As of 1/1/23…
Bitcoin to the moon!!! Wooohooo! A new bull market is ON!!!
For now at least. Enjoy it while it lasts. Sorry…
We are at the depths of the bear market and while I think there are emerging green shoots and bitcoin/crypto, on the whole, have been oversold, this shouldn’t be the time for mania and a blowoff top. That’s a few years away in my opinion. The Fed is still doing QT, interest rates are rising, and a recession is lurking…all very risk OFF things. Despite this, we have seen a decent rally though as of the start of this year…
So what the heck is going on????
Really hard to say and certainly multifactorial. I think we are witnessing six major things: 1) Shorts are covering on economic news that is overall positive, pushing up prices. Unemployment is at record lows and the jobs report was FIRE the other day. Very NOT recession-like numbers. 2) There is a lot of central bank “stealth liquidity” being injected into the markets that wasn’t expected. As central bank liquidity goes, so go the markets since 2008.
Bitcoin in particular sniffs out these liquidity injections like no other and price goes up. 3) Institutions are allocating funds to BTC at the start of the new year when they rebalance their portfolios. It’s hard to prove this, but I think it’s a minor contributor. 4)Bond yields have come down (10-year treasuries namely) as many are positioning for a recession to come. High bond demand brings yields down. When yields are lower that allows financial conditions to loosen some and makes stocks/riskier assets more appealing. 5) This is historically the time of the bitcoin cycle when price recovers from the lows (~1.5 years before the next halving). History doesn’t repeat, but it often rhymes.
6) The rate of change of interest rate hikes is drastically lower and the end is in sight for the terminal fed funds rate (~5%). Markets thrive when there is more certainty, and the Fed is helping provide that with their guidance that inflation is abating and rate hikes are nearing the end. Let’s discuss some of this further.
Regarding the first point – as we’ve talked about over the last few months, the economy is NOT falling apart (right now). Unemployment is at record lows…
wages are up in nominal terms, people are still spending that cash and still sitting on excess cash from lockdowns, disinflation is taking hold, energy prices are stabilizing, the DXY is down, Europe isn’t dying of a cold winter, and China has reopened their economy. A balloon from their reopening party even accidentally strayed over the US recently, if you hadn’t heard.
Bad joke?
This is all great news for the world economy. People betting on a 2008-like crash in 2023, shorting the stock market, and buying puts got smoked so far this year.
Betting that bitcoin would go to zero and shorting it at the lows was costly.
The market opened up…
on overconfident bears just like it did on overconfident bulls in December 2021. When shorts have to cover, the price of a low-float asset like bitcoin can quickly increase. It’s painful to be offside on that trade and lessons are learned. Another reason to HODL. You can’t time this stuff. Waiting to “buy the lows” is impossible - you’ll miss it.
DCA and chill at great prices is much easier.
Regarding the second point (central bank liquidity), I’m not an expert in this (nor anything outside of EM/CCM, bitcoin, and the Buffalo Bills – by the way, tough loss. Bengals were better. Too many injuries, too many distractions this year. Next year!) but there is some funny business going on under the hood.
I think this is THE primary driver of the recent surge up.
By central bank “stealth liquidity” I mean that what is happening currently with the Fed and the US Treasury is basically QE, but it’s not called that. Here are two articles that can help explain liquidity and this concept (one, two). The Fed is engaged in QT without question trying to drain liquidity. But there are so many variables other than that which affect net market liquidity. Liquidity in simple terms is just cash and bonds/credit available in the market. The more of it, the more risk people take.
The Reverse Repo, where banks park overnight cash to earn interest from the Fed, is slowly draining. That injects liquidity into the markets and offsets QT.
The debt ceiling impasse is a real issue and is forcing the US Treasury to drain the TGA (treasury general account) to pay the government’s bills which further adds liquidity and offsets QT.
Here’s an example:
Finally, China just reopened, and with that came stimulus and net added liquidity (~3T dollars). All of these things (and others for sure) have basically greased up the stock market to a point that looks similar to 2021 when meme stocks were flying.
In addition, the stock market has essentially turned into a casino with all the leverage and algos. This causes wild swings in both directions.
Mind you Bed Bath just filed for bankruptcy!!! What a joke.
Big money institutions use expensive AI/ML tools/algos/bots to buy/sell stocks. Meanwhile, retail traders try to gamble/speculate with the plethora of options trades at their disposal via Robinhood and other fintech apps. It’s pure madness.
