Dont Panic!

May 25, 2021

The late Douglas Adams gave us a modern tongue-in-cheek classic with “The Hitchhiker’s Guide to the Galaxy.”  In this much-loved work, Arthur Dent is a human who escapes the destruction of Earth only to end up in a universe much bigger, much bolder and much stranger than he ever imagined.  His rescuer and colleague, Ford Prefect, offers some simple advice on the way: “Don’t Panic” and “Always carry a towel.” While I can’t speak for towels in today’s crypto markets, I can say that we side with Ford in saying “Don’t Panic.”  Seriously. DON’T PANIC.

A Week for the Record Books

Certainly, it’s been a week for the record books, with the Crypto Markets taking a steep and deep dive over the past 14 days and then bouncing back and beginning the route to recovery.  This began as Elon Musk boldly disavowed Bitcoin due to its energy consumption, only to find himself in a detente organized by Michael Saylor of MicroStrategy, forming the Bitcoin Mining Counsel with a goal of moving to clean energy bitcoin. Hmmm… this alone (along with the fact that Tesla is still holding 90% of their Bitcoin) is revealing, and shows that far from a detractor, that Musk wants this technology to succeed as much as many, and perhaps more than most.  Don’t Panic.

While that topic grabbed headlines, this is generally regarded as not the reason for our first big drop in the markets on May 18. The market saw weakening technicals leading up to this drawdown (nothing goes up in a straight line forever) and, ultimately when $42,000 was breached (perhaps even intentionally by institutional pressure) over $8B in margin calls were executed resulting in 775,000 – that’s seven hundred and seventy-five thousand — positions being liquidated.  That is a nontrivial number, and this phenomenon is reviewed elegantly in this podcast.  Think about it. If you could sell a little bit of your bitcoin (whales applying pressure) and you knew that the market would fall 30% (because you can see the leverage stacked up) and you could sell and then re-enter and increase your position by 1/3, wouldn’t you?  I thought so. Don’t Panic.

On the heels of this, China came out and alluded to a potential ban on bitcoin mining. While this may (or may not) happen, I want to note that China has been sabre rattling for years and, far from a death knell, this would ultimately result in Chinese miners moving to other countries such as Kazakhstan, Mongolia or Afghanistan.  Will this affect prices? If it does happen of course it will – in the short term.  It will also create opportunities for mining in the other countries and – did I mention the green counsel that Musk and Saylor are on?  This is where conviction and, more importantly, understanding the long-term impact of crypto assets on our future carry the day. Don’t Panic.

What we did see after this announcement was a massive sell-off primary driven by retail investors, only to find that at the bottom institutional investors gobbled up crypto assets at desired lows, a strong sign of long term value appreciation and market conviction.  Don’t Panic.

Unremarkably, we saw a huge recovery at the beginning of this week.  Why unremarkable?  Well, as noted in our prior blogs, the last bull run had seven (roughly) 40% corrections.  So, for those that have a wide enough lens, this is just par for the course and to be expected.  Adding perspective, Tyler Winklevoss tweeted $37,000 would have been an absolute dream six months ago, and reminded us that a year ago bitcoin was at $9,000. This of course, was on bitcoin pizza day, the day we celebrate when two pizzas were purchased for 10,000 bitcoin.  We’ve come a long way since then. We’ve a long way to go.  Don’t Panic.

The Good News

Yes, crypto is polarizing, and I don’t deny it. Often the news is filled with naysayers and doomsday prophets and they love to grab the headlines, as seen in the past two weeks. In the midst of this market mania let’s look at some good news and also understand why we are here.

Many luminaries, including Paul Tudor Jones, Stanly Druckenmiller, Michael Saylor, even “Mr. Wonderful” Kevin O’Leary, have turned the corner and have included crypto in their portfolio over the past year as a hedge against monetary inflation.

Now – guess what – inflation is upon us.  As of April 2021 we are seeing a 4.2% increase in the consumer price index. That’s an astronomical number and the highest we’ve seen in 13 years. I’ll go ahead and make this really real; a dollar will now by you 4.2% less than it did a year ago.  On top of this, Stanly Druckenmiller has publicly stated that he believes that the world will be off of the Dollar as a reserve currency in the next 15 years.

You’re now probably wondering how in the world is this good news.  Well, it is bad for those that are (in)vested only in the US dollar.  This is good for those who believe – and are vested – in bitcoin as a hedge against inflation. Perhaps that’s why 46 million Americans now own at least some bitcoin.  That’s roughly 17% of the adult population. According to Malcom Gladwell, this would put us at the tipping point of technology adoption.  If you look at the Rodgers curve, illustrated below, we’re notably past the innovators and early adopters, moving into the Early Majority.

1200px-Diffusion_of_ideas.jpg

The point is this – we’ve hit critical mass. It’s not just retail investors either.  As an exclamation point on this topic, industry giant Ray Dalio, stated on Monday that he would rather own bitcoin than bonds and that he, in fact does own an undisclosed amount of bitcoin.

That is good news.

In Closing

The Crypto Markets can be volatile, so I again encourage perspective. Zoom way out. Look at what the big fish are doing.  Pay attention to those that have adopted and understand why they have.  And, as the best hedge against volatility is position size and duration, expose only what you are comfortable with and plan on a longer-term horizon.  Then, dips can end up being the best part of the roller coaster, when you catch your breath and begin that next climb.

That’s it for now. As always, take care, stay safe, and we’ll continue to Decrypt: Crypto for you!

About the author James Diorio

James is the principal and chief executive officer of Tradecraft Capital.