Putting $400M of Bitcoin on your company balance sheet
Also posted on my blog as usual. Read it there if you can, there are footnotes and inlined plots. A couple of months ago, MicroStrategy (MSTR) had a spare $400M of cash which it decided to shift to Bitcoin (BTC). Today we'll discuss in excrutiating detail why this is not a good idea. When a company has a pile of spare money it doesn't know what to do with, it'll normally do buybacks or start paying dividends. That gives the money back to the shareholders, and from an economic perspective the money can get better invested in other more promising companies. If you have a huge pile of of cash, you probably should be doing other things than leave it in a bank account to gather dust. However, this statement from MicroStrategy CEO Michael Saylor exists to make it clear he's buying into BTC for all the wrong reasons:
“This is not a speculation, nor is it a hedge. This was a deliberate corporate strategy to adopt a bitcoin standard.”
Let's unpack it and jump into the economics Bitcoin:
Is Bitcoin money?
No. Or rather BTC doesn't act as money and there's no serious future path for BTC to become a form of money. Let's go back to basics. There are 3 main economic problems money solves: 1. Medium of Exchange. Before money we had to barter, which led to the double coincidence of wants problem. When everyone accepts the same money you can buy something from someone even if they don't like the stuff you own. As a medium of exchange, BTC is not good. There are significant transaction fees and transaction waiting times built-in to BTC and these worsen the more popular BTC get. You can test BTC's usefulness as a medium of exchange for yourself right now: try to order a pizza or to buy a random item with BTC. How many additional hurdles do you have to go through? How many fewer options do you have than if you used a regular currency? How much overhead (time, fees) is there? 2. Unit of Account. A unit of account is what you compare the value of objects against. We denominate BTC in terms of how many USD they're worth, so BTC is a unit of account presently. We can say it's because of lack of adoption, but really it's also because the market value of BTC is so volatile. If I buy a $1000 table today or in 2017, it's roughly a $1000 table. We can't say that a 0.4BTC table was a 0.4BTC table in 2017. We'll expand on this in the next point: 3. Store of Value. When you create economic value, you don't want to be forced to use up the value you created right away. For instance, if I fix your washing machine and you pay me in avocados, I'd be annoyed. I'd have to consume my payment before it becomes brown, squishy and disgusting. Avocado fruit is not good money because avocadoes loses value very fast. On the other hand, well-run currencies like the USD, GBP, CAD, EUR, etc. all lose their value at a low and most importantly fairly predictible rate. Let's look at the chart of the USD against BTC While the dollar loses value at a predictible rate, BTC is all over the place, which is bad. One important use money is to write loan contracts. Loans are great. They let people spend now against their future potential earnings, so they can buy houses or start businesses without first saving up for a decade. Loans are good for the economy. If you want to sign something that says "I owe you this much for that much time" then you need to be able to roughly predict the value of the debt in at the point in time where it's due. Otherwise you'll have a hard time pricing the risk of the loan effectively. This means that you need to charge higher interests. The risk of making a loan in BTC needs to be priced into the interest of a BTC-denominated loan, which means much higher interest rates. High interests on loans are bad, because buying houses and starting businesses are good things.
BTC has a fixed supply, so these problems are built in
Some people think that going back to a standard where our money was denominated by a stock of gold (the Gold Standard) would solve economic problems. This is nonsense. Having control over supply of your currency is a good thing, as long as it's well run. See here Remember that what is desirable is low variance in the value, not the value itself. When there are wild fluctuations in value, it's hard for money to do its job well. Since the 1970s, the USD has been a fiat money with no intrinsic value. This means we control the supply of money. Let's look at a classic poorly drawn econ101 graph The market price for USD is where supply meets demand. The problem with a currency based on an item whose supply is fixed is that the price will necessarily fluctuate in response to changes in demand. Imagine, if you will, that a pandemic strikes and that the demand for currency takes a sharp drop. The US imports less, people don't buy anything anymore, etc. If you can't print money, you get deflation, which is worsens everything. On the other hand, if you can make the money printers go brrrr you can stabilize the price Having your currency be based on a fixed supply isn't just bad because in/deflation is hard to control. It's also a national security risk... The story of the guy who crashed gold prices in North Africa In the 1200s, Mansa Munsa, the emperor of the Mali, was rich and a devout Muslim and wanted everyone to know it. So he embarked on a pilgrimage to make it rain all the way to Mecca. He in fact made it rain so hard he increased the overall supply of gold and unintentionally crashed gold prices in Cairo by 20%, wreaking an economic havoc in North Africa that lasted a decade. This story is fun, the larger point that having your inflation be at the mercy of foreign nations is an undesirable attribute in any currency. The US likes to call some countries currency manipulators, but this problem would be serious under a gold standard.
Currencies are based on trust
Since the USD is based on nothing except the US government's word, how can we trust USD not to be mismanaged? The answer is that you can probably trust the fed until political stooges get put in place. Currently, the US's central bank managing the USD, the Federal Reserve (the Fed for friends & family), has administrative authority. The fed can say "no" to dumb requests from the president. People who have no idea what the fed does like to chant "audit the fed", but the fed is already one of the best audited US federal entities. The transcripts of all their meetings are out in the open. As is their balance sheet, what they plan to do and why. If the US should audit anything it's the Department of Defense which operates without any accounting at all. It's easy to see when a central bank will go rogue: it's when political yes-men are elected to the board. For example, before printing themselves into hyperinflation, the Venezuelan president appointed a sociologist who publicly stated “Inflation does not exist in real life” and instead is a made up capitalist lie. Note what happened mere months after his gaining control over the Venezuelan currency This is a key policy. One paper I really like, Sargent (1984) "The end of 4 big inflations" states:
The essential measures that ended hyperinflation in each of Germany,Austria, Hungary, and Poland were, first, the creation of an independentcentral bank that was legally committed to refuse the government'sdemand or additional unsecured credit and, second, a simultaneousalteration in the fiscal policy regime.
In english: *hyperinflation stops when the central bank can say "no" to the government." The US Fed, like other well good central banks, is run by a bunch of nerds. When it prints money, even as aggressively as it has it does so for good reasons. You can see why they started printing on March 15th as the COVID lockdowns started:
The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.
In english: We're going to keep printing and lowering rates until jobs are back and inflation is under control. If we print until the sun is blotted out, we'll print in the shade.
BTC is not gold
Gold is a good asset for doomsday-preppers. If society crashes, gold will still have value. How do we know that? Gold has held value throughout multiple historic catastrophes over thousands of years. It had value before and after the Bronze Age Collapse, the Fall of the Western Roman Empire and Gengis Khan being Gengis Khan. Even if you erased humanity and started over, the new humans would still find gold to be economically valuable. When Europeans d̶i̶s̶c̶o̶v̶e̶r̶e̶d̶ c̶o̶n̶q̶u̶e̶r̶e̶d̶ g̶e̶n̶o̶c̶i̶d̶e̶d̶ went to America, they found gold to be an important item over there too. This is about equivalent to finding humans on Alpha-Centauri and learning that they think gold is a good store of value as well. Some people are puzzled at this: we don't even use gold for much! But it has great properties: First, gold is hard to fake and impossible to manufacture. This makes it good to ascertain payment. Second, gold doesnt react to oxygen, so it doesn't rust or tarnish. So it keeps value over time unlike most other materials. Last, gold is pretty. This might sound frivolous, and you may not like it, but jewelry has actual value to humans. It's no coincidence if you look at a list of the wealthiest families, a large number of them trade in luxury goods. To paraphrase Veblen humans have a profound desire to signal social status, for the same reason peacocks have unwieldy tails. Gold is a great way to achieve that. On the other hand, BTC lacks all these attributes. Its value is largely based on common perception of value. There are a few fundamental drivers of demand:
Means of Exchange: if people seriously start using BTC to buy pizzas, then this creates a real demand for the currency to accomplish the short-term exchanges. As we saw previously, I'm not personally sold on this one and it's currently a negligible fraction of overall demand.
Criminal uses: Probably the largest inbuilt advantage of BTC is that it's anonymous, and so a great way to launder money. Hacker gangs use BTC to demand ransom on cryptolocker type attacks because it's a shared way for an honest company to pay and for the criminals to receive money without going to jail.
Apart from these, it's hard to argue that BTC will retain value throughout some sort of economic catastrophe.
BTC is really risky
One last statement from Michael Saylor I take offense to is this:
“We feel pretty confident that Bitcoin is less risky than holding cash, less risky than holding gold,” MicroStrategy CEO said in an interview
"BTC is less risky than holding cash or gold long term" is nonsense. We saw before that BTC is more volatile on face value, and that as long as the Fed isn't run by spider monkeys stacked in a trench coat, the inflation is likely to be within reasonable bounds. But on top of this, BTC has Abrupt downside risks that normal currencies don't. Let's imagine a few:
A critical software vulnerability is found in the BTC codebase, leading to a possible exploitation.
Xi Jinping decides he's had enough of rich people in China hiding their assets from him and bans BTC.
Some form of bank run takes hold for whatever reason. Because BTC wallets are uninsured, unlike regular banks, this compounds into a Black Tuesday style crash.
Blockchain solutions are fundamentally inefficient
Blockchain was a genius idea. I still marvel at the initial white paper which is a great mix of economics and computer science. That said, blockchain solutions make large tradeoffs in design because they assume almost no trust between parties. This leads to intentionally wasteful designs on a massive scale. The main problem is that all transactions have to be validated by expensive computational operations and double checked by multiple parties. This means waste:
BTC was estimated to use as much electricity as Belgium in 2019. It's hard to trace where the BTC mining comes from, but we can assume it has a huge carbon footprint.
A single transactions is necessarily expensive. A single transaction takes as much electricity as 800,000 VISA transactions, or watching 50,000 hours of youtube videos.
There is a large necessary tax on the transaction, since those checking the transaction extract a few BTC from it to be incentivized to do the work of checking it.
Many design problems can be mitigated by various improvements over BTC, but it remains that a simple database always works better than a blockchain if you can trust the parties to the transaction.
BTC/USD hourly chart Last week, the Bitcoin was able to break the $10,600 resistance and stay above $10,200, thus establishing a bullish trend in the short term. The BTC price reached as high as $11,185 and then formed a sideway channel, with support near $10,800. In order to continue with the bullish trend, the price needs to stay above the current support and break the new resistance at $11,200. Due to the low volatility in the past 2 weeks, the BTC price is not expected to reach $12,000 within this week. Review of the week： The CEO of Elitium published an article on Cointelegraph, expressing his views on the future of DeFi. As mentioned in the article, DeFi is the next evolution of the financial system, but there are many factors that affect the future of DeFi. For example, one is Ethereum 2.0 and its attempt to solve the scalability of Ethereum. Its success or failure will affect everything related to the Ethereum blockchain. Another factor is the response of banks and regulators to DeFi. Currently, DeFi must supervise itself as an industry. It must act in an ethical manner and develop solutions, such as insurance, to protect people. Unless we develop and meet these standards, DeFi will not be able to compete with traditional banking systems. There is also that practitioners in crypto industry should educate the public about DeFi and help them understand why this new technology can benefit people’s daily lives. In addition, DeFi alone is unlikely to be adopted on a large scale. Some people simply don’t want to deal with completely decentralized technology. Disclaimer: The above market commentary is based on technical analysis using historical pricing data, and is for reference only. It does not serve as investment or trading advice. https://preview.redd.it/zmek7j3r3ho51.jpg?width=260&format=pjpg&auto=webp&s=b2b622d2539e6d78480755a5598618e316db86d1
BTC/USD hourly chart The Bitcoin price had low volatility ever since it dropped from $12,000 to $10,000. There was buying activity as the price tested the $10,000 support multiple times. The BTC price rose slowly to $10,600 but was met with resistance, and is settling at around $10,300 without a strong sense of direction. In order to resume the bullish trend, the BTC price needs to build up the momentum to break the $10,600 resistance, as well as staying above $10,200. The support remains at $10,000. A break below this level would indicate a downturn and could test $9,000. Review of the week： Jay Hao, OKEx CEO, shared his views on DeFi that the decentralized finance space has grown exponentially over the last few months, to the point where more than $9 billion worth of crypto assets were locked in its protocols before crypto prices started dropping. This exponential growth in the last few months appears to be mainly related to a yield farming trend that started when lending protocol Compound began distributing its COMP governance token to users who interacted with the protocol. Yield farming or liquidity mining allows DeFi users to generate rewards with their cryptocurrency holdings by interacting with protocols that distribute governance tokens. Farming yield can be a profitable venture on its own, but the tokens being farmed often see their price surge as well (YFI and YFII’s success). Meanwhile, there are various risks that aren’t immediately clear (YAM’s unaudited protocols and SUSHI’s scam) Diversification is very often recommended by investors because not “putting all your eggs in one basket” helps ensure you don’t lose everything to scams, unexpected market moves or technical issues, and invest in potential gems while it’s still early. Disclaimer: The above market commentary is based on technical analysis using historical pricing data, and is for reference only. It does not serve as investment or trading advice. https://preview.redd.it/d8fnjquhr2n51.jpg?width=260&format=pjpg&auto=webp&s=2f07c65be29ed63da2d7fb564833f919fc74243b
Testing the Tide | Monthly FIRE Portfolio Update - June 2020
