Technical analysis in its very nature is simply following reality. We're not tied to position, a narrative, or whatever story journalists are spinning up. We're never dogmatic in our approach and are always open to changing our approach as new data comes in.
We've been discussing a lot internally with all the analysts the lack of actionable crypto trade ideas we've published. Don't get us wrong, we love trades. But equally, we need to be aware and mindful of when the very act of trading itself is detrimental to our portfolios.
There's no such thing as catching every move. I see this a lot in the crypto community, where traders often feel like they need to predict every rally.
There isn't some random giga chad or MM slinging every move. It just doesn't exist. If anything, the blowups we're seeing all across the place among the most sophisticated crypto funds (3AC et al.) are a testament to this.
As we turn the page of another quarter in cryptocurrencies, we leave behind one of the most volatile 3-month periods the asset class has ever seen in its brief history.
Losing a whopping 56%, Bitcoin saw its second worse quarter in its history. Meanwhile, Ethereum lost 67% of its value in this period. By all accounts, this is now one of the most severe crypto bear markets by loss realization, wealth destruction, and capital leaving the ecosystem.
One of the greatest features of Bitcoin and cryptocurrencies more broadly are the mechanisms that allow for self-custody.
In traditional assets like commodities and fiat, the only way to maintain self-custody of your assets is to inefficiently store them, which comes with a slew of security risks. Given the challenges of burying gold or stashing cash in a mattress, the overwhelming majority of people simply leave this daunting task to a financial intermediary.
The trouble in crypto, however, is the instability among even the most established of firms and institutions. Hacks, breaches, and insolvencies are incredibly commonplace in the world of digital assets. Even a handful of the largest protocols and lenders have gone under, and billions of funds have been lost in recent months.
And when it comes to exchanges -- one of the safer ways to store funds -- hacks have been common over the past few years.
One of the great features of technical analysis and classical charting is its universal nature.
Technical analysis is a proven value-add regardless of which asset class you're analyzing, be it equities, commodities, bonds, or even the emerging world of digital assets.
Markets are incredibly sophisticated, with many moving parts. A big misconception about technical analysis held by novice proponents is that fundamentals are of no use.
It's quite the opposite. Fundamentals drive markets.
Particularly when it comes down to long time frames, markets are driven by fundamentals and macroeconomic factors.
On the other hand, technicals help us profit in the direction of those fundamentals.
Over shorter time frames, markets are driven by speculation and significant players. As a result, technicals and order flow are important to emphasize over these time frames.
Under these conditions, smart players with a lot of size push prices to maximum pain thresholds of the so-called "dumb money."
Last week's letter addressed the asymmetric opportunity being presented to long-term crypto investors.
By most measures, the crypto capital markets are in extreme oversold conditions. Using on-chain data, we demonstrated how Bitcoin market participants are closely approaching their maximum pain thresholds.
For long-term holders, periods such as these represent advantageous places to more aggressively average into spot positions.
Over this time frame, we strongly believe that we'll look upon this period as a great time to have accumulated Bitcoin and other major cryptocurrencies.
But this raises yet another question: What does the short-term outlook look like?
As any technical analyst would be quick to announce, long-duration assets and cryptocurrencies have been in an assertive downtrend as central banks have moved into a tightening regime following inflationary pressures.
But these bear markets often see swift and aggressive counter-trend rallies.
There's no denying the fact that crypto and macro have become intertwined in recent times.
We'd even go far as to say that Bitcoin is a macro asset. I think over time, as its market capitalization grows, the correlation to traditional assets will remain concentrated, as Bitcoin will eventually go on to exhibit gold-like returns.
Some will ask what it'll take for Bitcoin to decouple from equities. This is often a great and insightful discussion. But, like most elements relating to financial markets, we need to see them for how they really are, not how we want to see them.
When it comes to the macro landscape, it's clearly been difficult to ignore what's taking place in yields. The carnage in the bond market is, by historical measures, extreme.
The first lesson you learn in any university finance program is that higher yields negatively impact long-duration assets -- you're seeing this take place right here and now.
The Nasdaq is trading tick-for-tick with US Treasuries over recent weeks:
It's not just retail. Some of the most sophisticated crypto funds on the planet are blowing up. Lives are getting destroyed.
But here's a quick reminder: The best trades come when others are forced to exit and are at their lowest points.
Is it a nice way to make a living?
No. But you have to deal with it. Otherwise, you end up being on the wrong side.
The ETF providers in their infinite wisdom seem to be feeding on this sentiment, with the first short Bitcoin ETF being launched in the US this week. This feels awfully reminiscent of October, when the first Bitcoin futures ETF was launched.
By focusing the vast majority of our research on price action, we're simply following money flow. We hate to sound like a broken clock, but if you're following something other than money flow, it's just noise.
Ignore it.
Money flow is by definition the only driver that impacts markets. That spans from price action, derivatives data, order flow, and, in the case of cryptocurrencies, on-chain.
Apart from that, all else is noise.
In this process, we typically have a rather binary view of markets.
"Above this level, we own it. Below there, we leave it alone."
We constantly say this for a reason.
We're not trying to be obnoxious in repeating itself. We are quite literally adjusting our thoughts based on money flow.
