhyme will be the same.