The Cryptocurrency Trading Journal

[Specterx]

https://www.elitetrader.com/et/threads/druckenmiller-vs-cramer.358718/

I like Druck but his description of his BTC trade is simply laughlable. He tried to buy $100M and failed, and settled just for $20M. then he trimmed too soon and now only has 1% of his assets there. The guy is a complete tourist with no clue on what he is doing. Saylor bought billions, Tesla $1.5B. Apparently he is too lazy or proud to learn about this space and go after information, he is friends with Novogratz for god sake. I wouldnt listen to Druckenmiller about anything when it comes to crypto. The odds that he will sell it all too soon is super high, so there is another top indicator right there: It cant be the top if Druckermiller is still long

I see a lot of issues with taking (or holding) a BTC position here:

- We definitely are well into the "public participation" phase yet the price has been weak. I was looking for a parabolic blowoff to >100k starting in March-April and ready to take a position, but the market didn't act right and instead we've tanked 30%.

- The liquidity situation may never be as favorable in our lifetimes as it was in Q4 2020. The Fed is still running full-tilt QE. Raising rates, or any significant monetary tightening will annihilate crypto prices. The narrative flip has happened much more quickly than I expected, and we may well get another Goldilocks run if CPI prints start coming in weak, but it's another warning sign.

- The boom in ETH during April seems to indicate that the market is wisening up a bit, realizing there are more cryptos out there, many of which are much better-constructed or have significantly better underlying fundamental/economic use than BTC. This is really bad news for BTC, because all it really has is the first-mover effect. As money shifts into other cryptos, you get negative sentiment caused by the broken BTC trend and falling prices; and to make matters much worse, the market will eventually realize that BTC's "limited quantity" feature doesn't apply to the crypto universe as a whole, which can of course be created in unlimited quantities.

Speculative manias in general live and die by liquidity, and when issuance of new product finally overwhelms speculative demand.

 

[Daal]

I see a lot of issues with taking (or holding) a BTC position here:

- We definitely are well into the "public participation" phase yet the price has been weak. I was looking for a parabolic blowoff to >100k starting in March-April and ready to take a position, but the market didn't act right and instead we've tanked 30%.

That seems normal historically

I would be careful about using downward price movements as a signal for bearish behavior (selling). That is like using a stop loss which in a super volatile market that can lose 40% still in the context of a bull market, is a strategy that is likely to underperform

- The liquidity situation may never be as favorable in our lifetimes as it was in Q4 2020. The Fed is still running full-tilt QE. Raising rates, or any significant monetary tightening will annihilate crypto prices. The narrative flip has happened much more quickly than I expected, and we may well get another Goldilocks run if CPI prints start coming in weak, but it's another warning sign.

I expect some tappering soon but I dont think raising rates is on the table in the next 12 months. First because that is the market forecast and Fed futures market are quite efficient (I used to trade it a lot back in the day but these days its super hard). Also, its also the Fed forecast.
In addition Powell term is up on February 2022 so if he were to crash markets, most likely he would be fired by Biden. Biden is full on the woke bandwagon so I bet he would love to put a woman as Fed chair. A Powell crash would given him the perfect excuse.

But I acknowledge that the Fed is a risk factor for crypto, I just dont think its a risk factor for a huge bear market but rather to the typical 30-40% corrections that we regulary see (and perhaps to a slower adoption curve, capping total upside). Because the Fed balance sheet will still be huge, the US fiscal deficit will still be huge, debt to GDP will still be huge and SS and Medicare is kicking in during this decade so forward fiscal expectations aren't so great. So if anything, a Powell suprise is likely to lead to a correction/pause that will give all the people that missed the rally (what I call the Dalio's of the world) a chance to get in or to increase size (or to create more funds). There is also the BTC ETF that is likely to be approved in the 2nd half

- The boom in ETH during April seems to indicate that the market is wisening up a bit, realizing there are more cryptos out there, many of which are much better-constructed or have significantly better underlying fundamental/economic use than BTC. This is really bad news for BTC, because all it really has is the first-mover effect. As money shifts into other cryptos, you get negative sentiment caused by the broken BTC trend and falling prices; and to make matters much worse, the market will eventually realize that BTC's "limited quantity" feature doesn't apply to the crypto universe as a whole, which can of course be created in unlimited quantities.

I do think there might be some canibalization of BTC going on with respect to ETH's value proposition. ETH will be favored as a store of value by some the same way Protestantism is preferred by some vs the Catholic church but I still think BTC's moat is strong. Its very similar to a religion, it takes a lot to convert people. BTC is so simple and so many people like it, its downsides can be mitgated by layer2's and some scalling solutions. So while I agree that some canibalization is going on, the fervor that I see from people, I just dont think its high enough to hurt BTC's brand enough. Also, institutions are likely to start at BTC and then diversify into others. I doubt many would have to guts to start as an ETH maxi. I know my convertion into thinking ETH was superior took years to occur

Speculative manias in general live and die by liquidity, and when issuance of new product finally overwhelms speculative demand.

