Bitcoin's Consolidation Below Resistance Means... #49

As this week comes to an end, it’s essential to make sure you are aware of the technical and macro play in bitcoin.

We seem to be close to a tipping point where having a bitcoin strategy is not an option, but a necessity.
Bitcoin continues to consolidate giving altcoins some room to breathe again. Meanwhile, fundamentals keep improving at a steady rate while new institutional investors enter the space on a weekly basis. Let’s briefly take a look at some technical analysis and continue with some of the fundamentally positive developments this week. 

Bitcoin Continues to Consolidate Below All-Time Highs

No major developments in terms of price action this week. Despite several rejections of the $19,800 level, bitcoin is still consolidating below ATH’s without signs of real weakness. Any corrections are bought up quickly, indicating that demand is still strong even this close to a big resistance level, both technical and psychological.

During consolidation phases like this, traders oftentimes give back profit to the market by being impatient. Although Twitter tends to argue otherwise, you don’t have to be in a position at all times. Ranging conditions are considered to be the most difficult to trade and conservative traders might be best off by waiting until the market breaks in either direction

Macro investor and bitcoin bull Raoul even posted an analysis hinting at a potentially larger correction, reasoning that ‘top patterns across 3 time series are something to take seriously and if you are not a long-term HODLer, you might consider some caution in merit.’ There are always arguments to be found on both sides. As traders, we must calculate the probabilities and structure our positions accordingly. Stay fluid with your bias or the market will catch you eventually. 

So now that you are up to speed with the technicals, let’s explore some of the fundamental or macro themes. Market Meditators, as more and more institutional investors enter the crypto space, it is well worth being aware of some macro themes. Even if they don’t factor in your trading strategy, they will factor in theirs and as such, it will be important in understanding the minds of market participants.

Is Bitcoin The New Gold? 

In an interview with CNBC yesterday, billionaire and legendary investor Paul Tudor Jones explained his thoughts on bitcoin in the context of his portfolio. Jones said that ‘with a market cap of $500 billion (~$350 billion according to Coinmarketcap), it’s the wrong market cap in a world where you got $90 trillion worth of equity market cap. It’s also the wrong market cap relative to gold, which is $8-9 trillion.’Jones further expanded on how bitcoin reminded him of the internet stocks in the 90’s, when the internet was in its infancy and nobody knew how to value it properly. 

Jones also compared the different crypto assets against precious metals, reasoning that bitcoin might be ‘precious crypto’ because of its first-mover advantage and finite supply and other crypto assets might be similar to the more industrial metals like copper and silver. Jones concluded saying that ‘nobody knows what the future will look like, but if I had to take a position I’m going to take the brand name, which is bitcoin, and assume its the wrong price for the possibilities that it has and assume that the path forward from here is north.’

Jones expects a huge rebound from the economy in Q2-Q3 next year as normal activity resumes. Given there is so much cropped-up demand due to lockdowns and several sectors having to close due to the Coronavirus pandemic, Jones argued that we could see inflation shoot back up again which could potentially be another strong catalyst for gold and potentially bitcoin to extend their rallies throughout 2021. 

So the above is one fundamental play with bullish implications for bitcoin. Let’s move on to another. 

Passive Investing & Crypto? S&P to Launch Crypto Indexes by 2021

Another positive development this week was news about Market index provider S&P Dow Jones Indices entering the space with the help of crypto startup Lukka. S&P is responsible for the popular legacy market indices like the S&P 500 and Dow Jones Industrial Average (DJI). S&P DJI plans to use Lukka’s data services to launch customizable crypto index capabilities, which will allow asset-management firms to build their own investment vehicles. Next year, the firm plans to launch its own branded index, essentially an S&P 500-like index but for the crypto market according to The Block.

Given that this year’s run up has been driven by institutional investors, the move makes perfect sense. There are still a lot of institutions looking for crypto exposure who can’t do it legally. Peter Roffman, head of innovation and strategy, said that “we’ve been watching [the digital asset space] and we feel it’s at a point of institutional interest in maturity, where companies such as ours want to get in and contribute to the transparency of the marketplace.” The infrastructure of the crypto market keeps improving at a steady rate, and both retail and institutions will have a range of options to gain exposure to this upcoming asset class soon. Signs of adoption are all trending upwards and it does not look like this trend will reverse anytime soon.

Conclusion

And there we have it. What should you take away from this? In terms of price action, bitcoin is consolidating below its ATH without any real signs of weakness. That being said, ranging conditions are considered to be the most difficult to trade and conservative traders might be best off by waiting until the market breaks in either direction. The fundamental themes are very positive. Not only has the influential Paul Tudor Jones come out with a bullish stance on bitcoin, we are also seeing a new element of credibility and transparency through the introduction of crypto indexes. It is possible that this will lead to a surge of new demand.

  • Over 1 Million Eth, Worth More Than $605 Million, Has Been Staked in the Eth2 Contract. The Ethereum 2.0 (Eth2) staking contract continues to increase in value, even after the beacon chain launch this week. More than 1 million ETH has now been deposited into the contract, with a total value over $600 million. There is no closing date for the contract so ETH holders can continue to make deposits in order to earn staking rewards. Those staking rewards are relatively high, with early stakers earning around 20% per annum. As more validators (stakers) join the network, those rewards drop slightly. Read more.

  • Investors Seek Inflation Protection as Economic Optimism Rises. As we outlined on the Market Meditations twitter this morning: demand for inflation-protected securities is soaring. This comes as investors move to safeguard their portfolios against rising consumer prices given the possibility of a faster economic recovery. Funds that buy US Treasury Inflation Protected Securities (commonly referred to as Tips) recorded %1.8bn of inflows in the week ending Wednesday. This might bode well for other anti inflationary hedge securities such as bitcoin. Read more.

