Certainly all traders will know what the Crypto market is because its been without doubt the best performing asset class of recent times. In this Macro deep dive into the Crypto market we are going to solely focus on Bitcoin as its the cornerstone of the Crypto market and once you understand Bitcoin, it goes a long way to understanding everything else in this asset class.
However some people still only understand Bitcoin as a speculative asset, purely as something that has kept growing in value but maybe fully understood the reasons for this rise and the developing thesis behind the rise is value.
Bitcoin is the first time that we (as a society) have tried to create the perfect money (money in the sense of this article refers to a store of value). Firstly before we can assess Bitcoin’s value as money, we need to understand what is “sound money”?
In fundamental terms there are two key aspects to “sound money” and how good an asset is at being used as money. The first one is that its able to maintain its value through time, the other property money should be able to do is be easily transferable over distance. This second property is referred to as Velocity of Money (how quickly it can move around the financial system.)
Lets consider the first question there… We will use the British Pound as a reference point because the Pound is the oldest (fiat) currency still used. The pound is 1200 years old, born about 775AD, when “sterlings” or silver pennies were the main currency in Anglo-Saxon kingdoms. If you had 240 of them, you had one pound in Silver weight – a vast fortune in the 8th century. So when it was first created one British Pound was exchangeable for one pound of Silver. A perfect ratio of 1:1 in value.
If we skip forward to 2021 however that one British Pound doesn’t buy anywhere near one pound of silver. In fact it takes approximately at the time of writing £174 to now buy one Pound of Silver. We have to consider then what’s happened, and the clear conclusion is that a pound (lb) of Silver still weighs the same, and its chemical make up is still exactly the same. Its the British Pound that has become worth less. The reason for this is that the British Pound has become considerably less rare, where as one British Pound was a vast fortune in the 8th Century … now you can find one down the back of your sofa. The rarity of Silver has lessened too but to a much less extent… as over time much more Silver has been found and mined. So the underlying value is Rarity.
Most of us already knew by now that fiat money is worth less than precious metals right? So lets compare metals for metals and consider their relative value.
Compare Silver vs Gold and you will see that over time Gold has been much more valuable than silver.
Again, because it’s rarer. It’s rarity is impacted also by the fact Gold is much slower to produce… the total Gold supply grows about 2% a year, while the Silver supply grows between 20%-30% a year.
The other word for this “growth” of supply is inflation.
So let’s now compare those monetary properties for Gold vs Bitcoin…
Bitcoin’s supply is fixed, it was hard-wired into its code at its creation that there can only ever be 21 million Bitcoins in the world. While it may be true also that Gold’s supply is fixed, there’s no exact number that anyone can definitively agree to put a figure on how much Gold exists that can be commercially mined. Also Gold is a compound, that chemical compound exists elsewhere in the universe, it was found to exist on The Moon for example so its entirely possible that technology will see us mining resources on other planets which means the total supply of Gold ‘can’ increase. Having a finite number for total supply is financially very important as it enables people to calculate financial aspects such as ‘risk’, ‘yield’ etc when implemented into a financial economy.
Bitcoin doesn’t increase its rate of supply at all – in fact it reduces it over time until it will get to zero. The other word for this is deflation and in that sense Bitcoin is the only true deflationary asset in the world.
The other property to note is the elasticity of supply, if on market open Gold was suddenly worth £1,000,000 then you can bet every pound you’ve got that on the next day the gold miners would be in work early, digging without a lunch break and doing overtime.
In other words, the supply of Gold would go up.
It is elastic.
However on the other hand if Bitcoin is worth £1,000,000 on market open then the laws of Bitcoin mean that regardless of the number of miners, it still takes 10 minutes to mine one Bitcoin. At 600 seconds (10 minutes), all else being equal it will take 72,000 GW (or 72 Terawatts) of power to mine a Bitcoin using the average power usage provided by ASIC miners..