We would rather be ruined than changed. -W H Auden, The Age of Anxiety This is my forty-third portfolio update. I complete this update monthly to check my progress against my goal. Portfolio goal My objective is to reach a portfolio of $2 180 000 by 1 July 2021. This would produce a real annual income of about $87 000 (in 2020 dollars). This portfolio objective is based on an expected average real return of 3.99 per cent, or a nominal return of 6.49 per cent. Portfolio summary Vanguard Lifestrategy High Growth Fund – $726 306 Vanguard Lifestrategy Growth Fund – $42 118 Vanguard Lifestrategy Balanced Fund – $78 730 Vanguard Diversified Bonds Fund – $111 691 Vanguard Australian Shares ETF (VAS) – $201 745 Vanguard International Shares ETF (VGS) – $39 357 Betashares Australia 200 ETF (A200) – $231 269 Telstra shares (TLS) – $1 668 Insurance Australia Group shares (IAG) – $7 310 NIB Holdings shares (NHF) – $5 532 Gold ETF (GOLD.ASX) – $117 757 Secured physical gold – $18 913 Ratesetter (P2P lending) – $10 479 Bitcoin – $148 990 Raiz app (Aggressive portfolio) – $16 841 Spaceship Voyager app (Index portfolio) – $2 553 BrickX (P2P rental real estate) – $4 484 Total portfolio value: $1 765 743 (+$8 485 or 0.5%) Asset allocation Australian shares – 42.2% (2.8% under) Global shares – 22.0% Emerging markets shares – 2.3% International small companies – 3.0% Total international shares – 27.3% (2.7% under) Total shares – 69.5% (5.5% under) Total property securities – 0.3% (0.3% over) Australian bonds – 4.7% International bonds – 9.4% Total bonds – 14.0% (1.0% under) Gold – 7.7% Bitcoin – 8.4% Gold and alternatives – 16.2% (6.2% over) Presented visually, below is a high-level view of the current asset allocation of the portfolio. [Chart] Comments The overall portfolio increased slightly over the month. This has continued to move the portfolio beyond the lows seen in late March. The modest portfolio growth of $8 000, or 0.5 per cent, maintains its value at around that achieved at the beginning of the year. [Chart] The limited growth this month largely reflects an increase in the value of my current equity holdings, in VAS and A200 and the Vanguard retail funds. This has outweighed a small decline in the value of Bitcoin and global shares. The value of the bond holdings also increased modestly, pushing them to their highest value since around early 2017. [Chart] There still appears to be an air of unreality around recent asset price increases and the broader economic context. Britain's Bank of England has on some indicators shown that the aftermath of the pandemic and lockdown represent the most challenging financial crisis in around 300 years. What is clear is that investor perceptions and fear around the coronavirus pandemic are a substantial ongoing force driving volatility in equity markets (pdf). A somewhat optimistic view is provided here that the recovery could look more like the recovery from a natural disaster, rather than a traditional recession. Yet there are few certainties on offer. Negative oil prices, and effective offers by US equity investors to bail out Hertz creditors at no cost appear to be signs of a financial system under significant strains. As this Reserve Bank article highlights, while some Australian households are well-placed to weather the storm ahead, the timing and severity of what lays ahead is an important unknown that will itself feed into changes in household wealth from here. Investments this month have been exclusively in the Australian shares exchange-traded fund (VAS) using Selfwealth.* This has been to bring my actual asset allocation more closely in line with the target split between Australian and global shares. A moving azimuth: falling spending continues Monthly expenses on the credit card have continued their downward trajectory across the past month. [Chart] The rolling average of monthly credit card spending is now at its lowest point over the period of the journey. This is despite the end of lockdown, and a slow resumption of some more normal aspects of spending. This has continued the brief period since April of the achievement of a notional and contingent kind of financial independence. The below chart illustrates this temporary state, setting out the degree to which portfolio distributions cover estimated total expenses, measured month to month. [Chart] There are two sources of volatility underlying its movement. The first is the level of expenses, which can vary, and the second is the fact that it is based on financial year distributions, which are themselves volatile. Importantly, the distributions over the last twelve months of this chart is only an estimate - and hence the next few weeks will affect the precision of this analysis across its last 12 observations. Estimating 2019-20 financial year portfolio distributions Since the beginning of the journey, this time of year usually has sense of waiting for events to unfold - in particular, finding out the level of half-year distributions to June. These represent the bulk of distributions, usually averaging 60-65 per cent of total distributions received. They are an important and tangible signpost of progress on the financial independence journey. This is no simple task, as distributions have varied in size considerably. A part of this variation has been the important role of sometimes large and lumpy capital distributions - which have made up between 30 to 48 per cent of total distributions in recent years, and an average of around 15 per cent across the last two decades. I have experimented with many different approaches, most of which have relied on averaging over multi-year periods to even out the 'peaks and troughs' of how market movements may have affected distributions. The main approaches have been:
An 'adjusted income' approach - stripping out the capital gains components of Vanguard funds to reach an estimate of underlying income generation, both across the entire investment period, and during the sharpest low of the Global Financial Crisis
A long-term asset class approach - relying on long-term historical data on averages of the income produced by various asset classes
A 'tax method' approach - this derives an income estimate as a percentage of the portfolio by drawing on taxable investment income totals from tax return records
Simple historical rolling average - this is a rolling three-year measure, based on the actual distributions record of the portfolio
Average distribution rate approach - this method uses a long-term average of annual distributions received as a percentage of the total portfolio since 1999
Each of these have their particular simplifications, advantages and drawbacks. Developing new navigation tools Over the past month I have also developed more fully an alternate 'model' for estimating returns. This simply derives a median value across a set of historical 'cents per unit' distribution data for June and December payouts for the Vanguard funds and exchange traded funds. These make up over 96 per cent of income producing portfolio assets. In other words, this model essentially assumes that each Vanguard fund and ETF owned pays out the 'average' level of distributions this half-year, with the average being based on distribution records that typically go back between 5 to 10 years. Mapping the distribution estimates The chart below sets out the estimate produced by each approach for the June distributions that are to come. [Chart] Some observations on these findings can be made. The lowest estimate is the 'adjusted GFC income' observation, which essentially assumes that the income for this period is as low as experienced by the equity and bond portfolio during the Global Financial Crisis. Just due to timing differences of the period observed, this seems to be a 'worst case' lower bound estimate, which I do not currently place significant weight on. Similarly, at the highest end, the 'average distribution rate' approach simply assumes June distributions deliver a distribution equal to the median that the entire portfolio has delivered since 1999. With higher interest rates, and larger fixed income holdings across much of that time, this seems an objectively unlikely outcome. Similarly, the delivery of exactly the income suggested by long-term averages measured across decades and even centuries would be a matter of chance, rather than the basis for rational expectations. Central estimates of the line of position This leaves the estimates towards the centre of the chart - estimates of between around $28 000 to $43 000 as representing the more likely range. I attach less weight to the historical three-year average due to the high contribution of distributed capital gains over that period of growth, where at least across equities some capital losses are likely to be in greater presence. My preferred central estimate is the model estimate (green) , as it is based in historical data directly from the investment vehicles rather than my own evolving portfolio. The data it is based on in some cases goes back to the Global Financial Crisis. This estimate is also quite close to the raw average of all the alternative approaches (red). It sits a little above the 'adjusted income' measure. None of these estimates, it should be noted, contain any explicit adjustment for the earnings and dividend reductions or delays arising from COVID-19. They may, therefore represent a modest over-estimate for likely June distributions, to the extent that these effects are more negative than those experienced on average across the period of the underlying data. These are difficult to estimate, but dividend reductions could easily be in the order of 20-30 per cent, plausibly lowering distributions to the $23 000 to $27 000 range. The recently announced forecast dividend for the Vanguard Australian Shares ETF (VAS) is, for example, the lowest in four years. As seen from chart above, there is a wide band of estimates, which grow wider still should capital gains be unexpectedly distributed from the Vanguard retail funds. These have represented a source of considerable volatility. Given this, it may seem fruitless to seek to estimate these forthcoming distributions, compared to just waiting for them to arrive. Yet this exercise helps by setting out reasoning and positions, before hindsight bias urgently arrives to inform me that I knew the right answer all along. It also potentially helps clearly 'reject' some models over time, if the predictions they make prove to be systematically incorrect. Progress Progress against the objective, and the additional measures I have reached is set out below. Measure Portfolio All Assets Portfolio objective – $2 180 000 (or $87 000 pa) 81.0% 109.4% Credit card purchases – $71 000 pa 98.8% 133.5% Total expenses – $89 000 pa 79.2% 106.9% Summary The current coronavirus conditions are affecting all aspects of the journey to financial independence - changing spending habits, leading to volatility in equity markets and sequencing risks, and perhaps dramatically altering the expected pattern of portfolio distributions. Although history can provide some guidance, there is simply no definitive way to know whether any or all of these changes will be fundamental and permanent alterations, or simply data points on a post-natural disaster path to a different post-pandemic set of conditions. There is the temptation to fit past crises imperfectly into the modern picture, as this Of Dollars and Data post illustrates well. Taking a longer 100 year view, this piece 'The Allegory of the Hawk and Serpent' is a reminder that our entire set of received truths about constructing a portfolio to survive for the long-term can be a product of a sample size of one - actual past history - and subject to recency bias. This month has felt like one of quiet routines, muted events compared to the past few months, and waiting to understand more fully the shape of the new. Nonetheless, with each new investment, or week of lower expenditure than implied in my FI target, the nature of the journey is incrementally changing - beneath the surface. Small milestones are being passed - such as over 40 per cent of my equity holdings being outside of the the Vanguard retail funds. Or these these retail funds - which once formed over 95 per cent of the portfolio - now making up less than half. With a significant part of the financial independence journey being about repeated small actions producing outsized results with time, the issue of maintaining good routines while exploring beneficial changes is real. Adding to the complexity is that embarking on the financial journey itself is likely to change who one is. This idea, of the difficulty or impossibility of knowing the preferences of a future self, is explored in a fascinating way in this Econtalk podcast episode with a philosophical thought experiment about vampires. It poses the question: perhaps we can never know ourselves at the destination? And yet, who would rationally choose ruin over any change? The post, links and full charts can be seen here.
10-07 17:06 - 'There's no need for the hassle of peer to peer unless you need anonymity. It's actually pretty easy, I found buying Bitcoin easier (not to mention far more profitable) than contributing to the Roth IRA I set up. / **Bitcoin...' by /u/paperraincoat removed from /r/Bitcoin within 0-7min
''' There's no need for the hassle of peer to peer unless you need anonymity. It's actually pretty easy, I found buying Bitcoin easier (not to mention far more profitable) than contributing to the Roth IRA I set up. Bitcoin 101 Show the wife a chart of Bitcoin versus the S&P500 over the past ten years. Buy small amounts of Bitcoin off of a reputable exchange, and transfer them to a hardware wallet ([Trezor]1 , [Ledger]2 , [Coldcard]3 ) that you (and you alone) have the seed for. Wait for each amount to clear to your wallet before buying again. Wait years, at least a halving cycle, which has historically seen 10-20x returns. Ignore the drama, 60% price crashes, exchanges hacked, China outlawing it, wanna-be shitcoin forks, 'we're the next Bitcoin' altcoins claiming they're a worldwide blockchain learning computer or whatever and governments telling you it isn't safe, or too volatile and that you should totally switch back to the fiat we printed $5 trillion of this year alone, no, inflation shouldn't be a problem because (hand waving Keynesian technobabble) etc. To sell, transfer small amounts back to the exchange, and again, make sure they clear in your bank account before transferring again. Pay your taxes. Pay off your house, travel, take up golfing, i.e. retire in comfort. ''' Context Link Go1dfish undelete link unreddit undelete link Author: paperraincoat 1: w*llet**re*or*io/#/ 2: s*op.*e*ge**com/p*o*ucts/ledg*r-na*o*s 3: cold*ardwal*e*.co** Unknown links are censored to prevent spreading illicit content.
The Next Crypto Wave: The Rise of Stablecoins and its Entry to the U.S. Dollar Market
Author: Christian Hsieh, CEO of Tokenomy This paper examines some explanations for the continual global market demand for the U.S. dollar, the rise of stablecoins, and the utility and opportunities that crypto dollars can offer to both the cryptocurrency and traditional markets. The U.S. dollar, dominant in world trade since the establishment of the 1944 Bretton Woods System, is unequivocally the world’s most demanded reserve currency. Today, more than 61% of foreign bank reserves and nearly 40% of the entire world’s debt is denominated in U.S. dollars1. However, there is a massive supply and demand imbalance in the U.S. dollar market. On the supply side, central banks throughout the world have implemented more than a decade-long accommodative monetary policy since the 2008 global financial crisis. The COVID-19 pandemic further exacerbated the need for central banks to provide necessary liquidity and keep staggering economies moving. While the Federal Reserve leads the effort of “money printing” and stimulus programs, the current money supply still cannot meet the constant high demand for the U.S. dollar2. Let us review some of the reasons for this constant dollar demand from a few economic fundamentals.
Demand for U.S. Dollars
Firstly, most of the world’s trade is denominated in U.S. dollars. Chief Economist of the IMF, Gita Gopinath, has compiled data reflecting that the U.S. dollar’s share of invoicing was 4.7 times larger than America’s share of the value of imports, and 3.1 times its share of world exports3. The U.S. dollar is the dominant “invoicing currency” in most developing countries4. https://preview.redd.it/d4xalwdyz8p51.png?width=535&format=png&auto=webp&s=9f0556c6aa6b29016c9b135f3279e8337dfee2a6 https://preview.redd.it/wucg40kzz8p51.png?width=653&format=png&auto=webp&s=71257fec29b43e0fc0df1bf04363717e3b52478f This U.S. dollar preference also directly impacts the world’s debt. According to the Bank of International Settlements, there is over $67 trillion in U.S. dollar denominated debt globally, and borrowing outside of the U.S. accounted for $12.5 trillion in Q1 20205. There is an immense demand for U.S. dollars every year just to service these dollar debts. The annual U.S. dollar buying demand is easily over $1 trillion assuming the borrowing cost is at 1.5% (1 year LIBOR + 1%) per year, a conservative estimate. https://preview.redd.it/6956j6f109p51.png?width=487&format=png&auto=webp&s=ccea257a4e9524c11df25737cac961308b542b69 Secondly, since the U.S. has a much stronger economy compared to its global peers, a higher return on investments draws U.S. dollar demand from everywhere in the world, to invest in companies both in the public and private markets. The U.S. hosts the largest stock markets in the world with more than $33 trillion in public market capitalization (combined both NYSE and NASDAQ)6. For the private market, North America’s total share is well over 60% of the $6.5 trillion global assets under management across private equity, real assets, and private debt investments7. The demand for higher quality investments extends to the fixed income market as well. As countries like Japan and Switzerland currently have negative-yielding interest rates8, fixed income investors’ quest for yield in the developed economies leads them back to the U.S. debt market. As of July 2020, there are $15 trillion worth of negative-yielding debt securities globally (see chart). In comparison, the positive, low-yielding U.S. debt remains a sound fixed income strategy for conservative investors in uncertain market conditions. Source: Bloomberg Last, but not least, there are many developing economies experiencing failing monetary policies, where hyperinflation has become a real national disaster. A classic example is Venezuela, where the currency Bolivar became practically worthless as the inflation rate skyrocketed to 10,000,000% in 20199. The recent Beirut port explosion in Lebanon caused a sudden economic meltdown and compounded its already troubled financial market, where inflation has soared to over 112% year on year10. For citizens living in unstable regions such as these, the only reliable store of value is the U.S. dollar. According to the Chainalysis 2020 Geography of Cryptocurrency Report, Venezuela has become one of the most active cryptocurrency trading countries11. The demand for cryptocurrency surges as a flight to safety mentality drives Venezuelans to acquire U.S. dollars to preserve savings that they might otherwise lose. The growth for cryptocurrency activities in those regions is fueled by these desperate citizens using cryptocurrencies as rails to access the U.S. dollar, on top of acquiring actual Bitcoin or other underlying crypto assets.