With regards to issuance I think you are correct when it comes to retail demand, they will run out of buying power due all the NFTs, dog crap coins and other alt shit they are buying. But I believe institutions are focusing more on stablished coins like BTC and ETH and I think they have a lot more buying power to bring to this space

Thanks for the comments, I like having both sides of the discussion here

 

[Daal]

A quick run down in my BTC timing model I see:

-Price action
No parabolic move up that I'm looking for to sell into

-Sentiment
The indicators show greed has been cleared from the BTC markets

-On-chain analytics
They havent reached peak levels compared to previous cycles, they are sorta half way through

-Stock to Flow
BTC is underperforming vs StF, that would indicate there is some 'value' there

-Futures & options markets
Futures premium hit 0% yesterday on some exchanges, now its creeping back up again but there is no wide speculation taking place. Options showed panic the other day (and thats a good thing in my mind)

-Gut feel
My gut feel says the price should remain under pressure, flushing out weak hands and then it will go back up again due institutional buying

-Macro picture
It still largely positive given fiscal and monetary stimulus and inflation dynamics

In none of these factors I'm seeing a reason to sell. Chartists will claim the Price action is bearish, but I'm using price action differently, I'm looking more for a parabolic move up to sell into rather than selling into weakness. I mean, I can see selling into weakness when most of everything else is saying the top is in but most of the time, selling into weakness leads to underperformance and worse, a trader now that will watch the investment run away exponentially with him on the sidelines. 30-40% corrections are normal, this one could even reach 50%, there is a first time for everything

 

[Daal]

30-40% corrections are normal, this one could even reach 50%, there is a first time for everything

I mean corrections in the context of a bull market, that ones that reverse in 1-2 months. Obviously, bigger drawdowns have occured but those took years to reverse. I think its possible a 50% drop in the context of a bull market. Just because it didnt happen before, it doesnt mean it can't happen

 

[Specterx]

A quick run down in my BTC timing model I see:

-Price action
No parabolic move up that I'm looking for to sell into

-Sentiment
The indicators show greed has been cleared from the BTC markets

-On-chain analytics
They havent reached peak levels compared to previous cycles, they are sorta half way through

-Stock to Flow
BTC is underperforming vs StF, that would indicate there is some 'value' there

-Futures & options markets
Futures premium hit 0% yesterday on some exchanges, now its creeping back up again but there is no wide speculation taking place. Options showed panic the other day (and thats a good thing in my mind)

-Gut feel
My gut feel says the price should remain under pressure, flushing out weak hands and then it will go back up again due institutional buying

-Macro picture
It still largely positive given fiscal and monetary stimulus and inflation dynamics

In none of these factors I'm seeing a reason to sell. Chartists will claim the Price action is bearish, but I'm using price action differently, I'm looking more for a parabolic move up to sell into rather than selling into weakness. I mean, I can see selling into weakness when most of everything else is saying the top is in but most of the time, selling into weakness leads to underperformance and worse, a trader now that will watch the investment run away exponentially with him on the sidelines. 30-40% corrections are normal, this one could even reach 50%, there is a first time for everything

Just a few comments:

First, the "stock to flow model" is bogus and not worth your attention. All things being equal, something which has a low stock to flow will face more downward price pressure over time, as a result of new production, compared to something with a high stock to flow. But there's no logical relationship between the numeric stock-to-flow ratio for any particular asset and the dollar price of that asset - it's a spurious correlation. What matters, if anything, is how much portfolio space BTC currently occupies in portfolios vs. how much space you think it might one day occupy. At 8-10% of the total gold stock value, it seems conceivable that BTC could double from here - more than that, I'd be very skeptical.

Second, don't lose sight of the fact that large price moves happen due to real buying and selling, not some sort of mystical process. BTC (and crypto in general to a lesser degree) is no longer an ignored, undiscovered, thinly traded, and difficult-to-access segment of the market; it's worth over $800 billion, has been featured prominently in the news for years, and any institutions or whales with a desire to buy BTC are perfectly able to do so, either directly through custodial services or through CME futures.

So, why will BTC's market cap go from $800 billion to $1,600bn or $2,400bn? "Institutional adoption" doesn't really cut it; we already went through that phase, and those headlines plus lots of actual buying from the likes of MSTR and TSLA etc. got us from $14k to $60k. If so many institutions are chomping at the bit to buy, then how did it fall 30% in the first place? Moreover, the properties of Bitcoin are well-known and fixed: it isn't a company which might one day release a revolutionary product or blockbuster earnings report. So, you need some kind of major change in external fundamentals.