It’s supply is fixed and importantly it’s supply is independent from its demand. Bitcoin is the only asset ever created where the supply is independent from it’s demand is true.
Now, lets explore the second property that “sound money” needs to have. How easily is it transferred over distance? In this aspect there really isn’t any comparison, Bitcoin can be sent anywhere in the world that has an internet connection with ease, using only a mobile phone. In contrast its vastly more expensive to move Gold anywhere, requiring extreme security and huge risk anytime its not stored in a vault.
So its clear that in all of the properties of “sound money” and as a store of value, Bitcoin is much better at being Gold, than Gold is.
So what does this mean for the future? Currently Bitcoin has a market cap of $950 Billion, while Gold is over $10 Trillion! If even Bitcoin’s market cap equals Gold then it tells us that the price of each Bitcoin could be $476,000 (10 trillion divided by 21Million Bitcoins in existence).
However there have been other calculations that use Realised Market Cap, which should how much Dollar worth has been invested into Bitcoin at the price Bitcoin was valued at, at the time of purchase. Under this metric, Bitcoin currently only has 2% of the market cap of Gold and if it was to equal the market cap of Gold, then each Bitcoin could be worth well over $1million.
Of course, we have to temper expectations and valuations such as that by explaining that this value of rarity only matters if enough people agree it matters. As an example, I could create a one of a kind painting that, is extremely rare by its definition but as I’m no great artist… my painting isn’t worth anything because enough people don’t perceive it has value. It’s this belief that something has value that is integral to Bitcoin’s value continuing to rise.
Harry Markowitz’s Modern Portfolio Theory (1952) (MPT) states that an investment portfolio must contain at least two constituents, such as shares in multiple companies/units in an equity fund, and a holding in a government bond which allows an investor to benefit from diversification.
MPT assumes that an investor acts rationally; that the investment with the lowest risk to proportionate returns will be chosen, and that the decision-making process is based on expected real returns and risk. It is the case however, that your risk tolerance and requirements must be taken into account. Your portfolio is a reflection of you, your vision and your appetite for risk.
Modern portfolio theory argues that through diversification, the rate of risk can be reduced whilst achieving the same or even greater returns.
Stocks face both systematic risk such recessions and unsystematic risk which are issues that are specific to each stock, such as changes in management, poor sales and projections being wide of the mark. This has happened to both IBM and Nike recently. Proper diversification in a portfolio can’t prevent systematic risk, but it can help to eliminate unsystematic risk.
Investment is not just about picking stocks, but about choosing the right combination of stocks to work together in YOUR portfolio.
Modern Portfolio Theory uses statistical measurements which you may hear mentioned such as beta, alpha, standard deviation and the Sharpe ratio to determine the risk to reward profile of an investment.
Asset allocation is the most important determinant of portfolio performance. In order to reduce the risk of a portfolio, it is recommended to diversify by increasing the number of constituents within the portfolio, and balancing the weightings accordingly.
Theres a number of different ways to achieve this, depending upon how much time you want to devote to this game. As a passive investor, you could simply buy into market indexes, or mutual funds. This would automate your investments whilst minimising the risk. If this is you, you could buy exposure in to a very low-cost index fund, such as the Berkshire Hathaway [NYSE: BRK] or an index tracker fund such as the Vanguard S&P 500 ETF [NYSE: VOO]. The downside to this, is you are investing across the whole index, and not specifically in YOUR vision, BUT less time consuming, lower risk, and maybe lower reward.
The M&G Fund, launched in February 1998, aims to track the performance of the FTSE All-Share Index by matching the weightings of, and holding nearly all of, the index constituents. It is currently heavily weighted to Unilever, Royal Dutch Shell and AstraZeneca and as you can see below has been on a slow road to recovery since the pandemic started in 2020, in reflection with the index. By actively managing your investments you may be able to out perform indexes and funds. Is your personal vision aligned with every single company in an index?
