To celebrate the new bitcoin highs, I am delighted to be giving our free community a taste of what we deliver for the premium community. I hope you read, learn, enjoy and become a better trader by the end of each letter.
The Real Reason Bitcoin Hit ATH and How to Trade it
The moment we’ve all been waiting for is here. Bitcoin finally broke above its all-time high and shot past $20,000 today. Twitter is celebrating collectively and we’ll likely see bitcoin being mentioned on pretty much all mainstream news outlets this evening. Breaking above this historic level draws in a lot of new attention as people realize this wasn’t just another bubble that would never recover again. This is confirmation of what we’ve been writing about for quite a while. We’re in a crypto bull market and all lights have now turned green for further price appreciation in the next couple of months and possibly years. Let’s take a look at some TA and look at what triggered today’s explosive break. After that, we comment on the recent bullish fundamental developments about yet another category of participants entering the space.
Technicals: Bitcoin Enters Price Discovery
After almost a month of consolidation below bitcoin’s all-time high, the break to the upside was expected to be violent and quick.A combination of shorts having to close or getting liquidated coupled with fresh long positions essentially resulted in double buying pressure which caused a +5% move to the upside in a very short period of time.As history has shown, assets that break their ATH’s generally continue to the upside for quite some time and $20k will now likely act as a new price floor or support.
With Bitcoin trading at the highest level it has ever traded, there isn’t a lot of data to find next possible resistance areas. The path of least resistance is up and with all the attention on this market right now, demand will continue to remain high for quite some time. Although a retest of $20k as support will likely happen eventually, we’re now officially in bull market territory and dips are for buying as long as bitcoin holds above $20k.
What About The Fundamentals?
Not a week seems to go by without a new institution announcing they are planning or have bought bitcoin. Recently, insurance company MassMutual announced their $100M BTC investment which, according to analysts, has the potential to open a massive new investment category. Insurance companies are considered to have deep pockets and in a recent note, JPMorgan wrote that an allocation as small as 1% by that category of company in major markets in the U.S. , Europe and Japan could represent $600 billion of new demand.
Earlier today, U.K.-based Ruffer confirmed their £550m bitcoin buy in November, equivalent to around 2.7% of the firm's assets under management. What was particularly interesting about this investment was Ruffer’s argument, stating that it was:
"Primarily a protective move for portfolios" to "act as a hedge" against "some of the risks that we see in a fragile monetary system and distorted financial markets."
In other news, billionaire hedge fund manager Alan Howard backed a new institutional-focused investment firm that was aiming to buy a $1 billion allocation to bitcoin and ether by early next year. It’s hard to ignore the institutional demand and it seems that the trend is only just getting started. It looks like 2021 will be another fantastic year for our little industry.
So the message is clear. From both a technical and fundamental perspective, signs are bullish. On the technical side, the path of least resistance is to the upside, implying dips are for buying as long as we stay above the $20,000 level. From the fundamental side, we continue to see significant demand from institutional investors. We now welcome insurance companies into the space, showing the increasing role of cryptocurrencies in the financial services. Of course, we must remain diligent and here at Market Meditations, we will be sure to keep our readers updated if anything changes but, at least for now, we would say this is certainly cause for celebration. We wish you continued trading success.
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CME Group Announces Ethereum Futures Product. Chicago Mercantile Exchange (CME), the world’s largest derivatives exchange, announced today that it will launch an Ethereum futures product next year. Although subject to regulatory approval, the product is expected to launch on February 8. It will be cash-settled and one contract will be equal to 50 ETH. "Building on the success of Bitcoin futures and options, CME Group will add Ether futures to the cryptocurrency risk-management solutions available to trade in February," the firm said. The launch of the Ethereum futures product comes 3 years after their bitcoin futures were launched by the firm. Read more.
Decentralized Exchange Bonfida Raises $4.5m in Seed Round Led by CMS Holdings. On Tuesday, the team behind the decentralized, non-custodial exchange bonfida announced it has raised $4.5 million in a seed round. Bonfida is built on open-source protocol Serum and is powered by the Solana blockchain. CMS holdings co-founder Bobby Cho explained that “Bonfida has built a full-featured exchange on top of the Serum protocol, helping it live up to the promise that decentralized exchanges can be as robust and powerful as their centralized counterparts.” Read more.
Trump Is Reportedly Considering Pardon for Silk Road Founder Ross Ulbricht. U.S. president Donald Trump is rumoured to be considering a pardon for Ross Ulbricht, founder of the now closed dark web marketplace Silk Road who is serving a life sentence. The Block cited a report from The Daily Beast that wrote that the White House counsel office has been reviewing the documents related to Ulbricht's case and that Trump privately expressed their sympathy for Ross’s case. Read more.
Mt. Gox Creditors’ Wait Nearly Over as Trustee Announces Draft Rehabilitation Plan. In 2014, Japanese-based Mt. Gox declared bankruptcy after hackers allegedly stole 850,000 bitcoin from its servers. Later, it found ~200,000 BTC in an old wallet, an amount that will be used to (partially) refund users who have been waiting for refunds since 2014. On Tuesday, an announcement was posted by a trustee that stated: “The Tokyo District Court and an examiner will review the draft rehabilitation plan and determine whether to proceed with the rehabilitation proceedings relevant to the draft rehabilitation plan." It is estimated that Mt. Gox still holds approximately 141,600 bitcoin and 142,800 bitcoin cash. Read more.
