Happy Wednesday! On Today’s Newsletter Menu:
Crypto Indicators: Option Smiles
Mental Models Part 2
650 U.S. Banks Enter Crypto
The Illusory Truth Effect
Read, enjoy and share with your network. Let’s all build wealth together.
🙂 Wait… Is The Chart Smiling At Me?
What you’re looking at is an option smile.
What is it: an option smile is a chart created by plotting implied volatilities against options at various strike prices expiring on the same date. Implied volatility refers to investor’s expectations of price turbulence over a specific period. It is influenced by demand for call and put options.
What does it mean: the option smile for short-date and near-dated expiries carries a steep slope at strikes lower than bitcoin’s current price. That’s a sign of relatively higher implied volatility or demand for options at lower strikes than those at higher strikes. In other words, investors are continuing to buy protective puts – contracts that give purchasers the right but not the obligation to sell the underlying asset, in this case bitcoin, at a predetermined price on or before a specific date.
Why should I give a hoot: protective puts tend to be a bearish risk management strategy. It essentially means long investors believe there is scope for further downside and want to ‘lock in’ an insurance policy or guaranteed sell price. And they are willing to pay a premium for this insurance.
Appreciate this section was a bit more technical than usual. Remember we have a beginner’s guide to crypto options if you need to brush up on the basics then re-read the above. Guide here: 👉Crypto Options 101
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🏋️♀️ Keep Going! Mental Models: Part 2
Remember Mental Models Part 1? Where we discussed Charlie Munger’s Mental Models? That’s ok. You can read Part 1 👉 Here. When you’re ready, let’s continue on our journey of creating the best mind in the world: “Charlie has the best 30-second mind in the world. He goes from A to Z in one move. He sees the essence of everything before you can even finish the sentence.” - Warren Buffet
⏮ Invert, Always Invert
At a Harvard Commencement Speech back in 1986, Charlie enlightened us as to 3 things that are guaranteed to make life a misery: 1) Drugs 2) Envy 3) Resentment. He went on to describe 4 things that are guaranteed to make you a failure (cheerful, right?):
1) Being unreliable 2) Learning everything yourself 3) Giving up early 4) Ignoring the advice of inverting 👇
INVERSION ➡️ Oftentimes in life it is hard to know how to create something. In fact, it’s easier to identify how NOT to create something and then avoid those pitfalls. This is the practise of inversion. Let’s use an example:
How do you become a profitable crypto trader? Ouch. That’s the millionaire dollar question, isn’t it? And one hardly knows where to start!
How do you NOT become a profitable crypto trader? Immediately, obvious things come to mind such as having good security in place to profit your funds and knowing how to use stop losses (to mention a few elements). For those interested, we have a Cryptocurrency Security Guide🧘 and Stop Loss Video Tutorial📹
To use Munger’s words: “try to be consistently not sutpid, instead of trying to be very intelligent”. Or, consider how to invert problems and avoid clear dangers, rather than aiming for a moonshot at your first attempt. Oftentimes, there is more to lose on the downside than there is to gain on the upside!
This is one of the most important concepts in investing: the value of a portfolio tends to grow exponentially.
Diminishing returns tend to only come at very big numbers. Money begets money.
A snowball is often used as an analogy here. As a snowball rolls it continues to get bigger and bigger. Compound interest can have a similar effect on your finances.
Of course, there are management fees, brokerage fees and unnecessary taxes that ought to be avoided.
For more on compounding, check out this video 📹 where we use thought experiments to convey the power of compound interest.
🚨 Be Open To Changing Your Beliefs
Think back to the man with the hammer in Part 1. He probably loves that hammer. In fact, it’s a family heirloom, passed down through generations. It’s no wonder therefore, that he will struggle to use different tools.There are many psychological tendencies that cause us to hold on to old ideas. We need only be aware of this truth when we go through life.
