How Low Can You Go
Hey Guys,
I hope you are all doing well. There hasn’t been much drama as of late, especially compared to what’s been going on in the crypto world, so without further ado, we’ll dive straight into things!
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Terror Luna
I can’t begin today’s newsletter without talking about Terra Luna, the most unstable stablecoin. Terra Luna was one of the biggest projects in the whole crypto space and it has spiralled to the circular value of zero. That’s over $40 billion gone in a few days… This is likely to send ripples through the whole crypto space, not just in neighbouring projects, but also in terms of how the general public perceive crypto. Altcoins are fundamentally risky and very speculative, and all positions in your portfolio should be sized accordingly.
“Only when the tide goes out do you discover who's been swimming naked.” - Warren Buffet on Luna..
Anyway, I hope none of you have lost too much money, and if you have, that you are doing ok. This is a rather brutal reminder to ‘never invest more than you can afford to lose’.
We also lost some money by holding UST (the stablecoin connected to LUNA) as we were seduced by the attractive 20% yield. It was only a small position, as I felt the stablecoin came with some risks, and we managed to get out before it collapsed too far, but a good lesson that there is 'no such thing as a free lunch, and to be super cautious when something looks too good to be true.
There were many who were voicing concerns of Terror beforehand, and a few deserve a worthy mention.
The first goes under the pseudonym Mr Leprechaun. Here’s a quick interaction I had with the concerned supernatural being from Irish folklore:
And the second is of course, the most diligent woman in the world, Lyn Alden. If you are not already a subscriber to her premium newsletter, I can honestly say it’s one of the best twenty pounds spent each month.
Here are a few words from one of her premium newsletters a few months ago:
The catch? Well, the huge demand for UST is almost entirely driven by unsustainably high yield farming opportunities, much like other DeFi ecosystems. Investors have been able to earn nearly 20% yields on UST in Terra’s Anchor protocol due to various arbitrage opportunities, and that looks like it is starting to dry up. If that VC-supported yield opportunity dries up, UST demand will likely decline. If UST demand shrinks, it could cause a negative feedback loop and liquidity problems for both UST and LUNA, also known as a “death spiral” where tons of capital pulls out of the Terra ecosystem, which crashes the price of LUNA and then eventually breaks the UST peg. If that occurs, it’s functionally very similar to an emerging market currency crisis.
…this presents a future risk for the bitcoin price. If Terra encounters a problem and is forced to sell a lot of bitcoin to defend its UST peg, it will be detrimental to price in a similar way that their current buying is favourable to the price. Terra’s unsustainable Anchor protocol with 20% yields results in a lot of UST demand, and with this new reserve practice by Terra, UST demand now results in BTC demand. This can be thought of as a source of indirect, artificial, or unsustainable BTC demand, which should eventually dry up. Active bitcoin traders should keep an eye on Terra’s LUNA and BTC reserves relative to UST market capitalization because if it starts to break down and they are forced to defend the UST peg, we could see tens of thousands of coins worth of rapid BTC selling pressure. I’m not saying that will happen but it’s a new factor to monitor going forward.
And her tweet 8 days before the catastrophe.
There are many more, but these were the ones I made a mental note of.
I’m not going to discuss Luna much more, so if you wish to learn more, these are two fantastic articles on what happened:
https://www.lynalden.com/digital-alchemy/
https://entrepreneurshandbook.co/luna-brothers-inc-712ec5abe199
Now onto the big boy Bitcoin.
Recipe For a Bitcoin Bottom
Well, I don’t think anyone can refute that we are most certainly deep into a bear market right now. To some this may seem scary, but logically, this is the time of opportunity.
‘Bull markets make you money, but bear markets make you rich’ - Ben Cowen
Here is the entire price chart of Bitcoin’s history:
If you could have bought during any of these cycles, where would you choose?
My guess is:
These are the times of maximum fear at the end of a gruelling bear market.
Max Fear = Max Opportunity
You think buying then was easy?
It’s not easy because of emotions. Emotions are why the typical retail investor does something like this:
This is completely backwards to the logic that if you want to own asset X, surely you want asset X to be as cheap as possible when you buy it.
So, how can we gauge where the end of the bear market could be, where we can get the cheapest price?
One method is by looking at the Realised Price of Bitcoin.
The realised price of a single Bitcoin is the value of the Bitcoin the last time it was sold/bought. The realised price of all Bitcoin is the value of all Bitcoin (including Bitcoin bought years ago) at the price they were last sold at, divided by the total Bitcoin in circulation - the average cost basis of all Bitcoin.
The realised price is in orange, and Bitcoin price in dark blue:
This is currently sitting at around $24k. Most dips below have historically been a macro bottom. These dips below represent brief moments in time in which the price of Bitcoin is lower than the average cost basis of all Bitcoin and area areas of extreme value. We have yet to see a dip below, which points towards one more push downwards.
Another way to visualise this is the % supply in profit and loss. When there is a crossover so that there is in fact more supply in loss than profit, this is another indication we are very near the bottom of a bull market.
Supply in loss (red), Supply in profit (orange)
To try and pinpoint further we can look at the 200-week and 300-week moving averages (MA).