The Rise of Crypto Dollars
Due to the highly volatile nature of cryptocurrencies, USD stablecoin, a crypto-powered blockchain token that pegs its value to the U.S. dollar, was introduced to provide stable dollar exposure in the crypto trading sphere. Tether is the first of its kind. Issued in 2014 on the bitcoin blockchain (Omni layer protocol), under the token symbol USDT, it attempts to provide crypto traders with a stable settlement currency while they trade in and out of various crypto assets. The reason behind the stablecoin creation was to address the inefficient and burdensome aspects of having to move fiat U.S. dollars between the legacy banking system and crypto exchanges. Because one USDT is theoretically backed by one U.S. dollar, traders can use USDT to trade and settle to fiat dollars. It was not until 2017 that the majority of traders seemed to realize Tether’s intended utility and started using it widely. As of April 2019, USDT trading volume started exceeding the trading volume of bitcoina12, and it now dominates the crypto trading sphere with over $50 billion average daily trading volume13. https://preview.redd.it/3vq7v1jg09p51.png?width=700&format=png&auto=webp&s=46f11b5f5245a8c335ccc60432873e9bad2eb1e1 An interesting aspect of USDT is that although the claimed 1:1 backing with U.S. dollar collateral is in question, and the Tether company is in reality running fractional reserves through a loose offshore corporate structure, Tether’s trading volume and adoption continues to grow rapidly14. Perhaps in comparison to fiat U.S. dollars, which is not really backed by anything, Tether still has cash equivalents in reserves and crypto traders favor its liquidity and convenience over its lack of legitimacy. For those who are concerned about Tether’s solvency, they can now purchase credit default swaps for downside protection15. On the other hand, USDC, the more compliant contender, takes a distant second spot with total coin circulation of $1.8 billion, versus USDT at $14.5 billion (at the time of publication). It is still too early to tell who is the ultimate leader in the stablecoin arena, as more and more stablecoins are launching to offer various functions and supporting mechanisms. There are three main categories of stablecoin: fiat-backed, crypto-collateralized, and non-collateralized algorithm based stablecoins. Most of these are still at an experimental phase, and readers can learn more about them here. With the continuous innovation of stablecoin development, the utility stablecoins provide in the overall crypto market will become more apparent.
In addition to trade settlement, stablecoins can be applied in many other areas. Cross-border payments and remittances is an inefficient market that desperately needs innovation. In 2020, the average cost of sending money across the world is around 7%16, and it takes days to settle. The World Bank aims to reduce remittance fees to 3% by 2030. With the implementation of blockchain technology, this cost could be further reduced close to zero. J.P. Morgan, the largest bank in the U.S., has created an Interbank Information Network (IIN) with 416 global Institutions to transform the speed of payment flows through its own JPM Coin, another type of crypto dollar17. Although people argue that JPM Coin is not considered a cryptocurrency as it cannot trade openly on a public blockchain, it is by far the largest scale experiment with all the institutional participants trading within the “permissioned” blockchain. It might be more accurate to refer to it as the use of distributed ledger technology (DLT) instead of “blockchain” in this context. Nevertheless, we should keep in mind that as J.P. Morgan currently moves $6 trillion U.S. dollars per day18, the scale of this experiment would create a considerable impact in the international payment and remittance market if it were successful. Potentially the day will come when regulated crypto exchanges become participants of IIN, and the link between public and private crypto assets can be instantly connected, unlocking greater possibilities in blockchain applications. Many central banks are also in talks about developing their own central bank digital currency (CBDC). Although this idea was not new, the discussion was brought to the forefront due to Facebook’s aggressive Libra project announcement in June 2019 and the public attention that followed. As of July 2020, at least 36 central banks have published some sort of CBDC framework. While each nation has a slightly different motivation behind its currency digitization initiative, ranging from payment safety, transaction efficiency, easy monetary implementation, or financial inclusion, these central banks are committed to deploying a new digital payment infrastructure. When it comes to the technical architectures, research from BIS indicates that most of the current proofs-of-concept tend to be based upon distributed ledger technology (permissioned blockchain)19. https://preview.redd.it/lgb1f2rw19p51.png?width=700&format=png&auto=webp&s=040bb0deed0499df6bf08a072fd7c4a442a826a0 These institutional experiments are laying an essential foundation for an improved global payment infrastructure, where instant and frictionless cross-border settlements can take place with minimal costs. Of course, the interoperability of private DLT tokens and public blockchain stablecoins has yet to be explored, but the innovation with both public and private blockchain efforts could eventually merge. This was highlighted recently by the Governor of the Bank of England who stated that “stablecoins and CBDC could sit alongside each other20”. One thing for certain is that crypto dollars (or other fiat-linked digital currencies) are going to play a significant role in our future economy.
There is never a dull moment in the crypto sector. The industry narratives constantly shift as innovation continues to evolve. Twelve years since its inception, Bitcoin has evolved from an abstract subject to a familiar concept. Its role as a secured, scarce, decentralized digital store of value has continued to gain acceptance, and it is well on its way to becoming an investable asset class as a portfolio hedge against asset price inflation and fiat currency depreciation.Stablecoins have proven to be useful as proxy dollars in the crypto world, similar to how dollars are essential in the traditional world. It is only a matter of time before stablecoins or private digital tokens dominate the cross-border payments and global remittances industry. There are no shortages of hypes and experiments that draw new participants into the crypto space, such as smart contracts, new blockchains, ICOs, tokenization of things, or the most recent trends on DeFi tokens. These projects highlight the possibilities for a much more robust digital future, but the market also needs time to test and adopt. A reliable digital payment infrastructure must be built first in order to allow these experiments to flourish. In this paper we examined the historical background and economic reasons for the U.S. dollar’s dominance in the world, and the probable conclusion is that the demand for U.S. dollars will likely continue, especially in the middle of a global pandemic, accompanied by a worldwide economic slowdown. The current monetary system is far from perfect, but there are no better alternatives for replacement at least in the near term. Incremental improvements are being made in both the public and private sectors, and stablecoins have a definite role to play in both the traditional and the new crypto world. Thank you. Reference:  How the US dollar became the world’s reserve currency, Investopedia  The dollar is in high demand, prone to dangerous appreciation, The Economist  Dollar dominance in trade and finance, Gita Gopinath  Global trades dependence on dollars, The Economist & IMF working papers  Total credit to non-bank borrowers by currency of denomination, BIS  Biggest stock exchanges in the world, Business Insider  McKinsey Global Private Market Review 2020, McKinsey & Company  Central banks current interest rates, Global Rates  Venezuela hyperinflation hits 10 million percent, CNBC  Lebanon inflation crisis, Reuters  Venezuela cryptocurrency market, Chainalysis  The most used cryptocurrency isn’t Bitcoin, Bloomberg  Trading volume of all crypto assets, coinmarketcap.com  Tether US dollar peg is no longer credible, Forbes  New crypto derivatives let you bet on (or against) Tether’s solvency, Coindesk  Remittance Price Worldwide, The World Bank  Interbank Information Network, J.P. Morgan  Jamie Dimon interview, CBS News  Rise of the central bank digital currency, BIS  Speech by Andrew Bailey, 3 September 2020, Bank of England
New Lands, or New Eyes? | Monthly FIRE Portfolio Update - April 2020
The real voyage of discovery consists not in seeking new landscapes, but in having new eyes. - Marcel Proust, Remembrance of Things Past This is my forty-first portfolio update. I complete this update monthly to check my progress against my goal. Portfolio goal My objective is to reach a portfolio of $2 180 000 by 1 July 2021. This would produce a real annual income of about $87 000 (in 2020 dollars). This portfolio objective is based on an expected average real return of 3.99 per cent, or a nominal return of 6.49 per cent. Portfolio summary Vanguard Lifestrategy High Growth Fund – $697 582 Vanguard Lifestrategy Growth Fund – $40 709 Vanguard Lifestrategy Balanced Fund – $76 583 Vanguard Diversified Bonds Fund – $110 563 Vanguard Australian Shares ETF (VAS) – $174 864 Vanguard International Shares ETF (VGS) – $31 505 Betashares Australia 200 ETF (A200) – $215 805 Telstra shares (TLS) – $1 625 Insurance Australia Group shares (IAG) – $7 323 NIB Holdings shares (NHF) – $5 904 Gold ETF (GOLD.ASX) – $119 458 Secured physical gold – $19 269 Ratesetter (P2P lending) – $12 234 Bitcoin – $158 360 Raiz app (Aggressive portfolio) – $16 144 Spaceship Voyager app (Index portfolio) – $2 435 BrickX (P2P rental real estate) – $4 471 Total portfolio value: $1 694 834 (+$127 888 or 8.2%) Asset allocation Australian shares – 40.9% (4.1% under) Global shares – 21.7% Emerging markets shares – 2.2% International small companies – 3.0% Total international shares – 26.9% (3.1% under) Total shares – 67.8% (7.2% under) Total property securities – 0.3% (0.3% over) Australian bonds – 4.5% International bonds – 9.9% Total bonds – 14.4% (0.6% under) Gold – 8.2% Bitcoin – 9.3% Gold and alternatives – 17.5% (7.5% over) Presented visually, below is a high-level view of the current asset allocation of the portfolio. Comments This month featured a sharp recovery in the overall portfolio, reducing the size of the large losses experienced over the previous month. The portfolio increased by over $127 000, representing a growth of 8.2 per cent, which is the largest month-on-month growth on record. This now puts the portfolio value significantly above the levels of a year ago. [Chart] The expansion in the value of the portfolio has occurred due to an increase in Australian and global equities markets, as well as substantial increases the price of Bitcoin. This is effectively the mirror image of the simultaneous negative movements last month. From a nadir of initial pessimism in late March, markets have generally moved upwards as debate continues about the path of a likely economic recession and recovery from Coronavirus impacts over the coming year. [Chart] First quarter distributions from the Australian and Global Shares ETFs (A200, VAS and VGS) were received this month. These were too early to fully reflect the sharp economic activity impacts of the Coronavirus and lockdown period on company earnings. Despite this, they were significantly down on a cents per unit basis on the equivalent distributions last year. Totalling around $2700, these distributions formed part of new contributions to Vanguard's Australian shares ETF (VAS). The rapid falls in equity have many participants looking forward to a return to normalcy, or at least more open to the pleasing ideas that nerves have been held in a market fall comparable to 2000 or 2008-09, and that markets now represent clear value. As discussed last month, there should be caution and some humility about these questions, if some historical perspective is taken. As an example, the largest global equity market in the world - the United States - remains at valuation levels well above those experienced in previous market lows. Portfolio alternatives - tracking changes under the surface A striking feature of the past year or so has been the expansion of the non-traditional or 'alternatives' components of gold and Bitcoin as a proportion of the overall portfolio. Currently, when combined these alternative assets form a greater part of the portfolio than at any point over the past two years. The chart below shows that since January 2019 the gold and Bitcoin component of the portfolio has lifted from around its long term target level of 10 per cent, to now make up over 17 per cent of the portfolio. In the space of the last four months alone, it has lifted from 13 per cent. [Chart] With no purchases of either gold or Bitcoin over the period, the growth in the chart is the result of two reinforcing factors: A substantial fall in the value of the equity portfolio - reaching nearly $200 000 since the recent February market peak has naturally and mathematically led to a commensurate increase the proportion of other assets. Increases in the value of gold and Bitcoin - have also played a role with a total appreciation of around $150 000 across the two assets over the past 16 months. In fact, the value gold holdings alone have increased by over 40 per cent since January last year. Further appreciation of either gold or Bitcoin prices, particularly if any further falls in equity markets occur, could easily place the portfolio in the same position as experienced in January 2018. At that time these alternative assets made up 1 in every 5 dollars of the portfolio, an unusual, and in that case temporary phenomenon. This represents a different portfolio and risk exposure than that envisaged in my portfolio investment plan. Yet, equally it is critical to recall what the circumstances would likely be for this to arise. Simultaneously high gold and Bitcoin prices are more likely to occur in a situation of severe capital market dislocation, or falling confidence. On the other hand, should confidence and equity market growth be restored, both of these portfolio components could fall back to lower levels. It is difficult to tell which state of the world will eventuate, a key reason for diversification across asset types. United States government debt is already at record levels - equivalent in real terms to levels last seen when it emerged out of the Second World War - despite no similar national effort having being undertaken. Future inflation can potentially partly manage this burden, however, the last sustained episode of persistently high inflation rates during the decade of the 1970s spelt negative real returns. Where investors expect future inflation or financially 'repressive' policies of inflation exceeding interest rates, the economic growth required to 'grow out' of debt can be affected. At this point, my inclination is to address this circumstance gradually through time by re-balancing of distributions and new contributions, rather than to realise capital gains by selling assets at one, or several, points in time. Chasing down the lines - falling average spending in lockdown Since the implementation of lockdown restrictions, average credit card expenditure has fallen by nearly 30 per cent. This has taken credit card expenditure to lower than any similar period in the past six years. Partly as a result of this - as the chart below shows - a new development is occurring. The previously fairly steady card expenses line (red) is now starting to bend down towards, or 'chase', the rolling average distributions line (in blue). [Chart] The declining distributions line is a result of some previous high distributions gradually falling outside of the data 'window' for the rolling three-year comparison of distributions and expenditure. This intriguing picture will probably change before a cross-over occurs, as lockdown restrictions ease, and as the data feeding into the three year average slowly changes over time. Progress Progress against the objective, and the additional measures I have reached is set out below. Measure Portfolio All Assets Portfolio objective – $2 180 000 (or $87 000 pa) 77.7% 104.6% Credit card purchases – $71 000 pa 94.8% 127.6% Total expenses – $89 000 pa 76.0% 102.3% Summary Last month market volatility theoretically took progress down to below most of my financial independence benchmarks on an 'All Assets' (i.e. portfolio and superannuation assets) basis. This position has reversed this month. As markets have recovered and with additional spare time in the lockdown period, I have continued to seek out and think about different perspectives on the history and future of markets. Yet it must be recognised that there is a natural limit to the utility of these ponderings. The shape of the future is always uncertain, and in this world, confident comparisons and analogies with past events can be perilous. Comparisons with past periods of financial market crises miss the centrality of government action as a causal influence on the path of virus affected economies and markets. A virus and recovery is not the same as a global financial crisis originating in housing finance markets addressed through monetary and fiscal stimulus. Most developed country governments have quickly applied the same, if not larger versions of responses as applied in the global financial crisis, a distinguishing step that also makes analogies with the great depression era problematic. Similarly, a pandemic is not hitting and interacting with the shattered economic and health systems of the 1918-19 Spanish flu. Overlaying all of this is the imperfect and partially disconnected relationship between the economy today, and equity markets that discount and focus on the future. This makes all history's lessons more than usually caveated and conditional. One avenue for managing through these times is to focus on what does not change - the psychological difficulty of accepting alterations in financial circumstances and the capacity of markets movements to cruelly surprise us in both timing and direction. One of the best texts to read to get a sense of both of these in such times is Benjamin Roth's A Great Depression Diary. This tells of the day-by-day changes observed in everyday urban life and investment markets, from the point of view of an American small retail investor living through the times. This month also saw the exciting news that Pat the Shuffler and Strong Money Australia are combining efforts to produce a new podcast. Speaking of which, Big ERN's reflections on the current implications of sharemarket market movements for seekers of financial independence have been filled with insight and wisdom. This interesting piece (video) - the latest in a 'virus' market series - from New York University's Professor of Finance Aswath Damodaran on asset performances through the past few months - is a more technical and detailed discussion of how markets have re-priced businesses and profits. Finally, the recently released Hmmminar interview series provides a more heterodox set of speakers and ideas on current markets, presented by Grant Williams. Unlike predicting the future, seeking out different perspectives on it is perhaps the easiest it has ever been in history. While it is not always possible to change the course taken, it is possible to look at the same horizon with new eyes. The post, links and full charts can be seen here.