Finally, the recent government spending is the cherry on top regarding liquidity. Despite record inflation and the need for fiscal responsibility the government just passed another landmark omnibus spending bill of ~2 trillion dollars. This just keeps the dollars flowing and the good times rolling while spending money we don’t have…but that’s just somebody else’s problem in the future, right? Our political system is set up for short-term victories to keep that party in power. Sad but true in our “insta” world today. Long-term success often requires short-term pain, but that’s not tolerated given our polarized society. I digress.
All of these factors have contributed to a sweet spot for bitcoin and stocks to move higher, and they have. But are we in the eye of the hurricane or is it truly clear skies and a new bull market that’s here to stay?
Great question – nobody knows, but I think this is the eye of the storm. As discussed last newsletter I’m sticking with my prediction that declining economic conditions are afoot sometime this year (likely the second half or into 2024), and at some point when the debt ceiling issue gets resolved by spring/summer, net liquidity is going to go in reverse…HARD (TGA will go up a lot). The cops are gonna show up to the high school house party and bang on the door – party’s over.
Right now, the neighbors are still sleeping, and the music isn’t loud enough to bother them…yet. Meme stocks and crypto rejoice for now while liquidity is flowing.
Regarding the economy (separate from central bank liquidity which I think is the MOST critical thing) you can make an equally compelling argument for an impending recession or things are fine/great.
Recession: I just don’t see how the consumer can keep this up. Prices are up across the board like 30% compared to 2020 and wage increases haven’t matched that. Sure inflation is coming down (for now), but remember, a 6% CPI means prices are still 6% higher than last year! They’re still up! Stimmies are done. Loans payments are restarting. Mortgage/loan rates and home prices are double. Credit cards are maxing out.
~60% of Americans are living paycheck to paycheck and working 2-3 jobs
Bond market yield curves are historically inverted (recession warning), consumer spending is down in both nominal and real terms the last quarter, the European economy is starting to feel the effects of the ongoing war and high energy prices…
the stock market is back to overvalued territory, rates are still going up, nearly every company is projecting lower earnings in 2023 and growth projections are to the downside
and the China reopening story is falling flat
etc. etc.
Things are great: People have jobs, people can easily get a new job, wages are up, GDP numbers are positive…
inflation is coming down, people still have excess savings from the pandemic and have found new ways to save (WFH), credit is easy to obtain while costs are higher
most people (in America) are locked into low mortgage rate long-term debt so higher rates don’t bother them, many things people need/want in life are generally affordable (iPhone, Netflix, TV, fast food, Costco/Walmart bulk items, clothes, gas, etc.), many people share housing/live with their parents to keep costs lower (probably also contributing to lower birth rates!)…
The stock market typically bottoms when inflation peaks and before earnings bottom so we’re in the clear…
etc. etc.
Basically, it’s a coin flip.
If I had to guess, I think things look okay for now on the surface, but trouble is brewing. Thus, I think bitcoin will retest the lows later this year, and maybe go a bit lower, but not much. The FOMO is real right now though, I can’t lie, but my spidey sense is flashing danger.
Fundamentals just aren’t adding up. Recessions take time to develop and are a process as rate hikes hit with a huge lag of 1-2 years. The Fed is still hiking and doing QT. I don’t think we’re out of danger yet. But mark my words, when the hurricane passes and the pivot eventually does come to undo the overtightening the Fed has done, look out. Covid stimulus/QE is going to look like a drop in the bucket. It will be rate cuts galore and QE on a roid’ rage. I’ll be here for it.
Regardless of all that, bitcoin right now is STILL at a decent/solid value IMO, despite the recent rally.
It was oversold before, and now I expect it to range here for quite some time. I think it could go higher as liquidity continues to enter the system as discussed above, but likely will fall back when it’s removed. I think it ends the year around this price with a lot of chop in between. I admit to having no clue though. That’s why I just DCA and chill, especially at these great prices.
If it goes down, I’ll actually be happy in a sick and twisted way. It’s like buying your favorite thing in the world on sale.
But once you get that precious…
what do you do with it? How do you safeguard it? I know many people are very uncomfortable with self custody so I wanted to write a bit about how to do it, mostly with links to webpages and videos that are quick and easy to follow and you can reference later. Below I’ll outline how to take bitcoin off the exchange and into your secure storage. It’s not hard. It’s not scary. R-E-L-A-X. You can do it!
