It’s not so much because JC and Louis needed me to step in. It’s because I wanted to share something with you.
I want to discuss a potential mean-reversion trade opportunity in Coinbase $COIN.
I think it’s one of the best ways to express a bullish tactical thesis on cryptocurrency markets right now.
I know that’s really not saying a lot these days. The asset class is a mess. “Disaster” might be a better descriptor, particularly as it relates to the FTX meltdown.
In the aftermath of its collapse, how can we trust any of the crypto exchanges right now? Why the hell would we want to buy Coinbase? Isn’t it just the next domino to fall?
We like to keep things simple and remove unnecessary complexity.
As far as we've been concerned, over the last few years -- and particularly since the November high -- Bitcoin has merely followed legacy markets.
For the longest time, it's been all about correlations. Has this made our job slightly boring? Sure, there's no doubt.
As technicians, we love having multiple uncorrelated asset classes at our fingertips. The more assets with their own idiosyncratic drivers away from systemic risk factors, the better.
But we need to see the market for what it is and profit from what ultimately pays, and that's price.
We remain patient in the face of this price action.
In fact, it's been many months since we've expressed any bullishness over long time frames.
At heart, we're trend followers. We're not here to stand in the way of the market. Rather, we want to keep our approach simple and ride the ebbs and flows of the tape to make our money.
Unless you're looking at your charts upside down, it's been difficult to ignore what's been happening in this space, be it in recent weeks or over the last year.
In the aftermath of the collapse of FTX, more parties will be exposed. Grayscale refuses to prove its reserves, and WETH has recently lost its trading peg to ETH.
In the parlance of Mr. Buffett, only when the tide goes out do you discover who's been swimming naked.
Following the collapse of Alameda and FTX, crypto's correlations to legacy markets have completely come off.
As an asset class, this is the most independent crypto has traded for over a year. For most asset allocators and traders, this is generally favorable because it increases the number of uncorrelated assets to profit from.
A big problem for crypto traders is they've been merely riding on a short volatility vehicle that's been tightly correlated to long-duration growth stocks.
All crypto has offered in this period is Beta rather than a unique directional market.
So it's certainly been nice to see some dislocation from equity markets -- even if crypto's been lagging hard following the FTX fiasco.
But my bet is this correlation between stocks and crypto will more than likely return in the coming weeks and prove a durable feature of the landscape.
You might not like it, but we must always deal with reality whenever money's on the table.
Back in June, we published a report assessing the asymmetric opportunity to dollar-cost average into Bitcoin.
We concluded that mass liquidations driving Bitcoin back to levels last seen in 2017 represented a favorable opportunity for crypto investors to begin scaling into long-term spot positions.
In the almost exactly five months since then, Bitcoin has continued to creep lower, nearing 15,000. This price action validates the DCA strategy, and it looks even more favorable for long-term crypto investors.
Let's revisit the underpinnings of the strategy in light of recent history.
Market breadth has to be the handiest tool in our technical analysis kit.
Sure, we love ripping through thousands of charts to gauge broad market trends. But breadth indicators are a cheat code. Putting in the work, we can easily quantify and, more importantly, visualize how well a market is being supported by its constituents.
Because remember, it will always be a market of stocks, not a stock market. Or, in this case, a market of cryptocurrencies.
There are numerous ways to optimize this data output; we can use this breadth data as the basis of a systematic approach.
Your trading system is only as good as your understanding of how well your system operates in different market environments.
If you understand that particular systems and strategies work better in trending environments but are terrible in rangebound markets, you can optimize your trading performance by leaning on different approaches depending on the market environment.
The collapse of the FTX exchange has been a significant catalyst for market participants to utilize one of Bitcoin's greatest value propositions -- self-custody.
Self-custody is when only you have possession of your digital funds because you control the private key. There's no question; there's no alternative to holding your crypto other than in private cold storage.
Owning your Bitcoin keys voids the necessity for a financial intermediary, completely removing any and all counterparty risk. This is especially important given that crypto exchanges hold a shaky history of being responsible stewards of clients' funds.
When you hold your crypto in hot wallets managed by intermediaries like exchanges, they have all the control. They can freeze your transactions, block withdrawals, set limits on the amount you can transact -- and, in the case of FTX, use your funds for their private self-interest.
We're seeing a massive migration where market participants are waking to the value of self-custody.
We pride ourselves on never being dogmatic and always being open to any scenario.
What often marks a great technical analyst is the ability to choose to be objective and not letting emotion get in the way of analyzing money flow.
And we all have that choice.
We can be driven by an immediate emotional response and gather into an angry mob over the injustices of the FTX situation.
Or we can take responsibility for our own self-interest and continue to look for opportunities as they come.
It's hard not to feel like an asshole as I write this. But your only objective here is to make money. If you're a trader, you're not here for some greater good.
Now, to be clear, I in no way celebrate these misfortunes. Financial markets are brutal, and there’s nothing worse than the guy getting off on people blowing up.
But it’d be a terrible shame to walk away from this institutional crypto contagion without taking some lessons.
We’re all human beings.
None of us is infallible.
Markets like these remind us of the importance of risk management, which is so easily forgotten in the good times.