There are really three things I can think of which might drive another big markup cycle:

1) BTC ETF - probably will have some impact, although muted as BTC has already just seen a massive runup, and most people who want to buy bitcoin can in practice do so (compare to GLD release in 2005)

2) Big marginal increase in liquidity conditions - possible although very hard to see this at present: financial conditions are already super-loose with USD printing running white-hot and inflation breaking out. Things are likely to get somewhat tighter over the next few years, rather than looser.

3) Uncontrolled inflationary breakout leading to panic flight from the USD - seems very, very unlikely to occur in the near future (2-3 years) but is possible in the longer term. There are big questions as to whether such a breakout (short of actual hyperinflation) will impact "inflation hedge" assets like gold and crypto in the manner expected - e.g. gold didn't advance at all between 1975 and 1978 despite high inflation, and went into a 20 year bear market after 1980.

 

[Daal]

Just a few comments:

First, the "stock to flow model" is bogus and not worth your attention. All things being equal, something which has a low stock to flow will face more downward price pressure over time, as a result of new production, compared to something with a high stock to flow. But there's no logical relationship between the numeric stock-to-flow ratio for any particular asset and the dollar price of that asset - it's a spurious correlation. What matters, if anything, is how much portfolio space BTC currently occupies in portfolios vs. how much space you think it might one day occupy. At 8-10% of the total gold stock value, it seems conceivable that BTC could double from here - more than that, I'd be very skeptical.

That's where I disagree. When I started trading crypto in 2017 I tried to understand what kind of mindset was better fit to maximize gains in that market. I had already done a lot of soul searching with regards to stock and tech investing and why I had made mistakes in that arena that minimized gains, crypto seemed to be very similar but it punishes those mistakes even more extremely.

I realized that every market has a proper mindset because the payoff matrix is vastly different. So when you say "it seems conceivable that BTC could double from here - more than that, I'd be very skeptical" that can only be right logarithmically but it can be wrong exponentially. Its a very fragile statement, P&L wise.
It also seem to lack creativity, which is a trait that I believe is worth a lot in tech investing/crypto/startups. The vast majority of bitcoin early adopters lacked creativity so as a result, they sold/lost/threw away most of their bitcoins, if they instead what asked themselves 'what if?' they would have built a ROBUST investing plan that accounted for the possibility that they were wrong. You see, even if that statement turns out to be correct, if an investor continue to trade exponential assets with network effects with that mentality, whatever losses he can avoid will be exponentially be offset by gains that were never made. In corporate bonds (for instance) that is a good mentality that is likely to lead to good returns, in exponential assets with network effects it doesnt make much sense.

I can see Bitcoin being worth $500B, $1T, $5T, $10T and even $15T one day and I will build my plan taking into account these different scenarios. What I will not do is to lack the imagination on the different possibilities. I recall pieces calling AMZN a bubble back in 2013, its very easy to be exponentially wrong.

And with regards to stock to flow, yes, its possible that is a bogus correlation but my gut says it isn't. First because Bitcoin is a religion. So the stock gets hoarded unlike anything I have ever seen (unlike most commodities), as a result when the flow gets cut after the halvenings, basic economic analysis would indicate a shortage becomes possible (supply and demand). Not a traditional shortage of not having BTC avaliable, but a shortage of CHEAP BTC because they are in the hands of zellots who think it will be worth hundreds of thousands one day so they wont let go cheaply. But that zealotry varies in scale and some will let go at lower prices than others and thats what I think it is going on now. The ones that believe less are being 'converted out' into stablecoins/fiat so prices are down. But if the flow of bitcoin is going from weaker hands to strong hands, its not so bearish after the selling is finished

Second, don't lose sight of the fact that large price moves happen due to real buying and selling, not some sort of mystical process. BTC (and crypto in general to a lesser degree) is no longer an ignored, undiscovered, thinly traded, and difficult-to-access segment of the market; it's worth over $800 billion, has been featured prominently in the news for years, and any institutions or whales with a desire to buy BTC are perfectly able to do so, either directly through custodial services or through CME futures.


So, why will BTC's market cap go from $800 billion to $1,600bn or $2,400bn? "Institutional adoption" doesn't really cut it; we already went through that phase, and those headlines plus lots of actual buying from the likes of MSTR and TSLA etc. got us from $14k to $60k. If so many institutions are chomping at the bit to buy, then how did it fall 30% in the first place? Moreover, the properties of Bitcoin are well-known and fixed: it isn't a company which might one day release a revolutionary product or blockbuster earnings report. So, you need some kind of major change in external fundamentals.

