Ecoinometrics - August 12, 2020

Just follow the trend...

Everyone is a genius in a bull market. You can be a genius too! Follow along…


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I guess there are different ways of looking at the long Bitcoin strategy. 

My personal strategy is to accumulate regularly. This is the stacking sats way of life. 

I have a pretty long term horizon. When it comes to realizing profits in any way I’m ready to wait two more halving cycles before considering it.

For me the best way to characterize stacking sats as an investment strategy would be as a value play. Bitcoin is still in its early growth phase. Most of the upside is yet to come. 

So for me any price is cheap. 

And if I see anything that looks like a crash I’m rushing to buy more. If you can stomach long periods of Bitcoin going nowhere and maybe seeing your position in the red then that’s a perfectly fine strategy.

But what if you cannot stomach being in the red for an extended period of time?

What if the price volatility is keeping you up at night?

What if the thought of seeing your position losing 50% of its value in one day is giving you cold sweat?

Or simply what if your goal is to trade the market to realize profits in cash (no judgement) at a shorter time horizon?

Well I’ve got something for you then. There is a dead simple strategy that is working very well with Bitcoin.

Just follow the trend.

Which trend? The long term one a.k.a. the good old 200 days moving average.

Here are the very simple rules. Look at Bitcoin value and its 200 days moving average:

  • When BTC moves above its 200 days moving average go long.

  • When BTC is crossing back below its 200 days moving average close the position.

When it comes to trading it is best to keep it simple. Less risk of messing up execution. Less risk of seeing patterns where there aren’t any. Less risk of over-engineering something that should be straightforward. 

If you aren’t Jim Simons, stick to the basics.

Ok. I don’t think I need to explain further how this works. 

Now how has this strategy worked out in the past? I’ve run the numbers. 

Since June 2013 you would have triggered 15 long positions. Of those 11 turned a profit including capturing 100%, 700% and 4,000% upsides. By comparison your worst loss would have been -20%...

Check out the return profile of those 15 positions.

There are a few good things here:

  • You aren’t booking any large losses.

  • Your winning positions are spending very little time in the red if any.

  • You are capturing large parts of the exponential growth phases of Bitcoin.

  • Historically the losing positions are pretty short lived. The longest one lasted a month.

Compared to a value investing strategy this one is likely to be easier to deal with psychologically. 

Now why is this strategy working? And why is it likely to continue working for a while? 

Well…

“Well, this is a bull market, you know”

Edwin Lefevre, Reminiscences of a stock operator.

Yes. If you take the very long time horizon Bitcoin is in a bull market. It is in a bull market because as an asset it is transitioning from being an aspirational store of value to being an actual store of value. 

We probably have two more halving cycles of this adoption phase playing out. That means this strategy should have plenty more opportunities to perform.

And something that will help the trend following crowd is the institutional investors deploying their own money on trend following strategies for Bitcoin.

Using the Commitment of Traders data for the CME Bitcoin derivatives we can see hints that it may be starting already.

Retail traders are still very much net long. They have been for ages but the amount of long positions continues to trend higher.

Meanwhile, as I wrote about last week, the smart money has been using a mix of “cash and carry” trades to harvest the futures premium over spot BTC and outright long positions.

But following the Paul Tudor Jones long Bitcoin thesis we are seeing the outright long positions gain momentum.

There is only so much juice you can extract from arbitraging between futures and spot. So I’d expect that over time the smart money will shift towards the net long side. 

But who knows how fast that will play out.

This week Bitcoin has found a ceiling at $12,000. The expected range of price fluctuations is somewhere between $11,300 to $12,300. We haven’t escaped that so far.

A good sign of the bullish sentiment running in the futures market is that even though yesterday had Bitcoin move down almost 5%, there was no massive liquidation of open positions. Volume remained steady too. And the spreads haven’t been coming down.

On the options side of things the puts are staging a comeback. Gone are the days when there were 31 calls for every put. 

Given the trading activity pattern at first sight it looks to be more traders buying protective puts than betting on a crash. The result is a put to call ratio back at 3 calls for every put.

I’ve been surprised that we don’t see more bull call spreads popping up in the options market. Those trades came in large volume, mostly losing money and then stopped…

There are still some of those big bets on August though. So maybe after the summer holidays they’ll make a comeback.

I don’t have any short term price predictions for this week. Everything that I see has me convinced that the next two years are likely to be a repeat of the last two halving cycles. 

Let’s go back to stacking sats. 

Nick


The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:

  1. Click on the subscribe button right below.

  2. Follow Ecoinometrics on Twitter at https://twitter.com/ecoinometrics

Done? That’s great! Thank you and enjoy.