09-07 17:55 - 'Bitcoin Market— Week of 09/07/2020' (self.Bitcoin) by /u/Coinviva removed from /r/Bitcoin within 573-583min
''' [ ]1 BTC/USD hourly chart The Bitcoin price had a volatile week, which started off with reaching $12,000 and then quickly dived to $10,000 within 2 days, as the stock market experienced a big drop in the beginning of September. The BTC price settled at around $10,250 the moment. As seen in the hourly chart, a sideway channel has formed and there is some support at $10,000, possibly due to profit taking by the short sellers. If the BTC price becomes volatile again and drops below $10,000, it would indicate a bearish market and could test the next support level, which is at $9,000. Disclaimer: The above market commentary is based on technical analysis using historical pricing data, and is for reference only. It does not serve as investment or trading advice. [link]2 ''' Bitcoin Market— Week of 09/07/2020 Go1dfish undelete link unreddit undelete link Author: Coinviva 1: *re*i*w.r**d.it/fjy*27*tool51.png?wid*h*1149*amp;f*rm*t**n*&*auto=web*&a**;*=03b3c8782*08*072f*318f48*d1*56c*4*d0***b 2: p*eview.*edd*it/*6*ytzb*p*l*1.*p**width*260*am*;*orma*=*jpg&*mp*auto*web*&a*p;s=b9*42f50*f8f**0f4e76efdb96**e0dbee7*b*a3 Unknown links are censored to prevent spreading illicit content.
Murmurs of the Sea | Monthly Portfolio Update - March 2020
Only the sea, murmurous behind the dingy checkerboard of houses, told of the unrest, the precariousness, of all things in this world. -Albert Camus, The Plague This is my fortieth portfolio update. I complete this update monthly to check my progress against my goal. Portfolio goal My objective is to reach a portfolio of $2 180 000 by 1 July 2021. This would produce a real annual income of about $87 000 (in 2020 dollars). This portfolio objective is based on an expected average real return of 3.99 per cent, or a nominal return of 6.49 per cent. Portfolio summary Vanguard Lifestrategy High Growth Fund – $662 776 Vanguard Lifestrategy Growth Fund – $39 044 Vanguard Lifestrategy Balanced Fund – $74 099 Vanguard Diversified Bonds Fund – $109 500 Vanguard Australian Shares ETF (VAS) – $150 095 Vanguard International Shares ETF (VGS) – $29 852 Betashares Australia 200 ETF (A200) – $197 149 Telstra shares (TLS) – $1 630 Insurance Australia Group shares (IAG) – $7 855 NIB Holdings shares (NHF) – $6 156 Gold ETF (GOLD.ASX) – $119 254 Secured physical gold – $19 211 Ratesetter (P2P lending) – $13 106 Bitcoin – $115 330 Raiz* app (Aggressive portfolio) – $15 094 Spaceship Voyager* app (Index portfolio) – $2 303 BrickX (P2P rental real estate) – $4 492 Total portfolio value: $1 566 946 (-$236 479 or -13.1%) Asset allocation Australian shares – 40.6% (4.4% under) Global shares – 22.3% Emerging markets shares – 2.3% International small companies – 3.0% Total international shares – 27.6% (2.4% under) Total shares – 68.3% (6.7% under) Total property securities – 0.2% (0.2% over) Australian bonds – 4.8% International bonds – 10.4% Total bonds – 15.2% (0.2% over) Gold – 8.8% Bitcoin – 7.4% Gold and alternatives – 16.2% (6.2% over) Presented visually, below is a high-level view of the current asset allocation of the portfolio. Comments This month saw an extremely rapid collapse in market prices for a broad range of assets across the world, driven by the acceleration of the Coronavirus pandemic. Broad and simultaneous market falls have resulted in the single largest monthly fall in portfolio value to date of around $236 000. This represents a fall of 13 per cent across the month, and an overall reduction of more the 16 per cent since the portfolio peak of January. [Chart] The monthly fall is over three times more severe than any other fall experienced to date on the journey. Sharpest losses have occurred in Australian equities, however, international shares and bonds have also fallen. A substantial fall in the Australia dollar has provided some buffer to international equity losses - limiting these to around 8 per cent. Bitcoin has also fallen by 23 per cent. In short, in the period of acute market adjustment - as often occurs - the benefits of diversification have been temporarily muted. [Chart] The last monthly update reported results of some initial simplified modelling on the impact of a hypothetical large fall in equity markets on the portfolio. Currently, the actual asset price falls look to register in between the normal 'bear market', and the more extreme 'Global Financial Crisis Mark II' scenarios modelled. Absent, at least for the immediate phase, is a significant diversification offset - outside of a small (4 per cent) increase in the value of gold. The continued sharp equity market losses have left the portfolio below its target Australian equity weighting, so contributions this month have been made to Vanguard's Australian shares ETF (VAS). This coming month will see quarterly distributions paid for the A200, VGS and VAS exchange traded funds - totalling around $2700 - meaning a further small opportunity to reinvest following sizeable market falls. Reviewing the evidence on the history of stock market falls Vladimir Lenin once remarked that there are decades where nothing happen, and then there are weeks in which decades happen. This month has been four such weeks in a row, from initial market responses to the coronavirus pandemic, to unprecedented fiscal and monetary policy responses aimed at lessening the impact. Given this, it would be foolish to rule out the potential for other extreme steps that governments have undertaken on multiple occasions before. These could include underwriting of banks and other debt liabilities, effective nationalisation or rescues of critical industries or providers, or even temporary closure of some financial or equity markets. There is a strong appeal for comforting narratives in this highly fluid investment environment, including concepts such as buying while distress selling appears to be occurring, or delaying investing until issues become 'more clear'. Nobody can guarantee that investments made now will not be made into cruel short-lived bear market rallies, and no formulas exist that will safely and certainly minimise either further losses, or opportunities forgone. Much financial independence focused advice in the early stages of recent market falls focused on investment commonplaces, with a strong flavour of enthusiasm at the potential for 'buying the dip'. Yet such commonly repeated truths turn out to be imperfect and conditional in practice. One of the most influential studies of a large sample of historical market falls turns out to provide mixed evidence that buying following a fall reliably pays off. This study (pdf) examines 101 stock market declines across four centuries of data, and finds that:
Large falls can lead to strong rebounds - After large falls of up to 50 per cent, the probability of a large rebound is higher.
Future returns after large market falls are generally positive - Returns following such a severe crash are systematically higher than otherwise.
Smaller market falls, however, may accurately signal poor future returns - Smaller declines (10-20 per cent) are more likely to be followed by further declines, although the strength of the relationship is weaker and less consistent.
Even these findings should be viewed as simply indicative. Each crisis and economic phase has its unique character, usually only discernible in retrospect. History, in these cases, should inform around the potential outlines of events that can be considered possible. As the saying goes, risk is what remains after you believe you have thought of everything. Position fixing - alternative perspectives of progress In challenging times it can help to keep a steady view of progress from a range of perspectives. Extreme market volatility and large falls can be disquieting for both recent investors and those closer to the end of the journey. One perspective on what has occurred is that the portfolio has effectively been pushed backwards in time. That is, the portfolio now sits at levels it last occupied in April 2019. Even this perspective has some benefit, highlighting that by this metric all that has been lost is the strong forward progress made in a relatively short time. Yet each perspective can hide and distort key underlying truths. As an example, while the overall portfolio is currently valued at around the same dollar value as a year ago, it is not the same portfolio. Through new purchases and reinvestments in this period, many more actual securities (mostly units in ETFs) have been purchased. The chart below sets out the growth in total units held from January 2019 to this month, across the three major exchange trade funds holdings in the portfolio. [Chart] From this it can be seen that the number of securities held - effectively, individual claims on the future earnings of the firms in these indexes - has more than doubled over the past fifteen months. Through this perspective, the accumulation of valuable assets shows a far more constant path. Though this can help illuminate progress, as a measure it also has limitations. The realities of falls in market values cannot be elided by such devices, and some proportion of those market falls represent initial reassessments of the likely course of future earnings, and therefore the fundamental value of each of those ETF units. With significant uncertainty over the course of global lock-downs, trade and growth, the basis of these reassessments may provide accurate, or not. For anyone to discount all of these reassessments as wholly the temporary result of irrational panic is to show a remarkable confidence in one's own analytical capacities. Similarly, it would be equally wrong to extrapolate from market falls to a permanent constraining of the impulse of humanity to innovate, adjust to changed conditions, seek out opportunities and serve others for profit. Lines of position - Trends in expenditure A further longer-term perspective regularly reviewed is monthly expenses compared to average distributions. Monthly expenditure continues to be below average, and is likely to fall further next month as a natural result of a virus-induced reduction of shopping trips, events and outings. [Chart] As occurred last month, as a function some previous high distributions gradually falling outside of the data 'window' for the rolling three-year comparison of distributions and expenditure, a downward slope in distributions continues. Progress Progress against the objective, and the additional measures I have reached is set out below. Measure Portfolio All Assets Portfolio objective – $2 180 000 (or $87 000 pa) 71.9% 97.7% Credit card purchases – $71 000 pa 87.7% 119.2% Total expenses – $89 000 pa 70.2% 95.5% Summary This month has been one of the most surprising and volatile of the entire journey, with significant daily movements in portfolio value and historic market developments. There has been more to watch and observe than at any time in living memory. The dominant sensation has been that of travelling backwards through time, and revisiting a stage of the journey already passed. The progress of the last few months has actually been so rapid, that this backwards travel has felt less like a set back, but rather more like a temporary revisitation of days past. It is unclear how temporary a revisitation current conditions will enforce, or exactly how this will affect the rest of the journey. In early January I estimated that if equity market fell by 33 per cent through early 2020 with no offsetting gains in other portfolio elements, this could push out the achievement of the target to January 2023. Even so, experiencing these markets and with more volatility likely, I don't feel there is much value in seeking to rapidly recalculate the path from here, or immediately alter the targeted timeframe. Moving past the portfolio target from here in around a year looks almost impossibly challenging, but time exists to allow this fact to settle. Too many other, more important, human and historical events are still playing out. In such times, taking diverse perspectives on the same facts is important. This Next Life recently produced this interesting meditation on the future of FIRE during this phase of economic hardship. In addition, the Animal Spirits podcast also provided a thoughtful perspective on current market falls compared to 2008, as does this article by Early Retirement Now. Such analysis, and each passing day, highlights that the murmurs of the sea are louder than ever before, reminding us of the precariousness of all things. The post, links and full charts can be seen here.
﷽ The Federal Reserve and the United States government are pumping extreme amounts of money into the economy, already totaling over $484 billion. They are doing so because it already had a goal to inflate the United States Dollar (USD) so that the market can continue to all-time highs. It has always had this goal. They do not care how much inflation goes up by now as we are going into a depression with the potential to totally crash the US economy forever. They believe the only way to save the market from going to zero or negative values is to inflate it so much that it cannot possibly crash that low. Even if the market does not dip that low, inflation serves the interest of powerful people. The impending crash of the stock market has ramifications for Bitcoin, as, though there is no direct ongoing-correlation between the two, major movements in traditional markets will necessarily affect Bitcoin. According to the Blockchain Center’s Cryptocurrency Correlation Tool, Bitcoin is not correlated with the stock market. However, when major market movements occur, they send ripples throughout the financial ecosystem which necessary affect even ordinarily uncorrelated assets. Therefore, Bitcoin will reach X price on X date after crashing to a price of X by X date.
Stock Market Crash
The Federal Reserve has caused some serious consternation with their release of ridiculous amounts of money in an attempt to buoy the economy. At face value, it does not seem to have any rationale or logic behind it other than keeping the economy afloat long enough for individuals to profit financially and politically. However, there is an underlying basis to what is going on which is important to understand in order to profit financially. All markets are functionally price probing systems. They constantly undergo a price-discovery process. In a fiat system, money is an illusory and a fundamentally synthetic instrument with no intrinsic value – similar to Bitcoin. The primary difference between Bitcoin is the underlying technology which provides a slew of benefits that fiat does not. Fiat, however, has an advantage in being able to have the support of powerful nation-states which can use their might to insure the currency’s prosperity. Traditional stock markets are composed of indices (pl. of index). Indices are non-trading market instruments which are essentially summaries of business values which comprise them. They are continuously recalculated throughout a trading day, and sometimes reflected through tradable instruments such as Exchange Traded Funds or Futures. Indices are weighted by market capitalizations of various businesses. Price theory essentially states that when a market fails to take out a new low in a given range, it will have an objective to take out the high. When a market fails to take out a new high, it has an objective to make a new low. This is why price-time charts go up and down, as it does this on a second-by-second, minute-by-minute, day-by-day, and even century-by-century basis. Therefore, market indices will always return to some type of bull market as, once a true low is formed, the market will have a price objective to take out a new high outside of its’ given range – which is an all-time high. Instruments can only functionally fall to zero, whereas they can grow infinitely. So, why inflate the economy so much? Deflation is disastrous for central banks and markets as it raises the possibility of producing an overall price objective of zero or negative values. Therefore, under a fractional reserve system with a fiat currency managed by a central bank – the goal of the central bank is to depreciate the currency. The dollar is manipulated constantly with the intention of depreciating its’ value. Central banks have a goal of continued inflated fiat values. They tend to ordinarily contain it at less than ten percent (10%) per annum in order for the psyche of the general populace to slowly adjust price increases. As such, the markets are divorced from any other logic. Economic policy is the maintenance of human egos, not catering to fundamental analysis. Gross Domestic Product (GDP) growth is well-known not to be a measure of actual growth or output. It is a measure of increase in dollars processed. Banks seek to produce raising numbers which make society feel like it is growing economically, making people optimistic. To do so, the currency is inflated, though inflation itself does not actually increase growth. When society is optimistic, it spends and engages in business – resulting in actual growth. It also encourages people to take on credit and debts, creating more fictional fiat. Inflation is necessary for markets to continue to reach new heights, generating positive emotional responses from the populace, encouraging spending, encouraging debt intake, further inflating the currency, and increasing the sale of government bonds. The fiat system only survives by generating more imaginary money on a regular basis. Bitcoin investors may profit from this by realizing that stock investors as a whole always stand to profit from the market so long as it is managed by a central bank and does not collapse entirely. If those elements are filled, it has an unending price objective to raise to new heights. It also allows us to realize that this response indicates that the higher-ups believe that the economy could crash in entirety, and it may be wise for investors to have multiple well-thought-out exit strategies.