So you say we already went though the phase of institutional adoption, again its a fragile statement in this type of market. That doesnt mean it is wrong but it does mean that when assessing in a exponential market with network effects I would want overwhelming evidence before thinking its correct. So I would love to see if you have any quantitative data on that because I'm not seeing that. Novogratz is on the front line of institutional adoption (due his OTC desk, NY connections) and he still thinks it is early. Morgan Stanley and Goldman just recently announced pathways for institutions to buy Bitcoin. The Canadian ETF came out like 2 months ago. I would say most asset managers dont even understand what Bitcoin is. Take Daniel Loeb, he just go into this and NOW he is starting to get it

https://twitter.com/x/status/1393265102363693059

People need time to do due diliguence, research, find good sources of info (most pieces are written by journalists, and they are horrible). Conversions take time

There are really three things I can think of which might drive another big markup cycle:

1) BTC ETF - probably will have some impact, although muted as BTC has already just seen a massive runup, and most people who want to buy bitcoin can in practice do so (compare to GLD release in 2005)

I dont think its that easy, it is certaintly not as easy as buying AMZN. I mean, the Morgan funds had a 2% of assets limit, Goldman just recently reinstated their OTC desk. The Blackrock funds and the CA ETF are also new. I also dont think people are so fast that they will immediatly jump into this, I believe they need time to get comfortable. Hugh Hendry/Dalio needed years to buy it and they are gold guys! Others will need more time.

2) Big marginal increase in liquidity conditions - possible although very hard to see this at present: financial conditions are already super-loose with USD printing running white-hot and inflation breaking out. Things are likely to get somewhat tighter over the next few years, rather than looser.

I believe these super loose conditions have created a TREND in the USD which will lead it to be lower for quite some time. It also increases all kinds of tail risks for the US. These risks will remain even if on the margin conditions change. The risks will lead to people wanting to find protection for it. In my macro journal I posted the news that Sam Zell was looking into buying gold. So the real estate guy is looking for non-real estate hedges, of course, he is old so he went for gold but I bet lots will go for gold+BTC or BTC alone

3) Uncontrolled inflationary breakout leading to panic flight from the USD - seems very, very unlikely to occur in the near future (2-3 years) but is possible in the longer term. There are big questions as to whether such a breakout (short of actual hyperinflation) will impact "inflation hedge" assets like gold and crypto in the manner expected - e.g. gold didn't advance at all between 1975 and 1978 despite high inflation, and went into a 20 year bear market after 1980.

If you incorporate the possibility that BTC could be a $10T asset one day into your assumptions, I suspect your conclusions could change. That seems to be our main disagreement

There is the store of value story (disruption of gold's $10T market cap plus another $10T in international investment real estate plus another $5-$10T in other stores of value such as old coins, art, collectibles, hard currency in inflation economies etc).

But there is also the story that Bitcoin is an institutional gateway to a world of returns/alpha. Anyone that wants lots of alpha these days needs to be trading crypto. Long or short and the first thing they are going to do most likely is to buy Bitcoin and get comfortable with it
When I see the Whitney Tilson's of the world (not necessarily him but people that suck like him) getting into crypto, then I will believe the institutional adoption phase is over but I'm not seeing it yet

 

[Daal]

With regards to this selloff, I'm curious @johnarb, how are Willy Woo predictions doing?

 

[Daal]

Fink and Blackrock seems to be leading the charge on ESG, thats all they talked about in their 2020 letters

https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

Fink gave an interesting fact about ESG/sustainability:
"The economy today remains highly dependent on fossil fuels, as is reflected in the carbon intensity of large indexes like the S&P 500 or the MSCI World, which are currently on trajectories substantially over 3ºC.2"

So SPY, S&P500 funds, and ES are non-compliant with ESG requirements. Yet, Blackrock offer funds in that. They make the distinction between active funds (in which they do not offer non compliant funds) and passive funds (in which they do). So it seems to me that they will continue to pursue BTC and ETH.

Of course, media backlash could lead them to pull the biggest hyprocrisy, to disable BTC funds but continue to offer indexes that are not compliant. But I'm not sure they would have the guts to ignore crypto based on that, they would have a lot to lose

ESG will be addressed in BTC through pressure on the miners and time, maybe thats what Musk was trying to do. But I dont think it will be a huge deal

 

[Daal]

https://www.cato.org/cato-journal/s...eir-monetary-policy-implications#prediction-3

Here is another potential source of liquidity to crypto markets: stablecoins

"European Central Bank staff issued a bulletin about this in May 2020, noting that Facebook Libra could become a $3 trillion collateral silo. The delayed launch of Facebook Libra merely bought time but didn’t solve the monetary policy pressure posed by the siloing of collateral by stablecoin issuers generally — because the market outside of Facebook Libra is proliferating."

 

[Daal]

This is pure panic, just bought more BTC at 31700