Ecoinometrics - Taking Shots
March 28, 2022
I don’t know what to think about this market. On one side Bitcoin is breaking out of this bottom range which is good for momentum. On the other side the macro landscape looks like crap. So what should we do?
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First there was inflation. Then there was a war. And after that there was the start of a quantitative tightening cycle.
What did the stock market do with all that?
It bounced back…
Which means one of three things:
We are missing something big which would justify that very rich valuations for stocks deserve to go even higher.
The Fed has it all under control, nothing to worry about (lol).
The market is complacent as fuck.
The Fed surely isn’t in control. If you want it summarized in one chart then just check out the 10-year yield versus inflation. This is not what being in control looks like. The Fed messed it up and didn’t see inflation coming. Now they are just playing catch up.
Actually now that I think about it the current situation is a mix of two things.
For sure investors are complacent. The Great Recession was 14 years. I bet that a lot of the people pumping money into the stock market right now weren’t investors back then.
All they have known is that the Fed will get their back if anything goes wrong. And they might be right except for the fact that we haven’t been in the current configuration (high debt, very low rates, very loose monetary regime) for a very long time. So it is hard to tell what will come out of it.
But also where the hell are you going to park your cash if not in the stock market?
I mean you don’t want to keep cash because of inflation. The bond market is paying you negative real rates. Gold isn’t really fashionable anymore. And with mortgage rates on the rise real estate might also become a more complicated play.
Which means you are left with piling on risk assets and digital assets. And since a lot of investors are doing both at the same time you end up with Bitcoin continuing to be positively correlated to the stock market.
Now Bitcoin is breaking out of this bottom range. This is still far away from the all-time high but if you are optimistic the pattern follows more or less the recovery mode of those long drawdowns.
Is this move supported by some on-chain trend?
Well it is supported by addresses controlling less than 10 BTC. But they are the only ones showing a clear trend. Addresses controlling 10 to 1k BTC are pretty much flat. And the whales are distributing coins.
So this move doesn’t have broad support on-chain. The accumulation score is warming up though. But all in all it doesn’t look super convincing.
That being said on-chain data just tells you about the backdrop. In the short term price discovery is driven by what happens on the exchanges and is more influenced by the derivative markets than anything else.
Right… So maybe you are as confused as I am about the current situation. Should you make a play and bet that this rally has legs? Or should you do nothing until everything becomes clear?
I think it depends on your situation.
If you have been stacking sats for a while and any incremental new position you take is small in percentage of your overall hodlings then doing nothing isn’t that bad. You already have exposure. So you might as well keep some dry powder to enter if we ever see a broad market crash.
If you don’t have a very large position things are different. Entering right when momentum is building is ideal to generate returns with low risk. And to execute on that you might as well use the ol’ reliable: follow the trend!
Historically trading momentum has been a no brainer. Losses are typically small while catching the upside can be massive.
So even if the days of 20x return in one move are probably gone for Bitcoin it is worth taking a shot. After all this strategy still works well on the likes of Apple.
And it just happens that we are getting an opportunity right now. Check out the multiple over the 200 days moving average.
By the time this newsletter comes out (I’m writing those lines on Monday morning Hong Kong time) Bitcoin might have already crossed above its 200 days moving average. If that’s the case then it is time to get long and ride the wave.
If this is the start of a parabolic move then you are pretty much guaranteed some positive returns. Otherwise you close the position the next time BTC crosses below the moving average and typically that doesn’t lead to very large losses.
You might also decide to place a bet on ETH instead of BTC since those two are moving in lockstep but Ethereum has the potential to move faster as it has demonstrated this cycle.
Is the macroeconomic situation supportive of another bull run for digital assets? Nope.
Is on-chain data suggestive of a broad support for a breakout? Not really.
Should you take the occasion of a 200 days moving average crossing to go long anyway? I’d say yes.
Sometimes trying to play it too smart just gets in the way of making money.
If you are being systematic about executing strategies that have positive expected returns just ignore everything else and play the odds.
Data visualizations website
Quick update on the interactive charts website.
Next week on Monday I will:
Publish an upgrade with some new charts.
Migrate the domain to ecoinometrics.com.
Send all paid subscribers to the newsletter an invite to become a member.
Then at the end of next week the website will switch to private which means that if you haven’t created a login using the invite you won’t be able to access it anymore.
I’ll remind you about all that and if you have issues just send me an email and we’ll sort it out.
If you aren’t a paid subscriber yet now is time to upgrade if you want to be able to keep accessing the charts and vote on the next ones that will be implemented.
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