Stocks Mixed Before Fed Amid Stimulus Wrangling. Over in legacy markets, stocks mixed as traders await guidance on the Fed’s meeting tonight, look for signs of economic recovery and monitor the progress of Biden’s stimulus bill. The S&P 500 trimmed gains from session highs (led by utility and industrial companies). The benchmark also fell off the back of disappointing retail sales data. NASDAQ 100 outperformed while DJIA dropped. Treasures retreated and USD was unchanged. Read more.
#32 Bobby Ong: Building Coingecko, How to DeFi and Dealing With Fake Volume
Bobby Ong (@bobbyong) is an entrepreneur, investor and trader. He is the co-founder of Coingecko, a data aggregation service for crypto that provides a market overview & analysis including price, market cap, trading volume.
In this episode, we talk about how Coingecko managed to survive and thrive since 2014. We dive into how Coingecko managed to profit from this year’s DeFi craze through fast execution and building new features that traders wanted. We talk about yield farming, Coingecko’s venture arm and what Bobby looks for when thinking about investing in new projects.
Things I learned:
A lot of products from traditional markets are simply being replicated in crypto. Initially on centralized exchanges, but now also on decentralized exchanges.
A big percentage of the Ethereum community switched over to Coingecko this summer because they offered innovative features on DeFi.
Discussions within the team are a lot easier when you’re face to face compared to being on a call. Working together in the same location builds a good working relationship that is hard to establish remotely.
For remote work to go well, you need to have the right tools in place in terms of project management and communication.
Working with a small team can work in your favor in terms of efficiency and focused attention.
In 2017, it was incredibly easy for an ICO to raise a couple million dollars. A lot of projects wasted their funds on expensive parties and offices instead of actually focusing on building a product
Bear markets are great to build the foundation for your product. During the bull market you simply don’t have enough time for it. Entrepreneurs who built during bear markets get rewarded in the bull market.
Trade volume alone isn’t a reliable indicator. Because of the lack of regulation, there’s still a lot of wash trading in crypto. Coingecko considers every non-regulated exchange as ‘suspicious’ and uses multiple metrics to evaluate an exchange.
The only way to learn DeFi is to participate in it yourself. Yield farming was a great way to learn about how DeFi works.
This space moves so fast that you can’t stop learning if you want to stay ahead.
What Traders Can Learn From Behavioural Finance
Market Meditators, welcome back to the Education section of our newsletter. Here, we explore topics, tools and skill sets that will help you to become a better trader. Trading is not confined to analysing price charts or fundamentals. Behaviour and psychology are also extremely important.To that end, let’s draw out some lessons from behavioural finance.
The basic idea behind behavioural finance is that investors/traders are humans and, therefore, imperfect. This is in contrast to Bayes’ formula, where individuals are assumed to act rationally by maximising utility within budget constraints and updating expectations. Behavioural finance is a science that seeks to understand these less than rational behaviours to explain observed pricing anomalies in the markets. It is helpful to explore these behaviours because:
You can gain an understanding of whether you exhibit these irrational behaviours in your trading strategies.
You can use these exhibited behaviours to try to predict how the market will react to technical or fundamental events. That is, you can use the knowledge of behavioural biases to predict how asset prices will be affected and act based on the prediction to earn abnormal profits.
Loss aversion. The first observed behaviour we look at is loss aversion. This refers to the tendency of people to dislike losses more than they like comparative gains. This results in a strong preference for avoiding losses as opposed to achieving gains. The consequence? If loss aversion is more important than risk aversion, investors overreact. Measure your losses according to the stop loss levels you set when you created your trading plan, do not let your emotions impact how you perceive them. Some traders let their losses run because they don’t want to admit defeat and are sure the market will return in the direction they want. If you would no longer enter your trade at the current level, it’s probably time to get out.
Herding and information cascading. Herding occurs when investors trade on the same side of the market in the same securities, or when they ignore their own private information and act as investors do. Of course, the direction of the herd may be wrong or the herd may have a different risk tolerance or diversification compared to the individual. This is why it is essential to trade on your own analysis. An information cascade is a bit different, it is the transmission of information from those participants who act first and whose decisions influence the decision of others. The same point applies, don’t just enter a position because your favourite account on twitter said they did (even if it’s me!). You might like the idea but it is crucial to get comfortable with it and understand it within the bounds of your own trading approach.
And there you have it. A few behaviours in the realm of behavioural finance and their implications. There are many other behaviours that you can explore if you wish: overconfidence, representativeness, mental accounting, narrow framing and conservatism to mention a few.
Three newsletters a day. Three bits of trading education a week. If you take these sections seriously and take actions for yourself each time you read them, you will very soon reap the benefits. As always, we are a community, so do share what you have learnt today with other traders.
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.