  • Bitcoin a ‘Potential Store of Value’ That’s Very Volatile: Fidelity Digital Assets Head. During the Reuters Global Investment Outlook Summit 2020, head of Fidelity Digital Assets (FDAS) Tom Jessop said that investors are hoping bitcoin becomes a store of value. In the interview, Jessop noted that “we use the word ‘potential store of value’ as bitcoin is still extremely volatile, and by any standard perhaps would not achieve the mantle of a true store of value.” In an earlier report in October, FDAS wrote that bitcoin’s uncorrelated nature could be a strong argument that crypto’s market cap has reason to grow. Read more

  • OMG Rallies as Genesis Block Ventures Acquires OMG Network. OMG Network, the layer 2 blockchain project aiming to help speed transactions and lower fees on the Ethereum blockchain has been acquired by Genesis Block Ventures. In their announcement on Friday, the firm said that GBV ‘is dedicated to leverage its network strength, to promote the accelerated growth of OMG Network, and further enhance the adoption of OMG blockchain in Asia and beyond.’ The token price jumped up almost 20% during Asian hours, but didn’t manage to hold its gains throughout the rest of the day. Read more.

  • Oil Price Hits 9-month High After Opec and Russia Agree Supply Boost. Oil prices hit the highest level since March after major producers agreed to a cautious increase in output that eased fears of oversupply. Brent crude has risen to $49.39 a barrel. On Thursday evening, Russia and Opec reached an agreement to boost oil supply by 500,000 barrels a day from January, which was a quarter of what they had agreed to previously. The other technical factor supporting oil price is a weaker US dollar. A weaker dollar boosts crude prices since it makes it cheaper for holders of other currencies to purchase the commodity. Read more

# 29 Sam Bankman-Fried: Altruism, Scaling a Cryptocurrency Exchange and Hiring The Right People

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Sam (@SBF_Alameda) is a former quant trader, entrepreneur, philanthropist and was recently nominated in Forbes's annual 30 Under 30 list. He is the CEO of cryptocurrency derivative exchange FTX and Alameda Research.

In this episode, we discuss Sam’s altruistic personality and what motivates him to work as much as he does. We talk about animal welfare and how to make the most impact on the world. After that, we take a look at what it takes to build and scale two successful companies in the crypto space, why scaling is so difficult and how Sam makes sure he hires the right people. We end with Sam’s thoughts on investing and how he approaches his personal growth.

Things I learned:

  • Above a certain level of income (~100,000/year), acquiring more wealth won’t make a person happier. You don’t need that much money to live comfortably.

  • The number of animals currently in factory farms is comparable to the number of humans alive.

  • Even if you know what change you want to effect in the world, depending on who you are, where you are and what your relative strengths are, sometimes the best way to do that is to make money and donate it instead of working directly on it.

  • In order to be effective and maintain your personal balance, you have to be able to distance yourself from the problems you’re trying to solve. Some of them are so big that they would crush you if you can’t find that balance.

  • When hiring new people, Sam looks for talent over skill almost every single time. 

  • You really don’t want people on the team who personally don’t want to be there, it drags everything down. As a boss, try to find a way to make them happy or otherwise they should leave. 

  • Being late in founding a company or when executing a feature is bad, and in many cases unrecoverably so. Being early is worth so much, you get all the customers (for free) when there’s no competition.

  • There is no such thing as the right or wrong odds, mostly they’re plausible odds. If Sam estimated the chance of FTX becoming a top-5 exchange at 10%, it was a gamble worth taking. His job was to figure out it wasn’t <1%.

  • Replicating features from other exchanges is a completely separate skill than building something new that other exchanges haven't done before. FTX’s speed of rolling out new features is one of their core strengths.

  • Most people underestimate what you can do with a small team, FTX currently has only 3 developers. Finding the right people is the most difficult part.

  • Be really flexible and willing to cut things off or change things quickly if they are not working as intended.

  • There is no better way of learning than by doing. 

  • Most of the time, the optimal thing to do has to be some amount of listening to what other (smart) people have to say but not blindly trusting it either.

Updating Your Trading Record

As we embark on this bitcoin roller coaster, I hope Market Meditators have a good sense of their profit and loss. Depending on what type of person you are, you will likely either remember your winning trades or only the losing trades. This is what makes it essential to keep a trading record. Numbers don’t lie and, if maintained properly, you will gain a greater appreciation for your strengths and weaknesses as a trader. Let’s explore this in more detail. 

Medium and longer term traders may be inclined to compare their average winning trade amount to their average losses. Short term traders may keep a daily profit and loss. Either way, this process will allow you to evaluate how good you are at picking trades and give you a clearer picture of your financial successes compared to failures. 

You can focus just on the trade entry price, closing price and amount or to take it a step further, you can also take a note of your stop-loss and take-profit levels and assess how suitability you set these. Some traders may also benefit from noting their ‘rationale’ for entering the trade. 

This practise will keep you honest. You will have a better idea of how profitable your trading ventures actually are. You will also be able to spot bad risk management habits. By beginning to hone in on your winning trades, you will be able to get a sense for what you are good at. You can be your own teacher. You may find you are better at technical analysis than you are fundamental. Or, you might find there are particular coins that you trade very well. Alternatively, you might discover some coins you ought to avoid. 

Evaluating your results is essential to your success as a trader. Your historical trading record is the best indication of your strengths and weaknesses. This daily habit can reap large benefits in the long run.

Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.