The crypto market
As you may recall from previous updates, the chart below tracks each halving cycle for Bitcoin. I index the Bitcoin price at 100 points for each halving date, then plots the price performance in one colour until the next halving occurs. Historically halving’s have created a supply shock, leading to increased prices until euphoric ecstasy evolves resulting in a parabolic move upwards prior to a massive bust.
Thus far the crypto market seems to trade like previous bull-cycles. As you can see below, the gains and volatility tend to diminish for each cycle and each bull run tends to last longer than the previous.
One may argue that the price peak of May 2021 still marks the top of this cycle, but I expect that top to be exceeded in a very short time. We have not seen any signs of euphoria in the price action yet, at least compared to what historically have occurred.
The future is as always unknown, yet it tends to rhyme with history. The reason is the static nature of human behaviour, and in Bitcoin’s case, the preprogramed supply shocks. Some readers may consider this analysis to be comparable to astrology or reading tea leaves, I beg to differ. The demand of Bitcoin is not correlated to the mining cycles; therefore, one should expect those supply shocks to have a meaningful impact – something one can easily recognize by looking at the chart above.
When I created the long-short algorithm for Bitcoin I used data going back to 2017, including all the data points from the third cycle. This current fourth cycle had a correction starting in May this year which was much deeper and longer than the ones revealed in the third cycle. That correction resulted in a trend change signal, but the trend didn’t change. Bitcoin just traded in a sideways pattern giving false signals several times. This was the Achilles heel of my trading strategy explained in the initial document for the portfolio and multiple times in the eToro feed.
I have written several times that this development echoes the second cycle much more then the third. This cycle also had a stronger run at the start, probably due to massive money printing by central banks. What goes up fast, tend to correct as well, and I suspect this correction to now be over.
I find comparing the second cycle to the current one intriguing. As stated above, both performance and volatility are diminished, but the correction follows a very similar pattern. In 2013, the Bitcoin price did almost 92x. If we extrapolate the remainder of 2021, asserting a top in December this year using the 2013 price action as a guide, we will gain about 12.6x this year. That would result in a price close to 365 000 USD.
I do not believe that will happen. If it were, the total market cap of Bitcoin would exceed 6.85 trillion USD, something that would render Bitcoin 2.6x larger then Apple or 5.5x larger then the entire German DAX-index.
If, however it was to happen, I would not be stressed about going short when the sentiment shifts. Remember that previous busts after a parabolic move on average have resulted in a drop of 87 percent!
How I plan to trade the crypto market the next few months
I have already revealed my bullish bias for this autumn and early winter. In both 2013 and 2017, the top happened in December of that year. However, that may not be information of significant value. The halving’s happened in November of 2012, July of 2016, and May of 2020. Remember that the price action is primarily driven by supply and demand (and eventually euphoric mass-hysteria), I will not anchor on the December date. If you again look at the Bitcoin Halving Cycle-chart, you will see a great tendency of three things.
- Each cycle lasts longer than the previous one
- Returns diminishes for each cycle
- Volatility tends to diminish for each cycle
I think many short-term speculators will sell in December expecting the cycle to end in a bust. I will reduce the position-size prior to that time, but not entirely exit until the trend signals of my algorithms suggests SHORT. As suggested above, I find it probable that the bull-market continues into next year.
If the parabolic move happens in the coming few weeks, I will not rebalance too aggressively to defensive assets. I have previously held the crypto assets at about 45 % of the total portfolio. If we go parabolic, I may exceed that limit to capitalize on the craziness. I will however not let it run above 55 %, and I will not let it drive my risk score above 6 or let the crypto allocation exceed 40 % in December.
A note on other crypto assets
I may never have explained why I tend to neglect the other crypto assets in these market updates. The reason is purely the strong correlation between what is typically categorized as “alt-coins” and Bitcoin. Almost always, the crypto market follows the trend of Bitcoin. If the sentiment changes, Bitcoin moves first, then the high cap alts, then the smaller ones. I am however not a Bitcoin maximalist. I believe Ethereum may exceed the value of Bitcoin, if not in this cycle, probably in the next. This is however not something I focus a lot of energy on. I rather let the market decide what’s happening, and trend follow whatever that may be.
That is important, because the platform coins like Ethereum and Cardano may decouple from Bitcoin eventually. There is no reason why Bitcoin should dictate the trading of utility tokens if those utility tokens indeed provide utility. Until this cycle, most of them have not. As of now, there are several real-world applications for crypto in addition to the monetary ones. The whole DeFi-space is an obvious example of that, NTFs, gaming and the metaverse are others.