Economic Analysis of Bitcoin
The reason why the Fed is so aggressively inflating the economy is due to fears that it will collapse forever or never rebound. As such, coupled with a global depression, a huge demand will appear for a reserve currency which is fundamentally different than the previous system. Bitcoin, though a currency or asset, is also a market. It also undergoes a constant price-probing process. Unlike traditional markets, Bitcoin has the exact opposite goal. Bitcoin seeks to appreciate in value and not depreciate. This has a quite different affect in that Bitcoin could potentially become worthless and have a price objective of zero. Bitcoin was created in 2008 by a now famous mysterious figure known as Satoshi Nakamoto and its’ open source code was released in 2009. It was the first decentralized cryptocurrency to utilize a novel protocol known as the blockchain. Up to one megabyte of data may be sent with each transaction. It is decentralized, anonymous, transparent, easy to set-up, and provides myriad other benefits. Bitcoin is not backed up by anything other than its’ own technology. Bitcoin is can never be expected to collapse as a framework, even were it to become worthless. The stock market has the potential to collapse in entirety, whereas, as long as the internet exists, Bitcoin will be a functional system with a self-authenticating framework. That capacity to persist regardless of the actual price of Bitcoin and the deflationary nature of Bitcoin means that it has something which fiat does not – inherent value. Bitcoin is based on a distributed database known as the “blockchain.” Blockchains are essentially decentralized virtual ledger books, replete with pages known as “blocks.” Each page in a ledger is composed of paragraph entries, which are the actual transactions in the block. Blockchains store information in the form of numerical transactions, which are just numbers. We can consider these numbers digital assets, such as Bitcoin. The data in a blockchain is immutable and recorded only by consensus-based algorithms. Bitcoin is cryptographic and all transactions are direct, without intermediary, peer-to-peer. Bitcoin does not require trust in a central bank. It requires trust on the technology behind it, which is open-source and may be evaluated by anyone at any time. Furthermore, it is impossible to manipulate as doing so would require all of the nodes in the network to be hacked at once – unlike the stock market which is manipulated by the government and “Market Makers”. Bitcoin is also private in that, though the ledge is openly distributed, it is encrypted. Bitcoin’s blockchain has one of the greatest redundancy and information disaster recovery systems ever developed. Bitcoin has a distributed governance model in that it is controlled by its’ users. There is no need to trust a payment processor or bank, or even to pay fees to such entities. There are also no third-party fees for transaction processing. As the ledge is immutable and transparent it is never possible to change it – the data on the blockchain is permanent. The system is not easily susceptible to attacks as it is widely distributed. Furthermore, as users of Bitcoin have their private keys assigned to their transactions, they are virtually impossible to fake. No lengthy verification, reconciliation, nor clearing process exists with Bitcoin. Bitcoin is based on a proof-of-work algorithm. Every transaction on the network has an associated mathetical “puzzle”. Computers known as miners compete to solve the complex cryptographic hash algorithm that comprises that puzzle. The solution is proof that the miner engaged in sufficient work. The puzzle is known as a nonce, a number used only once. There is only one major nonce at a time and it issues 12.5 Bitcoin. Once it is solved, the fact that the nonce has been solved is made public. A block is mined on average of once every ten minutes. However, the blockchain checks every 2,016,000 minutes (approximately four years) if 201,600 blocks were mined. If it was faster, it increases difficulty by half, thereby deflating Bitcoin. If it was slower, it decreases, thereby inflating Bitcoin. It will continue to do this until zero Bitcoin are issued, projected at the year 2140. On the twelfth of May, 2020, the blockchain will halve the amount of Bitcoin issued when each nonce is guessed. When Bitcoin was first created, fifty were issued per block as a reward to miners. 6.25 BTC will be issued from that point on once each nonce is solved. Unlike fiat, Bitcoin is a deflationary currency. As BTC becomes scarcer, demand for it will increase, also raising the price. In this, BTC is similar to gold. It is predictable in its’ output, unlike the USD, as it is based on a programmed supply. We can predict BTC’s deflation and inflation almost exactly, if not exactly. Only 21 million BTC will ever be produced, unless the entire network concedes to change the protocol – which is highly unlikely. Some of the drawbacks to BTC include congestion. At peak congestion, it may take an entire day to process a Bitcoin transaction as only three to five transactions may be processed per second. Receiving priority on a payment may cost up to the equivalent of twenty dollars ($20). Bitcoin mining consumes enough energy in one day to power a single-family home for an entire week.
Trading or Investing?
The fundamental divide in trading revolves around the question of market structure. Many feel that the market operates totally randomly and its’ behavior cannot be predicted. For the purposes of this article, we will assume that the market has a structure, but that that structure is not perfect. That market structure naturally generates chart patterns as the market records prices in time. In order to determine when the stock market will crash, causing a major decline in BTC price, we will analyze an instrument, an exchange traded fund, which represents an index, as opposed to a particular stock. The price patterns of the various stocks in an index are effectively smoothed out. In doing so, a more technical picture arises. Perhaps the most popular of these is the SPDR S&P Standard and Poor 500 Exchange Traded Fund ($SPY). In trading, little to no concern is given about value of underlying asset. We are concerned primarily about liquidity and trading ranges, which are the amount of value fluctuating on a short-term basis, as measured by volatility-implied trading ranges. Fundamental analysis plays a role, however markets often do not react to real-world factors in a logical fashion. Therefore, fundamental analysis is more appropriate for long-term investing. The fundamental derivatives of a chart are time (x-axis) and price (y-axis). The primary technical indicator is price, as everything else is lagging in the past. Price represents current asking price and incorrectly implementing positions based on price is one of the biggest trading errors. Markets and currencies ordinarily have noise, their tendency to back-and-fill, which must be filtered out for true pattern recognition. That noise does have a utility, however, in allowing traders second chances to enter favorable positions at slightly less favorable entry points. When you have any market with enough liquidity for historical data to record a pattern, then a structure can be divined. The market probes prices as part of an ongoing price-discovery process. Market technicians must sometimes look outside of the technical realm and use visual inspection to ascertain the relevance of certain patterns, using a qualitative eye that recognizes the underlying quantitative nature Markets and instruments rise slower than they correct, however they rise much more than they fall. In the same vein, instruments can only fall to having no worth, whereas they could theoretically grow infinitely and have continued to grow over time. Money in a fiat system is illusory. It is a fundamentally synthetic instrument which has no intrinsic value. Hence, the recent seemingly illogical fluctuations in the market. According to trade theory, the unending purpose of a market or instrument is to create and break price ranges according to the laws of supply and demand. We must determine when to trade based on each market inflection point as defined in price and in time as opposed to abandoning the trend (as the contrarian trading in this sub often does). Time and Price symmetry must be used to be in accordance with the trend. When coupled with a favorable risk to reward ratio, the ability to stay in the market for most of the defined time period, and adherence to risk management rules; the trader has a solid methodology for achieving considerable gains. We will engage in a longer term market-oriented analysis to avoid any time-focused pressure. The Bitcoin market is open twenty-four-hours a day, so trading may be done when the individual is ready, without any pressing need to be constantly alert. Let alone, we can safely project months in advance with relatively high accuracy. Bitcoin is an asset which an individual can both trade and invest, however this article will be focused on trading due to the wide volatility in BTC prices over the short-term.
Technical Indicator Analysis of Bitcoin
Technical indicators are often considered self-fulfilling prophecies due to mass-market psychology gravitating towards certain common numbers yielded from them. They are also often discounted when it comes to BTC. That means a trader must be especially aware of these numbers as they can prognosticate market movements. Often, they are meaningless in the larger picture of things.
Volume – derived from the market itself, it is mostly irrelevant. The major problem with volume for stocks is that the US market open causes tremendous volume surges eradicating any intrinsic volume analysis. This does not occur with BTC, as it is open twenty-four-seven. At major highs and lows, the market is typically anemic. Most traders are not active at terminal discretes (peaks and troughs) because of levels of fear. Volume allows us confidence in time and price symmetry market inflection points, if we observe low volume at a foretold range of values. We can rationalize that an absolute discrete is usually only discovered and anticipated by very few traders. As the general market realizes it, a herd mentality will push the market in the direction favorable to defending it. Volume is also useful for swing trading, as chances for swing’s validity increases if an increase in volume is seen on and after the swing’s activation. Volume is steadily decreasing. Lows and highs are reached when volume is lower.
Therefore, due to the relatively high volume on the 12th of March, we can safely determine that a low for BTC was not reached.
VIX – Volatility Index, this technical indicator indicates level of fear by the amount of options-based “insurance” in portfolios. A low VIX environment, less than 20 for the S&P index, indicates a stable market with a possible uptrend. A high VIX, over 20, indicates a possible downtrend. VIX is essentially useless for BTC as BTC-based options do not exist. It allows us to predict the market low for $SPY, which will have an indirect impact on BTC in the short term, likely leading to the yearly low. However, it is equally important to see how VIX is changing over time, if it is decreasing or increasing, as that indicates increasing or decreasing fear. Low volatility allows high leverage without risk or rest. Occasionally, markets do rise with high VIX.
As VIX is unusually high, in the forties, we can be confident that a downtrend for the S&P 500 is imminent.
RSI (Relative Strength Index): The most important technical indicator, useful for determining highs and lows when time symmetry is not availing itself. Sometimes analysis of RSI can conflict in different time frames, easiest way to use it is when it is at extremes – either under 30 or over 70. Extremes can be used for filtering highs or lows based on time-and-price window calculations. Highly instructive as to major corrective clues and indicative of continued directional movement. Must determine if longer-term RSI values find support at same values as before. It is currently at 73.56.
Secondly, RSI may be used as a high or low filter, to observe the level that short-term RSI reaches in counter-trend corrections. Repetitions based on market movements based on RSI determine how long a trade should be held onto. Once a short term RSI reaches an extreme and stay there, the other RSI’s should gradually reach the same extremes. Once all RSI’s are at extreme highs, a trend confirmation should occur and RSI’s should drop to their midpoint.
Trend Definition Analysis of Bitcoin
Trend definition is highly powerful, cannot be understated. Knowledge of trend logic is enough to be a profitable trader, yet defining a trend is an arduous process. Multiple trends coexist across multiple time frames and across multiple market sectors. Like time structure, it makes the underlying price of the instrument irrelevant. Trend definitions cannot determine the validity of newly formed discretes. Trend becomes apparent when trades based in counter-trend inflection points continue to fail. Downtrends are defined as an instrument making lower lows and lower highs that are recurrent, additive, qualified swing setups. Downtrends for all instruments are similar, except forex. They are fast and complete much quicker than uptrends. An average downtrend is 18 months, something which we will return to. An uptrend inception occurs when an instrument reaches a point where it fails to make a new low, then that low will be tested. After that, the instrument will either have a deep range retracement or it may take out the low slightly, resulting in a double-bottom. A swing must eventually form. A simple way to roughly determine trend is to attempt to draw a line from three tops going upwards (uptrend) or a line from three bottoms going downwards (downtrend). It is not possible to correctly draw a downtrend line on the BTC chart, but it is possible to correctly draw an uptrend – indicating that the overall trend is downwards. The only mitigating factor is the impending stock market crash.
Time Symmetry Analysis of Bitcoin
Time is the movement from the past through the present into the future. It is a measurement in quantified intervals. In many ways, our perception of it is a human construct. It is more powerful than price as time may be utilized for a trade regardless of the market inflection point’s price. Were it possible to perfectly understand time, price would be totally irrelevant due to the predictive certainty time affords. Time structure is easier to learn than price, but much more difficult to apply with any accuracy. It is the hardest aspect of trading to learn, but also the most rewarding. Humans do not have the ability to recognize every time window, however the ability to define market inflection points in terms of time is the single most powerful trading edge. Regardless, price should not be abandoned for time alone. Time structure analysis It is inherently flawed, as such the markets have a fail-safe, which is Price Structure. Even though Time is much more powerful, Price Structure should never be completely ignored. Time is the qualifier for Price and vice versa. Time can fail by tricking traders into counter-trend trading. Time is a predestined trade quantifier, a filter to slow trades down, as it allows a trader to specifically focus on specific time windows and rest at others. It allows for quantitative measurements to reach deterministic values and is the primary qualifier for trends. Time structure should be utilized before price structure, and it is the primary trade criterion which requires support from price. We can see price structure on a chart, as areas of mathematical support or resistance, but we cannot see time structure. Time may be used to tell us an exact point in the future where the market will inflect, after Price Theory has been fulfilled. In the present, price objectives based on price theory added to possible future times for market inflection points give us the exact time of market inflection points and price. Time Structure is repetitions of time or inherent cycles of time, occurring in a methodical way to provide time windows which may be utilized for inflection points. They are not easily recognized and not easily defined by a price chart as measuring and observing time is very exact. Time structure is not a science, yet it does require precise measurements. Nothing is certain or definite. The critical question must be if a particular approach to time structure is currently lucrative or not. We will measure it in intervals of 180 bars. Our goal is to determine time windows, when the market will react and when we should pay the most attention. By using time repetitions, the fact that market inflection points occurred at some point in the past and should, therefore, reoccur at some point in the future, we should obtain confidence as to when SPY will reach a market inflection point. Time repetitions are essentially the market’s memory. However, simply measuring the time between two points then trying to extrapolate into the future does not work. Measuring time is not the same as defining time repetitions. We will evaluate past sessions for market inflection points, whether discretes, qualified swings, or intra-range. Then records the times that the market has made highs or lows in a comparable time period to the future one seeks to trade in. What follows is a time Histogram – A grouping of times which appear close together, then segregated based on that closeness. Time is aligned into combined histogram of repetitions and cycles, however cycles are irrelevant on a daily basis. If trading on an hourly basis, do not use hours.
