Oh nowww you're bearish

Friday October 21, 2022 - Issue # 26

As this bear market trudges along, I’ve been thinking a lot about how I was feeling almost one year ago when we were on our high horse at $69k BTC. Actually, I was writing back then so I know exactly how I was feeling. As inflation started surging, I was feeling like the smartest guy behind the keyboard…I couldn’t be happier that 90%+ of my wealth was in BTC — I was literally getting richer by the day. Oh boy, talk about eating one’s own words…at the time, the Fed was talking about hiking rates. I made the argument that with debt levels so high, they would be hard pressed to get to the 2.5% mark that they had to double-back on in 2018. Womp womp womp, I was wrong. In fact, just the mere feeling of being the smartest in the room should’ve been a top signal for me to internalize. Here’s the article: BTC Hits New Highs As Inflation Surges. Don’t fight the Fed they say...

Whether you were a staunch bitcoiner or a trader evaluating their performance relative to BTC, when times were good, it was hard to imagine that in just 11 short months BTC would be back below $20k. You were bullish then and you’re bearish now? What exactly has changed? 1 BTC still equals 1 BTC, right?

At the end of the day, we’re all human and we tend to act on emotion. The more I read into it, the more it’s hard not to notice that we’ve shifted to the world of extremes and escalations. It all starts from the top down. For example, when we were faced with Covid, extreme (some would say, draconian) measures were taken to dampen the spread. To save the economy from a demand side shock (job losses stemming from businesses that were forced to shut down etc., etc.), central banks across the board decided to ease up on what were already relatively easy conditions with interest rates near 0% and turn on the money printers. Instead some sort of targeted support, the Fed was spending money at historic levels and then some. Remember this meme:

All-in money printing totaled roughly $13 trillion; 80% of all US dollars in existence were printed from Jan 2020 to Oct 2021.

The result, rampant inflation that we haven’t had to deal with since the 70s. So, what was the Fed’s next move? They chose the path of the most aggressive rate hiking pace since the 70s. In fact, you could argue that their pace has been even more extreme due to the massive debt burden they’re hiking into.

From near 0% in March, the Fed expects to raise its target rate to around 4.4% by the end of 2022.

Looking at these two charts closer, we can see that by the end of the year the Fed’s pace is nearly the same as Volker’s who took rates from 4.2% to 22% or ~500% increase…if the Fed continues to its target of 4.4% by EOY we’ll be in the same ballpark we’ll be nearly there in only 10 months!

From one extreme to another.

If world leaders, policy makers, central bankers, and the like, allow emotions to cloud their judgements, then we shouldn’t fault ourselves for doing the same. The reasons why we were excited about Bitcoin 300 days or so ago are still valid despite a popularly myopic view that we will see much lower levels in the near future.

Yes, rising interest rates are horrible for risk assets which is where Bitcoin is currently bucketed — albeit, it has been impressively resilient compared to the rest of the market — but these hikes are also wreaking havoc across the global bond market where there is a ton more “risk-off” capital invested. Eventually, investors and money managers will need to find a new home, which in the short term might mean cash, but at some point will have to work towards getting ahead of inflation.

With regards to BTC’s resilience vs. other things that should be more stable — check out this Bloomberg headline from this morning:

Even if we get a move down to levels many folks are worried about/hoping for, if history is an indicator of how the market will respond, then it will likely be a quick wick down followed by a sharp bounce back up to previous levels. What makes me think that the market would respond in this fashion? So many people are bullish on Bitcoin — they know they missed their chance catching the low in 2020, the previous low in 2018, and this could be one more chance. Those that understand Bitcoin fundamentally, know that Bitcoin is not going to 0. Long term investors who see this move as possibly their last opportunity to accumulate, would secure their bags and subsequently suck the liquidity from the speculative side of the market.

So if I’ve learned anything from how I was feeling at the top as displayed in the article I wrote during that time, it’s that I need to be cognizant of my biases and emotions while also considering what’s going on around me. Back then, everyone was bullish despite the Fed telling us that they would start raising rates to combat inflation. In hindsight, it was “don’t fight the Fed” on the way up and on the way down. Now that the Fed is less than 100 bps away from it’s target after a record hiking pace, everyone is so bearish and we’re starting to see major cracks in the global economy, I can’t help but feel objectively bullish that we’ve either seen the lows, or that something happens that causes an even better opportunity to accumulate on a short-lived big wick down.

The way I’m thinking about things is, regardless if the lows are in or not, at these levels and with any sort of medium to long-term view on Bitcoin investors might be sacrificing at most 50-70% on the downside for potentially 100+, if not 1000+ percent to the upside.

Feels good to feel good. Have a wonderful weekend!