Moving average captures the average change in a data series over time. The 200-week moving average is simply the average price of the last 200 weeks of Bitcoin price.
200-week MA in Blue, 300-week MA in Purple
Bitcoin typically bottoms at the 200-week but can also wick down to the 300-week in extreme capitulations, like March 2020.
The 200-week is currently around $22k and the 300-week around $16k. These prices represent areas of extreme value and align with a drop below the realised price of $24k. Until we reach here, the data once more points towards one more final drop before the bear market is over.
Now if a $16k Bitcoin sounds alarming to you, this would actually be less of a drawdown (drop) than Bitcoin as historically experienced in bear markets. A typical Bitcoin bear market has been around an 80% drop, which would put price at $13,978. This is not necessarily likely but is something to bear in mind.
I see this as the most extreme case and would of course be the opportunity of a lifetime.
Another interesting indicator based on Bitcoin mining statistics are the Hash Ribbons. Be warned it’s quite technical, but for those interested:
Hash ribbons is a local bottom predicting indicator that is based on the hash rate of the network. More specifically, it is based on crossover of the 30-day simple moving average (SMA) of the hash rate, with the 60-day simple moving average (SMA) of the hash rate. In this way we compare shorter-term hash rate changes to longer-term hash rate changes. The 30D SMA of the hash rate crossing below the 60D SMA signals a miner capitulation. The first instance of positive momentum after a recovery of the hash-rate (30D SMA crosses above 60D SMA) has historically been a rewarding place to buy with limited downside.
This is combined with 10d price SMA divided by the 20-day price SMA which represent price momentum. A signal using momentum occurs at the first instance of the 10d/20d ratio being above 1 after a hash rate recovery (30D SMA of hash rate crosses above the 60D SMA of hash rate).
The graph plots the 30D/60D hash rate in orange and a bullish cross happens when this rises above 1. The signal then occurs if, or once, the 10d/20d price ratio is above 1.
Dotted vertical white lines represent the crossover signal.
This signal is remarkably good at marking Bitcoin bottoms and has flashed at the end of every bear market so far, including the mini one in summer 2021. We have yet to see this flash which also points towards the possibility of further downside.
A volume spike following a period of low volume also marks reversal points very well.
Volume in green and red bars below, with dotted purple lines to mark spikes.
When there is a huge spike in volume, it shows a capitulation has taken place, where a lot of Bitcoin has changed hands. This is usually from dumb money to smart money, or ‘weak hands’ to ‘strong hands’. A moment of panic in which everyone sells out of fear or is forced to sell due to liquidations. Anyone with an intention of selling has now already sold, and the people willing to buy in these moments are the ones with no intention of selling, so it sets the stage for a change in trend.
We have just seen a huge spike in volume in the first capitulation since May 2021, indicating at the very least that we are at a local bottom. It should be noted that in 2018 the bottom occurred 3 weeks after the spike in volume, so this still leaves some room for further downside.
We can also take a look at how long Bitcoin bottoms have historically taken after falling below the fair-value regression band. You can think of the fair-value as the long-term average of Bitcoin price.
Fair-value regression band in Yellow.
It has typically taken 2-6 weeks for Bitcoin to find a bottom after falling below. Bitcoin has just fallen below, which gives us another rough estimate of how long it could potentially be until we see the bottom.
We can also do some whale watching to see what some of the biggest wallets are doing. The wallets below, bought Bitcoin 2 weeks before the end of the 2018 bear market, and a bit in July 2021, right before the end of that end of the mini summer bear market.
It’s likely they are all owned by the same person. A person who is clearly quite good at timing the bottom. If we take a look at their holdings, we can see that they just bought for the first time since July 2021. Each wallet bought $47.4 million of Bitcoin, increasing their stack by 20%.
An indication that we are possibly quite close to a cycle bottom, or at least a local bottom.
There are also other indicators that are already signalling a bottom, like the Dormancy Flow:
But to have more confidence that a bottom is truly in, I think we need to see a few more of these indicators, like the ones discussed above, flashing bottom signals.
To summarise:
Although it is possible we have already bottomed, there are still quite a few indicators which show that there is more room to fall. If this is the case, a rough estimate for how long a bottom could take, from here, is about 2 - 6 weeks. The range for this bottom is likely anywhere between $14k - $24k and represents an area of huge opportunity.
My strategy is to continue to DCA Bitcoin, as I don’t have crystal ball (only diamond balls), whilst also keeping back a stack of cash to go in heavy if we fall down to the $14k - $24k range. Until we see more of a convincing bottom, I will still not be buying any alt coins. They are likely to continue getting rekt against both the dollar and Bitcoin. We are in a very risk-off environment and altcoins are about the furthest asset out on the risk curve. Even if Bitcoin moves sideways for the next few months, altcoins will likely continue to fall. For perspective, Cardano, a coin which did 100x in the last bull run, crashed 98.8% in the bear market prior to its huge run up.