Daily Lows Mode for those Months: 1, 1, 2, 4, 12, 17, 18, 24, 25, 28, 29, 30
Hourly Lows Mode for those Months (Military time): 0100, 0200, 0200, 0400, 0700, 0700, 0800, 1200, 1200, 1700, 2000, 2200
Minute Lows Mode for those Months: 00, 00, 00, 00, 00, 00, 09, 09, 59, 59, 59, 59
Day of the Week Lows (last twenty-six weeks):
Weighted Times are repetitions which appears multiple times within the same list, observed and accentuated once divided into relevant sections of the histogram. They are important in the presently defined trading time period and are similar to a mathematical mode with respect to a series. Phased times are essentially periodical patterns in histograms, though they do not guarantee inflection points Evaluating the yearly lows, we see that BTC tends to have its lows primarily at the beginning of every year, with a possibility of it being at the end of the year. Following the same methodology, we get the middle of the month as the likeliest day. However, evaluating the monthly lows for the past year, the beginning and end of the month are more likely for lows. Therefore, we have two primary dates from our histogram. 1/1/21, 1/15/21, and 1/29/21 2:00am, 8:00am, 12:00pm, or 10:00pm In fact, the high for this year was February the 14th, only thirty days off from our histogram calculations. The 8.6-Year Armstrong-Princeton Global Economic Confidence model states that 2.15 year intervals occur between corrections, relevant highs and lows. 2.15 years from the all-time peak discrete is February 9, 2020 – a reasonably accurate depiction of the low for this year (which was on 3/12/20). (Taking only the Armstrong model into account, the next high should be Saturday, April 23, 2022). Therefore, the Armstrong model indicates that we have actually bottomed out for the year! Bear markets cannot exist in perpetuity whereas bull markets can. Bear markets will eventually have price objectives of zero, whereas bull markets can increase to infinity. It can occur for individual market instruments, but not markets as a whole. Since bull markets are defined by low volatility, they also last longer. Once a bull market is indicated, the trader can remain in a long position until a new high is reached, then switch to shorts. The average bear market is eighteen months long, giving us a date of August 19th, 2021 for the end of this bear market – roughly speaking. They cannot be shorter than fifteen months for a central-bank controlled market, which does not apply to Bitcoin. (Otherwise, it would continue until Sunday, September 12, 2021.) However, we should expect Bitcoin to experience its’ exponential growth after the stock market re-enters a bull market. Terry Laundy’s T-Theory implemented by measuring the time of an indicator from peak to trough, then using that to define a future time window. It is similar to an head-and-shoulders pattern in that it is the process of forming the right side from a synthetic technical indicator. If the indicator is making continued lows, then time is recalculated for defining the right side of the T. The date of the market inflection point may be a price or indicator inflection date, so it is not always exactly useful. It is better to make us aware of possible market inflection points, clustered with other data. It gives us an RSI low of May, 9th 2020. The Bradley Cycle is coupled with volatility allows start dates for campaigns or put options as insurance in portfolios for stocks. However, it is also useful for predicting market moves instead of terminal dates for discretes. Using dates which correspond to discretes, we can see how those dates correspond with changes in VIX. Therefore, our timeline looks like:
2/14/20 – yearly high ($10372 USD)
3/12/20 – yearly low thus far ($3858 USD)
5/9/20 – T-Theory true yearly low (BTC between 4863 and 3569)
Coinviva BTC/USD 30-min chart The Bitcoin continued to trade in range bound for the third week in a row. The BTC price dropped below the $9,000 support at one point, but it managed to rebound and reach $9,468 afterwards. The price has since stabilized and is moving sideway again, at around $9,300. The current support level remains at $9,000, while the resistance is at $9,500. There is no clear direction at the moment. If the volatility picks up, wait for the BTC price to break the support or resistance before determining the trade direction. Disclaimer: The above market commentary is based on technical analysis using historical pricing data, and is for reference only. It does not serve as investment or trading advice. Review of the week: Since 1 July, Bitcoin‘s price hasn’t gained or lost by much, with the cryptocurrency continuing to trade within a tight price band. While the Realized Volatility dipped to 3.2% on 10 July, the implied volatility remained firm at 3.5%. It can be observed that the IV had been moving sideways over a couple of weeks, with traders not expecting an immediate trend reversal in the Bitcoin market. According to one of the Managing Partners at Blockhead Capital, Matt David Kaye, the reason for this suppressed volatility may be the flood of yield-seeking funds with short volatility options in the market. These have been advertised as low-risk, yield generating vehicles to many investors in the market. As the price of Bitcoin consolidated, market makers were trying to hedge their risk by ever-adjusting their spot exposure. This resulted in the creation of a tighter spread and by extension, predictable price ranges for June as they bought back BTC at low prices and sold BTC when the price rose even a little. Thus, these short-volatility funds were gaining pennies, with Kaye adding that the risk was mispriced in the Bitcoin Options market. However, this also gives an excellent opportunity to accumulate volatility, as when the market breaks out, it could result in larger profits. The only way now for the price to pick up is to have the spot market volume note a boost too. BTC-USD Chart Disclaimer: The above market commentary is based on technical analysis using historical pricing data, and is for reference only. It does not serve as investment or trading advice. About Coinviva: Coinviva aims to create the best crypto financial services ecosystem for both institutional and individual investors. We provide reliable fiat funding options, excellent trading liquidity, bank security level custody and one-stop high liquidity provision on-site & off-site. Our founding management team all come from top tiered investment banking (e.g. JP Morgan, Morgan Stanley, Bank of America Merrill Lynch), with fully comprehensive financial institution operation experience. Homepage: https://coinviva.com/ Telegram: https://t.me/coinviva
Major Moon Math Update: The Pre Halving Prognostication Update
Major Moon Math Update: The Pre Halving Prognostication Update
https://www.moonmath.win/ The halving is coming and just like each preceding halving event bears argue that the halving is priced in while bulls argue that it’s impossible to price in the halving. The pattern repeats itself predictably. If you don’t believe me go back and look at the discussion threads leading up to the last halving. We see the same arguments using the same reasoning today that we saw back then. Where does Moon Math stand on the controversy? That shouldn’t be hard to predict; both perspectives have important truths to observe. Unwrapping the truths and attaching ourselves to what seems most important is a hard problem, and maybe we can try to figure that out together. https://www.tradingview.com/x/mgWU9IkM/ We’re going to unpack that graphic over the course of this post. Bitcoin’s price moves ahead of itself a little before each halving event and cools off immediately after the price surges. That happens even though eight weeks before the last halving we saw the price almost double in a four week period. Bulls will be quick to point out that the price still jumped from a low of $430 to a high of $780, but the market showed that the price was unsustainable on the high end of that. https://www.tradingview.com/x/pJK2Ppd6/ The 2012 halving also showed an unsustainable doubling of the price, from a low of $7.05 to a high of $15.50 8 weeks before the halving. https://www.tradingview.com/x/zKx5pyYx/ Each time bitcoin breaks out like this before the halving we see the price recede back to more rational prices. Then, after the halving, the price rises into a slow multi-year parabolic advance. To be clear, I do NOT see bitcoin’s price doubling again before the halving. That improbable event will take us to a new ATH and performance like that will out pace all previous halving events. It could happen, but $20k bitcoin before the third quarter of this year is an extremely low probability event. Instead, I think we’re seeing the impact of a mature and slower market. Instead of the price doubling over a few weeks we see it more than double over a year. Proportionally we’re right where we should be, and $10k bitcoin only seems like a slightly high premium for late market entrances. The Moon Math narrative is that the price of bitcoin is stabilizing over time. We can see that by measuring the gap between Bollinger bands from week to week. https://www.tradingview.com/x/uN71Abe5/ BBand width shows us that volatility is trending down, but also that we’re seeing fewer periods of extended price stability. Overall, though, bitcoin is much less volatile in the past. We can also see that we’ve been in an extended period of accumulation as measured by “on balance volume” https://www.tradingview.com/x/VlEjfXgd/ The market is accumulating bitcoin week over week and the rate of that accumulation is, compared historically, very gradual. We haven’t seen rapid accumulation spikes pre halving, yet. The lack of obscene pre halving accumulation might convince some bulls that the market hasn’t seen what should be a pre halving surge. Those bulls might pause for a minute and observe the impact of leverage and the increased volume we’ve seen over the last several weeks. The pre halving surge is here, but the market might have priced in the “inevitable” surge and crash by way of leveraged short positions. Have short positions stabilized bitcoin’s price performance and prevented what would otherwise be a very irrational pre halving swing? Indeed, the market cannot rationally anticipate the impact of the halving event, but it can smooth out the peaks and valleys that we’ve seen in the past. Again, look at OBV and BBand widths on the weekly chart and try to tell yourself that bitcoin is less stable today than it was 4 or 8 years ago. Retail’s share of overall market volume has also been increasing steadily. https://www.tradingview.com/x/33C6kCo The story is the same with (green) and without (red) Bitmex. More bitcoins are being purchased on unleveraged markets. Presumably those bitcoins are being held longer term. On the twelve-hour chart we see a descending broadening wedge. https://www.tradingview.com/x/dfi2jtzB/ http://thepatternsite.com/dbw.html If this pattern confirms we’ll see an irrational pre halving surge, but I don’t think it we’ll see a local high before the halving.
The Final prognostication
Cash, stability, volume, fractals, fundamentals, classical charts… everything is pointing to business as usual for the halving, but with less gusto. The price isn’t going to do a lot in 2020 and any substantial breakout will probably be kyboshed by way of shorts on leveraged markets. It’s going to look a lot like past halvings; the price will look and feel flat, which is what our final chart projects. Behold, the price projected using the price performance of the last two halvings. The blue line describes what I think will happen: https://www.tradingview.com/x/kdrfJNA And now zoomed out: https://www.tradingview.com/x/1B9PVdF0/ So, as always, zoom the fuck out. Good hunting
On March 15th, the Federal Reserve started the first round of its stimulus plan to stabilize the tumultuous economic conditions caused by the country-wide shut down due to COVID19. Significant was a $700 billion round of Quantitative Easing (QE) and the cutting of interest rates effectively to zero percent. The reaction of the stock market and most asset classes was to continue its downward trend that had started in late February. The Federal Reserve continued to make smaller policy changes during the next 8 days until March 23rd when it announced its “extensive new measures to support the economy”. In short, the Fed is expanding its QE program announced on March 15th and will be making additional expansions in the future as needed. This time Wall Street reacts positively, as March 23rd was the starting point of a historic bull run.
The Breaking of the 60/40 Model
The 60/40 model of portfolio allocation has been a traditional portfolio management strategy used for over 30 years. The strategy states to put 60% of your funds into stocks and the remaining 40% into high quality bonds. The philosophy behind this investment strategy is that by having your portfolio diversified this way, you won’t take a huge hit if your stocks go down because you’ll have returns from bonds to make up for it. This is a strategy generally used by people with low risk tolerances, or people who don’t want to constantly keep their eyes on the markets. Over the past few decades, the 60/40 model has demonstrated a good amount of success; however, there are many who believe the chances of this strategy continuing to function successfully into the future are very low. Both JP Morgan and Bank of America have released statements on the decline of the 60/40 portfolio. JP Morgan strategists have stated “In the zero-yield world, which we think will be with us for years, bonds offer neither much return nor protection against equity falls,” referencing the fact that the majority of government bonds are trading at yields below 1%. In a research note titled “The Death of 60/40” Bank of America strategists had this to say, “The challenge for investors today is that both of those benefits from bonds, diversification and risk reduction, seem to be weakening, and this is happening at a time when positioning in many fixed-income sectors is incredibly crowded, making bonds more vulnerable to sharp, sudden selloffs when active managers rebalance.” So, with diminishing trust and poor returns from bonds, many investors are looking for other assets to replace the 40% hole in their portfolios. Many are increasing their percentage allocated to stocks in addition to investing in Gold and other metals as a protection against inflation. Many investors are also looking to Bitcoin.
Asset Reallocation Flowing from Bonds to Stocks
The historical runup in stock prices, specifically for the tech heavy Nasdaq, started on March 23rd. With the NAS100 index up close to 60% (from $6,584 to $10,616) in less than 3 months. It's not showing any signs of slowing down. In the opinion of QuantifyCrypto, the major reason for this is the flow of capital that would normally be going into bonds is now going into stocks. Yes the Fed stimulus is positive, but can you say the market conditions are actually better for stocks when there is still uncertainty in the future? While some stocks are fundamentally better due to COVID19, this is not true for most stocks. The next chart shows the price movement of the NASDAQ 100 Index for 2020. NAS100 Daily Chart from Trading View
Asset Reallocation to Cryptocurrency – When?
When asked about the current demise of the 60/40 portfolio model, veteran investor Dan Tapiero stated there could be “nothing more bullish for gold and bitcoin,” and that we are in the midst of the “beginning of the end for [government] bonds as a functioning productive asset class. Traditional 60/40 portfolios will need to find a new defensive asset to replace a portion of the 40%.” It seems that other players in the world of finance are saying similar things, hedge fund manager Paul Tudor Jones told CNBC in May that Bitcoin is a “great speculation” and that he has one to two percent of his assets in Bitcoin. Historically, Bitcoin and other cryptocurrencies tend to have higher volatility than stocks. Three days before the Federal Reserve started making its announcements, Bitcoin went down over 50% in a single day. High volatility and a full price recovery continued in April and May, with Bitcoin closing on May 30th at ~$10,440. Until this point, there had been a high correlation between the NASDAQ 100 and Bitcoin as shown in the chart below. NAS100 Daily Chart with Bitcoin (blue line) added Since June 1st, Bitcoin has clearly lagged while stocks have continued their upward climb. While Crypto has been stagnant and down since May, the fundamental picture has never been better:
The Central Bank stimulus response is inflationary to Fiat currencies, this is positive for non-inflationary assets like gold and cryptocurrency.
The lack of new funds moving into bonds is flowing into stocks. When the stock market advance slows or starts to decline, the flow into other assets classes will start to increase.
The full deflationary impact of the Bitcoin halving still has not kicked in.
Corporate adoption and use cases for cryptocurrency is accelerating (Future article).
Before COVID occurred, 2020 was looking like a very strong year for Bitcoin and Altcoins. This price strength is likely to return.
As government bonds continue to trade with yields below 1%, it is safe to say that more and more people will be abandoning the traditional 60/40 strategy. While it’s too early to determine what the new percent strategy will become, with Bitcoin presenting a clear solution to the problems with bonds and the diminishing value of cash, portfolio managers may very well be using cryptocurrency to solve their diversification requirement.
The platform Quantify Crypto provides live cryptocurrency prices, technical analysis, news, heatmaps and more. Our flagship product is the trend algorithm, designed to be on the correct side of significant cryptocurrency price moves. We are a new site, please check us out and let us know what you like and do not like about the site. None of this is meant to be financial advice and I do not have any financial expertise. John Barry worked at the New York Stock Exchange for over 23 years, it was as a developer supporting computer systems, not as a stock trader. Alex Wason is an intern working for Quantify Crypto Full discloser: John Barry owns Bitcoin and has stock positions.