I’m also featuring products I use, because that’s what I’m most comfortable with and knowledgeable of. I do trust these things personally. Of note, I’m not getting paid or getting any perks from these companies. This is just what I use after doing my own research and testing. You do you.
Big picture:
1. If you just bought a small amount to dip your toes in and see what it’s all about…consider leaving it on the exchange (Coinbase, etc.) until you invest more (understanding there is risk involved of course given recent events with FTX, Voyager, etc.). Coinbase is a good bet since it’s a registered US public company. Swan is also a great option. Just leave it with them as they both should be very safe bets, but not 100% bulletproof. Nothing is. Binance is likely more risky, just FYI. I’m not sure a small investment justifies the cost of a hardware device and cold storage, but some may argue with that. Even a small amount of bitcoin today could be worth quite a bit in the future. You have to decide.
2. You're serious about bitcoin and have put a decent chunk of money into it. Maybe ~1% of your portfolio and plan to HODL it long term. You’re here for the ride and can handle the volatility. You’ve invested what you’re okay with losing. NYKNYC. Time to get them off the exchange.
It’s time for a hardware wallet.
i. Trezor – my favorite
ii. Ledger
3. You’re a nut job like me. You’re all in. You see the forest for the trees and have serious doubts about the world’s nightmare debt and demographic situation
You believe Proof of Work is akin to the printing press, Bitcoin mining is going to usher in an energy revolution, and Bitcoin is the best money and the world’s first open monetary network that everyone can benefit from. Bitcoin is > 1% of your portfolio holdings as you see it as the supreme store of value asset.
a. It’s time for a multi-signature (multisig) setup. Why? Security and peace of mind. Multisignature setups allow for redundancy so that if you lose something (like your seed phrase or the hardware wallet itself gets destroyed in a fire), you can still recover your bitcoin. Most people are afraid of holding their own keys and taking bitcoin off the exchange for this exact reason. By paying a fee (nothing in life is free), you can rest easy knowing that it’s alllll good. There are backups to help you if you mess up/something happens (fire, theft) AND your bitcoin is infinitely more secure.
Here are links explaining multisig better than I can
Casa is my favorite company and who I trust
How to do it:
Step 1: buy the corn (bitcoin). I’m assuming you know how to do this.
Step 2: Buy and then set up your hardware wallet and transfer coins to the hardware wallet. Do NOT buy hardware wallets from Amazon, etc. Buy them from the companies themselves. Make sure the website you’re purchasing them from is legit. For illustration purposes, I will be showing transfers from Swan/Coinbase, but it’s basically the same from any exchange.
a. This is a good intro video for setting up your Trezor. ~15 min. Shows the entire process from start to finish.
b. Here is a link that is also helpful if you don’t want to watch a video.
c. The video above also shows how to transfer bitcoin from an exchange (Coinbase) to the hardware wallet towards the end.
d. Here is a link that details how to transfer bitcoin from Swan exchange to a hardware wallet
If you are NOT using a multisig setup, you are finished! Way to go!
NYKNYC! Store your device and seed phrase safely!
Do NOT put your seed phrase on any device (phone, computer, etc.) Keep it on paper. Consider backups and where you plan to store them safely.
Step 3: If you are using a multisig set up continue on
Sign up for Casa service (or another service of your choice)
Casa gold is the cheapest multisig setup they offer (free 30 day trial)
Set up your multsig security
a. Here is a link describing how to do it. There are both video and written instructions
Transfer bitcoin from the exchange to your multisig security wallet
a. Here is a link how to do it.
b. Here is another simple version using Coinbase.
Congrats! You’re set up with multsig security!!! Not that bad, huh?
Step 4: Sending bitcoin (if you ever need to/want to sell)
From a single hardware device
From a multisig setup
That’s all for this newsletter. A few other things are happening like the SEC going after Kraken exchange for providing staking services which could end up causing some cascading effects for altcoins like Ethereum…stay tuned. This has no impact on bitcoin - it’s a digital commodity. Not a security. It may actually drive flows of money from altcoins into bitcoin as the SEC ramps up the pressure.
There are also some quirky things going on with bitcoin NFTs (ordinals) and some tremendous low-profile developments with the Lightning network regarding payments (as previously discussed and predicted - it’s going to be mind-blowing)
and a decentralized open social network rival to Twitter (called Nostr), but I won’t be diving into those in this newsletter.
Until next time…
Thanks for reading!
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