Whether Bitcoin falls lower or not, buying at $30k is still a great area to be layering in. With $14k as the downside risk, and a conservative price target of $100k, this gives you a trade with a risk to reward of 4.46. That means you have 4 times more to gain than what you risk losing.
I’ll take that any day.
I’ll end this section with a thread from the Director of Global Macro at Fidelity:
Have a Little Faith
Major bottoms occur when everyone forgets that the tide also comes in. Those are the times we live for. - The Most Important Thing by Howard S. Marks
Just in case anyone is genuinely scared of the possibility of a lower Bitcoin price, I just thought I’d reiterate a few simple reasons why I have very little doubt that Bitcoin will continue to trend up with time in the long run:
Bitcoin has a fixed supply of 21 million, of which 90% has already been mined. This makes it one of the few truly scarce assets in the world. So long as the money supply continues to look like this…:
…when a scarce asset is priced in a currency with an infinite supply, I have little doubt that the scarce asset will both hold their value as well as increase in value. No one who’s done their homework wants to be caught holding a currency with an infinite supply (fiat money).
In addition, the build out of Bitcoin infrastructure shows no signs of slowing and even during this bear market, just keeps drawing in more people from the conventional world.
Who listened to Jack Maller’s fantastic podcast with Peter McCormack?
If you did, you will have heard the story of Jack talking about Bitcoin at a dinner party with top executives from both Google and Facebook. He told the Facebook group that they were wasting their time trying to build their own stablecoin, as they are essentially competing with the Federal Reserve. Facebook is in essence the biggest country in the world, and regulators aren’t going to allow Zuckerberg to become the digital central bank of Facebook. Instead, he said they should build on top of Bitcoin, the most secure and decentralised money in the world, and compete with the Western Union instead. If Facebook focused on building the best user experience on top of Bitcoin, using all the tools and experience they already have, legacy finance wouldn’t stand a chance. A week after the dinner, Facebook announced they were ending their stablecoin venture… Maybe a coincidence.
Then just the other day, David Marcus…. a former president of PayPal, vice president of Facebook Messenger, and the co-creator of Diem (Facebook’s stablecoin project), just announced he is starting a company called Lightspark that will be building on top of Bitcoin!
You couldn’t make it up.
To add to this, Australia’s first spot Bitcoin ETF was launched the other day, and Nubank (a bank Warren Buffest invested $1 billion into after selling Visa and Mastercard shares) has just allocated a small % of their treasury to Bitcoin. But Warren still hates Bitcoin :(
That’s just in the last week…
Adoption doesn’t look like it’s stopping anytime soon, and neither does the money supply, so a decentralised scarce asset is where I feel safest.
Bear Market Appreciation
This current bear market is not isolated to Bitcoin, and is part of a broader bear market in traditional markets. Investing can be a dangerous game and here are some of the casualties as a reminder.
60/40 Stocks and Bonds
Spotify
Not sounding so good…
Netflix
Bridgeton season 2 was just as bad Bridgeton season 1, and now look what’s happened:
Zoom
It’s all zoom and gloom these days.
Not the worst casualty but just wanted to point out that even the great British pound is down over 13% in the last year…
And of course, the moon of the show, Terrable Luna
Personal
A Great Story: Bo Shao on the Tim Ferris Show
If you fancy listening to an amazing story of the rise of a boy from poverty in China, this is a great a listen.
Bitcoin: Troy Cross on Bitcoin Mining and the Environment
A philosophy professor shares his Bitcoin story and how he believes it can help fuel the green energy evolution.
Economics and Investing: The Fed’s Dilemma by Lyn Alden
Her public monthly newsletter dives into the Fed’s dilemma and outlines the current dynamics wonderfully.
Life Advice
Just a lovely page of small advice tips from the co-founder of Wired, Kevin Kelly, shared by Tim Ferris:
https://kk.org/thetechnium/103-bits-of-advice-i-wish-i-had-known/
A Random Thread About Chickens:
That’s all for today.
Have a wonderful week and see you next time!
All the best,
Tats
Library
Bullish - Causing, expecting, or characterized by rising stock market prices.
Bearish - Causing, expecting, or characterized by falling stock market prices.
Bear Trap - Tricking everyone that price is going to break down, before moving up.
Bull Trap - Tricking everyone that price is going to break up, before crashing down.
DCA - Dollar Cost Average. Investing incrementally on fixed schedule.
DEX - Decentralised exchange.
EMA - Exponential moving average
ETF - Exchange traded fund. A type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way a regular stock can.
Fed - The Federal Reserve, central banking system of the US.
Fiat Currency - Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver.
FOMC - The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System.
Fractal - Repeating patterns from the past.
HODL - To hold your coins and not sell them despite crashes in price.
MA - Moving average.
S/R - Support/Resistance level.
Stablecoin - A cryptocurrency pegged to a traditional fiat currency, like the dollar.
Whale - A very large holder of Bitcoin.
The information contained herein is for informational purposes only. Nothing herein shall be construed to be financial legal or tax advice. The content of this email is solely the opinions of the write who is not a licensed financial advisor or registered investment advisor. Trading cryptocurrencies poses considerable risk of loss. The writer does not guarantee any particular outcome.