Precious metals
Crypto is the risk on asset in the portfolio. The intention is to capitalize gains in this asset class and rebalance it to defensive assets like gold, and value stocks. The gold market has struggled for 15 months straight and that has taken me by surprise. I am aware that the crypto mob continuously trashes gold on Twitter and other social medias, pushing the narrative that gold will be replaced by Bitcoin, and that gold is just an old useless relic. I find that narrative stupefying. Gold is not the same thing as crypto at all. Comparing those assets is not useless but claiming Bitcoin to be superior to gold is indeed ignoring 5000 years of successful store of value.
Gold do not trade like a risk on asset, and the last 15 months have truly been a risk on environment. Bitcoin and other crypto assets may eventually become a risk off asset, but now it trades more like a speculative commodity while gold trades more like a safe-haven currency.
I have taken a loss on several precious metal positions and have chosen to swap most of the mining exposure to streaming companies. That is a decision based on volatility and expected performance in case gold continues to struggle. Streaming companies can be explained as a mining bank or mining venture fund. They provide money up front, helping to finance the construction or expansion of a mine. Then they have some agreement of future “dividends” paid in gold. That makes streaming companies an interesting hybrid of gold exploration and producer with dimmed operational risk, hence lower volatility.
When gold enters a bull market, gold moves first. Then streaming companies, then big producers, and eventually junior miners and explorers. Considering this, I find it better for this portfolio to invest in streaming companies.
The Oil-market
Money printing in concert with reduced oil exploration, ESG-mania, and de-carbonization of the West may result in a massive supply-shock this winter. I hope sincerely this won’t play out, but chances are that oil and other energy commodities will be of extreme shortage, resulting in people freezing to death if this winter turns out as cold as the previous one. I live in an old house in Norway, and the winters here are tough. Minus 15 degrees Celsius is not uncommon, and with electricity prices looking like a Bitcoin-chart, one may wonder if de-carbonization truly is prudent prior to investing sufficiently in other sources of energy.
I have increased the energy allocation in the portfolio expecting prices to steepen further. Even if they don’t, the valuation of the energy sector is attractive. I have also added a small position in Cameco Corp (uranium producer), expecting nuclear power to regain some favour. A lot of nuclear plants have been shut down in the aftermath of the Fukushima event. Considering the need for de-carbonization and the green-agenda, I find that inconsistent with rationality. We need more clean energy, and windmills are not going to suffice!
Emerging markets and country indices
China have truly changed its stance on free capitalism. The tech-sector have suffered from increased regulation impacting growth and investing sentiment. I was late to realize the impact of this shift. I do believe it is value by holding Tencent and Ali Baba, but I do not think it is right for this portfolio. The idea is that the stocks and indices should provide defence and a not too volatile store of value compared to the aggressive crypto portion. Due to this, I changed allocation from EEM (emerging markets ETF with heavy China exposure) to several other indices with better price action.
The macro situation
It seems like the taper-talk by the FED have had some impact on the market. The S&P have traded somewhat less bullish lately, but I do not expect this to pop the bubble as I do not believe tapering will happen in a meaningful way this year. The central bankers do exactly like the Oracle in the Matrix. They tell you what “they need you to hear”, not necessary prophesising the future or what they are going to do. They can’t increase rates much in a 125 % debt to GDP economy, and inflation is indeed their goal. They must however let the public believe otherwise. If not, the public may initiate an inflation spiral, demanding higher wages for increased prices which again results in ever higher prices. If this happens, the whole economy may break.
I realize this may sound conspiratorial, but it is merely a repeat of the FEDs rhetoric of the inflationary 70s. Back then, they also claimed inflation to be transitory. They even removed the most inflationary components from the CPI to “reduce” (or manipulate) the reported inflation. Of course, that had no impact on real inflation, just their measurement of it. It seems they are doing the same thing now. Neglecting what is obvious to everyone, that inflation is here to stay.
I do not believe this inflation will result in much higher yield, and therefore I am less concerned about a market crash then I was earlier this year. I think the FED and other central banks will continue to keep rates low even though inflation will continue to trend. This is not like the 70s, but rather the 40s. During the WW2 era, we had supply bottle necks, inflation, and low yield (yield curve control). Bonds traded awfully and was considered “certificate on confiscation” for several decades. Therefore, I expect gold to regain its momentum. Bonds offer no protection at all if this is to materialize. Crypto, commodities, gold and value stocks continue to be my preferred asset allocation.
The portfolio performance
The portfolio is up 51 % YTD and holds a risk of 5 most of the time.
If you want to learn more about the portfolio and its strategy, consider heading over to this section of my blog:
https://www.frihetsfondet.com/category/the-crypto-portfolio/
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