Coinviva BTC-USD Daily Chart The volatility of Bitcoin movement remained low for the second week. Since the beginning of July, the Bitcoin price ranged between $8,918 and $9,298. The trend remained slightly bearish as the price failed to break above $10,000 last month, and the bars were hovering around the lower Keltner band. The current support is at $9,000. If the volatility starts to pick up this week and breaks below the support, a short signal is confirmed amid the current bearish trend. The next support level is at $8,500. Review of the week: CoinGecko, the cryptocurrency analytics firm, in its recent quarterly report for Q2 2020, charted the price change for before and after the 2016 and the 2020 halvings. In July 2016, Bitcoin was trading between $400 – $950. While in the 50 days prior, it rose by 11 percent, in the 50 days after the halving, the price dropped by 9 percent. Coming back to 2020, in the 50 days prior to the halving, the price rose by 50 percent, and in the 50 days after, by 5 percent. Given the late halving surplus in 2016, the prevailing economic conditions of 2020, and the massive increase in the market capitalization of Bitcoin in the ensuing four years, it concluded that the present price is “more bullish” than expected: “Despite having a market capitalization 15 times larger in 2020 than in 2016, Bitcoin showed a more bullish price movement during the 3rd Halving event.” https://preview.redd.it/pd26ci5en6951.png?width=912&format=png&auto=webp&s=0feabe20422b0aa13e8b8c6e80991ed63ddc5157 Disclaimer: The above market commentary is based on technical analysis using historical pricing data, and is for reference only. It does not serve as investment or trading advice. About Coinviva: Coinviva aims to create the best crypto financial services ecosystem for both institutional and individual investors. We provide reliable fiat funding options, excellent trading liquidity, bank security level custody and one-stop high liquidity provision on-site & off-site. Our founding management team all come from top tiered investment banking (e.g. JP Morgan, Morgan Stanley, Bank of America Merrill Lynch), with fully comprehensive financial institution operation experience. Homepage: https://coinviva.com/ Telegram: https://t.me/coinviva
Bitcoin has been trading sideways in a tight price range from $9,000 to $10,000 since the beginning of May 2020. As a result, its 10-day volatility has now fallen to a new year-to-date low. Looking at the tightened price moves through Bollinger Bands further implies a growing contraction in the cryptocurrency’s volatility. https://preview.redd.it/wdnind6kns751.png?width=980&format=png&auto=webp&s=6e51b1ed426ff449c09d0b316a32d14093aeb179 A period of low volatility ends up in a breakout. But it is difficult to predict the direction of Bitcoin’s next big move. As shown in the chart below, Bitcoin is trading inside a symmetrical triangle, its price fluctuating within the pattern’s contracting upper and lower trendlines. Since the Triangle appears after Bitcoin’s 150 percent price rally, its bias is to the upside. That puts Bitcoin en route to new 2020 highs. https://preview.redd.it/w1m2d9knns751.png?width=980&format=png&auto=webp&s=ac596c6c15f62ac13ed96c383864a46065c3aad7 Review of the week: Former Wall Street investor Tone Vays summarised this week that because of Bitcoin’s high correlation with the stock market (S&P 500), BTC will be stuck in the $6,000 to $10,000 range until 2021. On a technical level, he added, Bitcoin’s daily relative strength index, or RSI, breaking below a long-term trendline in June came at the same time as higher Bitcoin price levels compared to May. And if bears win out, a potential low for BTC/USD should lie in the $7,000 zone, with an RSI of around 30. Bitcoin is more likely to break this consolidation to the downside rather than the upside. Disclaimer: The above market commentary is based on technical analysis using historical pricing data, and is for reference only. It does not serve as investment or trading advice. About Coinviva: Coinviva aims to create the best crypto financial services ecosystem for both institutional and individual investors. We provide reliable fiat funding options, excellent trading liquidity, bank security level custody and one-stop high liquidity provision on-site & off-site. Our founding management team all come from top tiered investment banking (e.g. JP Morgan, Morgan Stanley, Bank of America Merrill Lynch), with fully comprehensive financial institution operation experience. Homepage: https://coinviva.com/ Telegram: https://t.me/coinviva
Crossing the Ocean | Monthly FI Portfolio Update - February 2020
No one would have crossed the ocean if he could have gotten off the ship in the storm. Charles Kettering This is my thirty-ninth portfolio update. I complete this update monthly to check my progress against my goal. Portfolio goal My objective is to reach a portfolio of $2 180 000 by 1 July 2021. This would produce a real annual income of about $87 000 (in 2020 dollars). This portfolio objective is based on an expected average real return of 3.99 per cent, or a nominal return of 6.49 per cent. Portfolio summary Vanguard Lifestrategy High Growth Fund – $772 191 Vanguard Lifestrategy Growth Fund – $44 099 Vanguard Lifestrategy Balanced Fund – $81 139 Vanguard Diversified Bonds Fund – $111 360 Vanguard Australian Shares ETF (VAS) – $174 810 Vanguard International Shares ETF (VGS) – $32 294 Betashares Australia 200 ETF (A200) – $250 949 Telstra shares (TLS) – $1 844 Insurance Australia Group shares (IAG) – $8 083 NIB Holdings shares (NHF) – $5 580 Gold ETF (GOLD.ASX) – $114 375 Secured physical gold – $18 455 Ratesetter* (P2P lending) – $13 971 Bitcoin – $149 920 Raiz* app (Aggressive portfolio) – $17 424 Spaceship Voyager* app (Index portfolio) – $2 446 BrickX (P2P rental real estate) – $4 485 Total portfolio value: $1 803 425 (-$69 900 or -3.7%) Asset allocation Australian shares – 42.1% (2.9% under) Global shares – 22.3% Emerging markets shares – 2.3% International small companies – 3.1% Total international shares – 27.7% (2.3% under) Total shares – 69.8% (5.2% under) Total property securities – 0.2% (0.2% over) Australian bonds – 4.6% International bonds – 9.7% Total bonds – 14.3% (0.7% under) Gold – 7.4% Bitcoin – 9.7% Gold and alternatives – 15.7% (5.7% over) Presented visually, below is a high-level view of the current asset allocation of the portfolio. [Chart] Comments Equity markets fell significantly this month, resulting in a portfolio loss of around $70 000. This is the largest monthly fall across the three years of this record in dollar terms, and the third largest as a proportion of assets. [Chart] The falls follow a large increase in the portfolio value last month, and have occurred amidst increasing global impacts and fears from the spread of the Corona virus. The losses are mainly in Australian and global equities and have been concentrated in the last two weeks. Overall, the portfolio fell around 6 per cent from a peak in mid-February. Amidst this downward movement, gold and Bitcoin have performed relatively positively, with the price of gold increasing and Bitcoin mostly maintaining its value. Consistent with their role of diversifying portfolio risks, the value of bond holdings slightly increased over the period. [Chart] The equity market losses have left the portfolio below its target Australian equity weighting, so contributions this month have been made to Vanguard's Australian shares ETF (VAS). In better news, this month expenditure has been lower than over the summer holiday period, continuing the broader declining trend. The most significant development in looking at the rolling three-year comparison of distributions and expenditure, however, is a new downward slope in distributions. [Chart] This is the first in this particular record, and results from the three year averaging window starting to move beyond a period of exceptionally high distributions in 2017. So it is an artefact of the chosen time period, and, for example, the equivalent four year comparison does not show this. Relocating the emergency stores This month has also seen a small re-entry into exploration of the world of fintech, through opening an account with Neo-bank Xinja. The motivation was an interest rate of 2.25 per cent, with no complex bonus eligibility rules. Added to this was curiosity about the experience with the product. The sign-up process was quick and easy, and I am planning to use it instead of a previous Ubank USaver online account - paying less than half of that in interest - for my emergency fund. So far the process has been smooth, and the pre-tax benefit of the switch from the improved rate is around $33 per month. Worse things happen at sea - modelling future portfolio risks With a range of markets at or close to highs, pushing progress towards my financial objective forwards in past weeks, I had been considering the issue of downside portfolio risk. Needless to say, the past week has reinforced the value of reflecting on that risk. To keep this issue steadily in view I have for the past year kept a rough and ready data series, called 'Market Event', which rather crudely assumes a rapid 25 per cent fall in equity values. Over the past month I have spent time considering and building a slightly more sophisticated way of modelling the impact of market falls on the portfolio. This allows some simple scenarios to be modelled, and recognises the potential for different behaviour of individual parts of the portfolio (for example, equities, bonds, gold and Bitcoin) in equity market falls. The value in this is that it allows better visibility of what the portfolio could look like after what are, in historical terms, quite regular occurrences. The three illustrative scenarios modelled are:
Normal 10% equity market decline - These are fairly routine over any length of time investing in equities, and could easily be expected in any given month. The past week - at least so far - is an example of this kind of event.
'Bear market' - This scenario is a 20 per cent decline, which could occur in a given month or over a sustained period of decline.
'Global Financial Crisis Mark II' - This is broadly based on the equity impact of the Global Financial Crisis on US share markets, including up to a 50 per cent fall.
These are imperfect simplifications of a myriad of possible events over different timeframes. Yet they are still sufficient to give a sense of the range of underlying risks in equity markets. The question they help answer is: just how does diversification actually reduce risk and volatility? In the scenarios below it is assumed that losses in equities are partly offset by gains in alternative diversifying assets (such as bonds, gold or even - more speculatively - Bitcoin). The reactions of these alternative assets to equity market falls are not a constant. In fact, research indicates (pdf) that from the early 2000s bonds have transitioned from being negatively correlated to equity (rising when equity prices fall), to be mildly positively correlated at times. Therefore, populating the three scenarios in Figure 1 has included some assumptions, drawing typically on long-term historical averages and some judgement, rather than just extrapolating performance over the past 15 years. Testing the waters - the scenarios results The results of each of these scenarios are set out below. Figure 1 - Illustrative Effect of Three Market Scenarios on the FI Portfolio [Diagram] Some observations on the scenarios and model outputs are:
Downside risk is real and unavoidable in an equity dominated portfolio - There is no escaping that a large fall in equity values will have a significant portfolio impact, even with around 30 per cent of assets being non-equities.
Diversification helps soften the fall - In large market events, assuming equities move in the opposite directions to other portfolio components, the current portfolio construction tends to reduce losses by around 10 per cent.
Equity market falls can make a difference to the journey time - A normal to moderate bear market would put the overall portfolio back the equivalent of 6 and 9 months of progress. A Global Financial Crisis style crisis would put the progress of the portfolio back around 24 months
Critically, the results of this thought experiment are sensitive to correlation assumptions. Relationships between assets returns change over time, in both direction and magnitude. This means reliance on historical relationships is not a certain guide. In the case of Bitcoin, especially, no long historical pattern of relationship exists. Changing the magnitudes or the plus or minus sign from the correlation assumptions I have adopted produces quite different results. Progress Progress against the objective, and the additional measures I have reached is set out below. Measure Portfolio All Assets Portfolio objective – $2 180 000 (or $87 000 pa) 82.7% 112.8% Credit card purchases – $71 000 pa 100.9% 137.6% Total expenses – $89 000 pa 80.9% 110.3% Summary This month has seen a transition from the heat of summer, smoke, into storms and an unsettled period. This has been reflected in both daily life as well as in the continuing volatility in markets and the portfolio. It has felt like a changing of perspective, and a shifting vantage point upon the world. The last post sought to trace my shifting perceptions and actions while investing through the Global Financial Crisis. A barrier to this was reconstructing contemporaneous thoughts from the persistent embrace of hindsight bias. This record is partly designed to overcome that problem. My perceptions on current falls are that they are unsurprising given the strong record of equity markets over the past decade, but that it is simply unknown and unknowable whether they represent a 'typical' pull back that routinely occurs, or the opening stages of a sustained downturn in equity markets lasting 12-24 months. These times can lead to a sense of being a passive observer of events beyond our control. The potential loss analysis above - which was started before the recent downturn - is designed to at least start to put some boundaries around these uncertainties, and volatility. To 'practice' - as it were - facing possible outcomes before we come upon them. Regularly reviewing downside exposures helps re-check that the portfolio risk is at the right level, and avoid complacency from past market gains by reinforcing their potentially temporary nature. Another method of addressing the same issue is to maintain flexibility around future spending rules or withdrawal rates. This paper (pdf) from Vanguard proposes a particular 'dynamic spending rule'. This places moving 'guardrails' around a spending level, partially recognising the value of market gains (or losses). As a concept, this is potentially a helpful update to simple 'rules of thumb' such as the 4.0 per cent safe withdrawal rate (or its 2012 updated version, the 4.5 per cent 'rule'). On the same topic, from a different direction, I have been interested in the findings of this research paper (pdf) based on a century of data of Australian equity returns. It makes a strong case for lowering expectations for future returns. Similarly, this interview provides an intriguing suggestion of how the next global financial crisis may originate from central banks, rather than private debt or equity markets. Finally, Credit Suisse have released their annual yearbook of global investment. This year unfortunately only a partial snapshot of global returns is given. This work highlights the changing nature of global investment through time, as sectors and technologies change, and provides useful historical checks on past global equity returns (5.2 per cent on a geometric basis). Backed by a century of data, it also reinforces the truism that most journeys are defined by their end, even though storms and uncertainties may assail us on the passage. The post, links and full charts can be seen here.