To quote Munger again: “one should recognise reality even when one doesn’t like it. Indeed, especially when one doesn’t like it.”
🛠 Faced between the choice to change our mind or search for proof to defend our current belief system, how often do we start searching for proof? This type of behaviour stops us from learning. Why be a man with a hammer when you can have an entire toolbox? Indeed each new idea is a new tool that can make you more effective in the future! This doesn’t make your hammer any less useful. It might just make you better equipped for future challenges, which may require a screwdriver.
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🐦 Explain That Tweet
According to a Forbes article, 650 U.S. banks will soon be able to offer bitcoin purchases to an estimated 24 million total customers. Highlights from the article:
As part of the deal, between enterprise payments giant NCR and digital asset management firm NYDIG, community banks including North Carolina-based First Citizens Bank and credit unions including Bay Federal Credit Union in California will be able to offer their clients cryptocurrency trading through mobile applications built by the payments provider.
“We're firm believers in the benefits of crypto and the strategic application,” says NCR president of digital banking, Douglas Brown. “And that's true for our banking relationships, as evidenced by NYDIG, and across retailers as well as restaurants and the like.”
NYDIG and its banking partners, FIS, Fiserve, Q2 Holdings and Alkami Technology today took out a full page ad in the Wall Street Journalin an effort to bring bitcoin to a more mainstream audience.“Those five partners are the piping of the global financial system. And so it's nothing but excitement to think about bitcoin, the asset, bitcoin, the rails, and what in combination and collaboration we can do together.”
At Market Meditations, we firmly believe that cryptoshould be accessible to everyone. That’s why we are delighted to be partnered with Exodus, one of the top cryptocurrency wallet providers.
Allowing you to easily store, trade and earn interest on your crypto from one place. Another great feature is the capability to track your entire portfolio: breaking down how much of each asset you own, it’s price and it’s percentage of your total portfolio.
✅ True or False? - You Decide
If the events of the past few years have taught us anything, it is that the human race is prone to believing false information. But what is the underlying reason for this, and how does it affect our ability to navigate the markets successfully? One explanation is the illusory truth effect - where hearing the same information repeatedly, makes us believe it to be true, regardless of other factors including even the validity of that information.1
As we have noted many times before we live in an information age where we are constantly bombarded with data, often from unreliable sources. The illusory truth effect means we are likely to believe much of this, simply due to repetition and even perceive it in a more positive light!2 Even when we know that a fact is untrue, repetition still makes us significantly more likely to believe it.3
Twitter and social media can act as an echo chamber during both bull and bear markets. Simply seeing comments repeatedly can heavily bias our view of the market, regardless of our technical analysis and the effect extends to altcoins. The more often we see a particular project talked about, the more likely we are to view that project in a positive manner, regardless of the fundamentals.
So how can you avoid being tricked? At this stage we normally like to provide simple action steps to help you overcome the biases we discuss. Unfortunately, matters are not so simple when it comes to the illusory truth effect due to how deep it is embedded within us. Whilst it takes a real effort, the best advice we can give is to build your critical thinking skills. Think from first principles, “always invert” (see above) and remember to use new information to reinforce what you already know (aka Bayes Theorem).
In a world full of contrasting opinions and false information, focus on your critical thinking and you can learn to distinguish what is true, what is false and what information you should give validity to.
Not financial or tax advice. The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision. See our important security disclaimers here.
Disclosure. Some of the links we’ve included are affiliate, they give you rewards and discounts and earn us a commission. Additionally, the Market Meditator writers hold crypto assets. See our investment disclosures here.
Hasher, L., Goldstein, D., & Toppino, T. (1977). Frequency and the conference of referential validity. Journal of Verbal Learning and Verbal Behavior, 16, 107–112. https://doi.org/10.1016/S0022-5371(77)80012-1
Zajonc, R. B., & Rajecki, D. W. (1969). Exposure and affect: A field experiment. Psychonomic Science, 17(4), 216-217.