Coinviva BTC/USD Hourly Chart After failing to reach $10,000 and dropping below $9,500 the week before, the Bitcoin price was able to find support at $9,250 last week. It formed a sideway channel that ranged between $9,250 and $9,600. The intraday volatility remained low throughout the week, with no clear sense of direction. If the volatility picks up in the coming week and the BTC price breaks below the current support line at $9,250, then a lower low would form and a downward trend would be confirmed. If the volatility remains low throughout the week, the BTC price would continue to trade within the sideway channel between $9,250 and $9,600. Wait for volatility to pick up before determining the direction of the trade. Disclaimer: The above market commentary is based on technical analysis using historical pricing data, and is for reference only. It does not serve as investment or trading advice. About Coinviva: Coinviva aims to create the best crypto financial services ecosystem for both institutional and individual investors. We provide reliable fiat funding options, excellent trading liquidity, bank security level custody and one-stop high liquidity provision on-site & off-site. Our founding management team all come from top tiered investment banking (e.g. JP Morgan, Morgan Stanley, Bank of America Merrill Lynch), with fully comprehensive financial institution operation experience. Homepage: https://coinviva.com/ Telegram: https://t.me/coinviva
I've heard that founder of MakerDAO is not strictly against KYC. I have a message to whole community and specifically to a founder of MakerDAO Rune Christensen. I will explain using concrete examples why having KYC in MakerDAO is a grave mistake and it will lead to MakerDAO fork. Many people in the first world never actually understand why financial privacy and financial inclusion is important. Even people (in the first world) who seemingly supportive of such ideas are not able to provide any concrete examples of why it's actually important. Unfortunately, I was born in a "wrong" country (Uzbekistan) and I experienced first hand what financial exclusion actually means. I know first hand that annoying feeling when you read polite, boilerplate rejection letter from financial institution based in first world. So I had to become practical libertarian. I'm going to give you concrete examples of financial discrimination against me. Then I'm going to explain fundamental reasons why it happens. And finally, I'm going to explain my vision for DAI. Back in 2005, I lived in Uzbekistan. I had an idea to invest in US stocks. I was very naive and I didn't know anything about investing, compliance, bank transfers, KYC etc. All I knew is nice long term charts of US stocks and what P/E means. I didn't contact any US brokerage but I checked information about account opening and how to transfer money there. I approached local bank in Uzbekistan and asked how to transfer money to Bank of New York. Banker's face was like - WOW, WTF?!?! They asked me to go to private room to talk with senior manager. Senior manager of local bank in Uzbekistan asked me why I wanted to transfer money to US. They told me that it's absolutely impossible to transfer money to US/EU and pretty much anywhere. I approached nearly every local bank in the town and they told me the same. In 2012, I already lived in Moscow and acquired Russian citizenship. I got back to my old idea - investing in US stocks. I called to many US brokerages and all of them politely rejected me. Usually when I called I asked them if I can open an account with them. They told me to hold on line. After long pause, I was able to speak with "senior" support who politely explain me that Russia in their list of restricted countries and they can't open an account for me. Finally, I was able to open an account with OptionsXpress. Next challenge was to convince local Russian bank to transfer money to US. Back then in 2012, I was able to get permission to do so. So you might say - is this happy end? Fast forwarding US brokerage story to 2017, OptionsXpress was acquired by Charles Schwab. I was notified that my OptionsXpress account will be migrated to Charles Schwab platform. In 2017, I already lived in the Netherlands (but still having Russian citizenship). I wasn't happy with my stupid job in the Netherlands. I called Charles Schwab and asked if I quit my job in the Netherlands and have to return to Russia, what will happen with my account. Schwab told me that they will restrict my account, so I can't do anything except closing my account. So even if I was long term customer of OptionsXpress, Charles Schwab is not fully okay with me. Going back to 2013, I still lived in Russia. I had another idea. What if I quit my job and build some SAAS platform (or whatever) and sell my stuff to US customers. So I need some website which accept US credit cards. I contacted my Russian bank (who previously allowed me to transfer money to OptionsXpress) about steps to make in order to accept US credit cards in Russia. I've been told explicitly in email that they won't allow me to accept US credit cards under any circumstances. Back then I still believed in "the free west". So I thought - no problem, I will just open bank account abroad and do all operations from my foreign account. I planned vacation in Hong Kong. And Hong Kong is freest economy in the world. Looks like it's right place to open bank account. I contacted HSBC Hong Kong via email. Their general support assured me that I can open bank account with them if I'm foreigner. I flew to Hong Kong for vacation and visited HSBC branch. Of course, they rejected me. But they recommended me to visit last floor in their HQ building, they told me that another HSBC branch specializes on opening bank accounts for foreigners. I went there and they said minimum amount to open bank account is 10 mil HKD (1.27 mil USD). Later I learned that it's called private banking. When I relocated to the Netherlands, I asked ABN Amro staff - what's happen with my bank account if I quit/lose my job in the Netherlands and have to return back to Russia. I've been told that I can't have my dutch bank account if I go back to Russia even if I already used their bank for 2+ years. I still had idea that I would like to quit my job and do something for myself. The problem is that I'm Russian citizen and I don't have any residency which is independent from my employment. So if I quit my job in the Netherlands, I have to return back to Russia. I wanted to see how I would get payments from US/EU customers. I found Stripe Atlas, it's so exciting, they help you to incorporate in US, and even help with banking, all process of receiving credit card payments is very smooth. But as usual in my case, there is a catch - Russia in their list of restricted countries. Speaking of centralized compliance-friendly (e.g. KYC) crypto exchanges. This year I live and work in Hong Kong. Earlier this year, I thought it would be nice to have an account at local crypto exchange in Hong Kong so I can quickly transfer money from my bank account in Hong Kong to crypto exchange using FPS (local payment system for fast bank transfers). What could go wrong? After all Hong Kong is freest economy in the world, right? I submitted KYC documents to crypto exchange called Weever including copy of my Hong Kong ID as they requested. They very quickly responded that they need copy of my passport as well. I submitted copy of my Russian passport. This time they got silent. After a few days, they sent me email saying that Russia is on the US Office of Foreign Assets Control sanction list, so they just require me to fill a form about source of the funds. I told them that the source of my funds is salary, my Hong Kong bank can confirm that along with my employment contract. They got very silent after I sent them a filled form. After a week of silence I asked them - when my account get approved? They said that their compliance office will review my application soon. And they got very silent again. I waited for two or three weeks. Then I asked them again. And I immediately got email with title - Rejection for Weever Account Opening. And text of email was:
We are sorry to inform you that Weever may not be able to accept your account opening application at this stage.
Exactly the same situation I had with one crypto exchange in Europe back in 2017. Luckily I have accounts at other crypto exchanges including Gemini, one of most compliance obsessed exchange in the world. Although I don't keep my money there because I can't trust them, who knows what might come into head of their compliance officer one sunny day. By the way, I'm living and working outside of Russia for quite a few years. The situation with crypto exchanges is much worse for those who still living in Russia. I give you a few other examples of financial discrimination is not related to troubles with my Russian citizenship. Back in 2018, I still lived in the Netherlands. I logged in into my brokerage account just to buy US ETFs as I always do - SPY and QQQ. I placed my order and it failed to fill. I thought it's just a technical problem with my brokerage account. After a few failed attempts to send buy orders for SPY and QQQ, I contacted their support. What they told me was shocking and completely unexpected. They said I'm not permitted to buy US ETFs anymore as EU resident because EU passed a law to protect retail investors. So as a EU resident I'm allowed to be exposed to more risk by buying individual US stocks but I'm not allowed to reduce my risk by buying SPY because ... EU wants to protect me. I felt final result of new law. By the way, on paper their law looks fine. And the final example. It's a known fact that US public market become less attractive in recent decades. Due to heavy regulatory burden companies prefer to go public very late. So if successful unicorn startup grows from its inception/genesis to late adoption, company's valuation would be 3-5 orders of orders of magnitude. For example, if valuation of successful company at inception is 1 Mil USD, then at its very latest stage it's valuation would be 10 Bil USD. So we have 10'000 times of growth. In the best case scenario, company would go public at 1 Bil USD 5-10 years before reaching its peak 10 Bil USD. So investors in private equity could enjoy 1000 fold growth and just leave for public only last 10 fold growth stretched in time. In the worst case scenario, company would go public at 10 Bil USD, i.e. at its historical peak. But there are well known platforms to buy shares of private companies, one of such platforms is Forge Global. You can buy shares of almost all blue chip startups. You can even invest in SpaceX! But as always, there is a catch - US government wants to protect not just US citizens but all people in the world (sounds ridiculous, right?). US law requires you to have 1 Mil USD net worth or 200'000 USD annual income if you want to buy shares of non-public company. So if you are high-net worth individual you can be called "accredited investor". Funny thing is that the law intends to protect US citizens but even if you are not US citizen and never even lived in US, this law is still applies to you in practice. So if you are "poor loser", platforms like Forge Global will reject you. So high-net worth individuals have access and opportunity to Bitcoin-style multi-magnitude growth every 5-10 years. Contrary to private equity markets, US public markets is low risk/low return type of market. If you have small amount of capital, it's just glorified way to protect yourself from inflation plus some little return on top. It's not bad, US public market is a still great way to store your wealth. But I'm deeply convinced that for small capital you must seek fundamentally different type of market - high risk/high return. It's just historical luck that Bitcoin/Ethereum/etc were available for general public from day one. But in reality, viral/exponential growth is happening quite often. It's just you don't have access to such type of markets due to regulatory reasons. I intentionally described these examples of financial discrimination in full details as I experienced them because I do feel that vast majority of people in the first world honestly think that current financial system works just fine and only criminals and terrorists are banned. In reality that's not true at all. 99.999% of innocent people are completely cut off from modern financial system in the name of fighting against money laundering. Here is a big picture why it's happening. There are rich countries (so called western world) and poor countries (so called third world). Financial wall is carefully built by two sides. Authoritarian leaders of poor countries almost always want full control over their population, they don't like market economy, and since market forces don't value their crappy legal system (because it works only for close friends of authoritarian leader) they must implement strict capital control. Otherwise, all capital will run away from their country because nobody really respects their crappy legal system. It only has value under heavy gun of government. Only friends of authoritarian leader can move their money out of country but not you. Leaders of rich countries want to protect their economy from "dirty money" coming from third world. Since citizens of poor countries never vote for leaders of rich countries nobody really cares if rich country just ban everyone from poor country. It's the most lazy way to fight against money laundering - simply ban everyone from certain country. Actually if you look deeper you will see that rich countries very rarely directly ban ordinary people from third world. Usually, there is no such law which doesn't allow me to open bank account somewhere in Europe as non-EU resident. What's really happens is that US/EU government implement very harsh penalties for financial institutions if anything ever goes wrong. So what's actually happens is that financial institutions (banks, brokerages etc) do de-risking. This is the most important word you must know about traditional financial system! So if you have wrong passport, financial institution (for example) bank from rich country just doesn't want to take any risks dealing with you even if you are willing to provide full documentation about your finances. It's well known fact that banks in Hong Kong, Europe, US like to unexpectedly shutdown accounts of thousands innocent businesses due to de-risking. So it's actually de-risking is the real reason why I was rejected so many times by financial institutions in the first world!!! It's de-risking actually responsible for banning 99.999% of innocent people. So governments of rich democratic countries formally have clean hands because they are not banning ordinary people from third world directly. All dirty job is done by financial institutions but governments are well aware of that, it's just more convenient way to discriminate. And nobody actually cares! Ordinary citizens in rich countries are never exposed to such problems and they really don't care about people in third world, after all they are not citizens of US/EU/UK/CH/CA/HK/SG/JP/AU/NZ. And now are you ready for the most hilarious part? If you are big corrupt bureaucrat from Russia you are actually welcome by the first world financial institutions! All Russian's junta keep their stolen money all across Europe and even in US. You might wonder how this is possible if the western financial system is so aggressive in de-risking. Here is a simple equation which financial institution should solve when they decide whether to open an account for you or not: Y - R = net profit Where: Y - how much profit they can make with you; R - how much regulatory risk they take while working with you; That's it! It's very simple equation. So if you are really big junta member from Russia you are actually welcome according to this equation. Banks have special name for serving (ultra) high-net worth individuals, it's called private banking. It's has nothing to do with the fact that bank is private. It's just fancy name for banking for rich. So what's usually happen in real world. Some Estonian or Danish bank got caught with large scale money laundering from Russia. European leaders are ashamed in front of their voters. They implement new super harsh law against money laundering to keep their voters happy. Voters are ordinary people, they don't care about details of new regulations. So banks get scared and abruptly shutdown ALL accounts of Russian customers. And European voters are happy. Modern money laundering laws are like shooting mouse in your house using bazooka! It's very efficient to kill mouse, right? Now imagine world without financial borders. It's hard to do so because we are all get so used to current status quo of traditional financial system. But with additional effort you can start asking questions - if Internet economy is so global and it doesn't really matter where HQ of startup is located, why they are all concentrated in just a few tiny places like Silicon Valley and ... well, that's mostly it if you count the biggest unicorns! Another question would be - why so many talented russian, indian, chinese programmers just go to the same places like San Francisco, London and make super rich companies like Amazon, Google, Facebook, Apple to get even richer? If all you need is laptop and access to internet, why you don't see any trade happening between first and third world? Well actually there is a trade between first and third world but it's not exactly what I want to see. Usually third world countries sell their natural resources through giant corporations to the first world. So it's possible to get access to the first world market from third world but this access usually granted only to big and established companies (and usually it means not innovative). Unicorns are created through massive parallel experiment. Every week bunch of new startups are created in Silicon Valley. Thousands and thousands startups are created in Silicon Valley with almost instant access to global market. Just by law of large numbers you have a very few of them who later become unicorns and dominate the world. But if you have wrong passport and you are located in "wrong" country where every attempt to access global market is very costly, then you most likely not to start innovative startup in the first place. In the best case scenario, you just create either local business or just local copy-paste startup (copied from the west) oriented on (relatively small) domestic market. Obviously in such setup it's predictable that places like Silicon Valley will have giant advantage and as a result all unicorns get concentrated in just a few tiny places. In the world without financial barriers there will be much smaller gap between rich and poor countries. With low barrier of entry, it won't be a game when winner takes all. Whole architecture of decentralized cryptocurrencies is intended to remove middle man and make transactions permissionless. Governments are inherently opposite to that, they are centralized and permissioned. Therefore, decentralized cryptocurrencies are fundamentally incompatible with traditional financial system which is full of middle mans and regulations (i.e. permissions). Real value of crypto are coming from third world, not the first world. People are buying crypto in rich countries just want to invest. Their financial system and their fiat money are more or less already working for them. So there is no immediate urgency to get rid of fiat money in the first world. So the first world citizens buying crypto on centralized KYCd exchanges are essentially making side bet on the success of crypto in third world. Real and natural environment of cryptocurrencies is actually dark OTC market in places like Venezuela and China. But cryptocurrencies like Bitcoin and Ethereum have a big limitation to wide adoption in third world - high volatility. So the real target audience is oppressed (both by their own government and by first world governments) ordinary citizens of third world countries yet they are least who can afford to take burden of high volatility. Right now, Tether is a big thing for dark markets across the world (by the way, dark market doesn't automatically imply bad!). But Tether soon or later be smashed by US/EU regulators. The only real and working permissionless stable cryptocurrency (avoiding hyped word - stablecoin) is DAI. DAI is the currency for post-Tether world to lead dark OTC market around the world and subvert fiat currencies of oppressive third world governments. Once DAI become de-facto widespread currency in shadow economy in all of third world, then it will be accepted (after many huge push backs from governments) as a new reality. I'm talking about 10-20+ years time horizon. But if MakerDAO chooses the route of being compliance friendly then DAI will lose its real target audience (i.e. third world). I can not imagine US/EU calmly tolerate someone buying US stocks and using as a collateral to issue another security (i.e. DAI) which is going to be traded somewhere in Venezuela! You can not be compliance friendly and serve people in Venezuela. Facebook's Libra was stupidest thing I've seen. It's extremely stupid to ask permission from the first world regulators to serve third world and create borderless economy. Another stupid thing is to please third world governments as well. For example, Libra (if ever run) will not serve Indian, Chinese, Venezuelan people. Who is then going to use stupid Libra? Hipsters in Silicon Valley? Why? US dollars are good enough already.
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