Our preferred method is to invest in companies and ETFs that we believe in. We monitor charts 7 days a week, and as a team, we are in regular conversation discussing opportunities that the markets present to us. Our view for the future of the markets are aligned and over many years of using our strategy, we have been able to show and maintain success in a number of markets. It is important to have a deep understanding of stocks, how they are valued, and financial statements. You should be willing to spend at least five to ten hours a week analysing the market, and looking for opportunities in order to get ahead.
The US dollar is the most influential currency in the world, this is because it is currently the most dominant world reserve currency / asset (in the form of US Treasury bonds).
You can easily see how influential the dollar is in the financial world when you realise how many assets and commodities are denominated in dollars… anything from Oil & Gold to currency pairs.
Particularly in the FX world, the dollar is king. It is simple to understand when you see currency pairs where the dollar is quoted, for example EURUSD. The dollar is also present in currency pairs such as EUR/GBP.
The price of EURGBP is actually just EUR/USD divided by GBP/USD.
With all of these global assets and currencies denominated in dollars it is easy to see how any change in the dollars price will cause ripple effects through the rest of the financial world.
We have chosen this topic of understanding the “US Dollar System” as the first topic to be covered in our Macro Newsletter because if you understand the dollar and how it moves and influences everything else, you will go a long way to trading successfully.
Before you can trade the dollar, first you need to be able understand the economic system it dominates.
The Bretton Woods agreement was created in a 1944 conference of all of the World War II Allied nations. It took place in Bretton Woods, New Hampshire. Under the agreement, countries made a promise that their central banks would maintain fixed exchange rates between their currencies and the dollar.
The Bretton Woods system itself collapsed in 1971, when President Richard Nixon severed the link between the USD and gold — a decision made to prevent a run on Fort Knox, which contained only a third of the gold bullion necessary to cover the amount of dollars in foreign hands.
During Bretton Woods (BW) System the “world reserve asset” while officially was US Dollars, it was in effect gold because other countries could hold gold as their reserve asset instead which means there wasn’t the insatiable demand for actual dollars. This is because those countries could sell their gold in order to service dollar debts while the US dollar was under the BW system / Gold standard.
However since the BW System / Gold Standard was broken in 1971 it means that other countries have to hold US Treasury bonds (actual dollars) in order to service their debts denominated in dollars.
Most debt is also denominated in US dollars, this causes liquidity problems when dollar demand rises.
As a result of being the worlds reserve currency and asset, most of the debt in the world economy, both sovereign debt held by countries and corporate debt held by international companies is denominated in dollars. Most importantly, the interest on that debt is paid in dollars.
This global debt is what creates such an insatiable demand for dollars consistently, of course debt levels hit an new record throughout 2020 due to the colossal printing (quantitative easing) that central banks had to do to support economies during the COVID pandemic.
Stock markets across the world have just seen a ‘value rotation’ where money managers ditched thier momentum stocks and ‘rotated’ into stocks beat down by covid-19.
i think that the next rotation will be into bonds.
theres a distinct difference between the real economy and the financial economy, if you just looked at the financial economy you wouldnt imagine we are still in a global pandemic.
vaccine news is positive but i can’t help feel the market has overpriced it in terms of how much of an effect it will have for the real economy.
the are question marks of how long vaccination will be effective for, question marks over the transportation needs and besides the implementation of it is still a long way off for the majority of the public.
none of which helps the sectors of the economy such as hospilatity that when already operating on a low margin level, hasnt had any real income since q1 of 2020 and has no likelihood of returning to profitable levels until q2 or q3 of 2021 at the earliest.
not many businesses can continue to operate successfully after such a long time with suppressed income. many have taken on debt (in the form of covid relief loans).
this is just one example of how the real economy is at breaking point and the only ‘vaccine’ that will save it will be fiscal and economic stimulus.
as a part of that stimulus for the real economy I foresee interest rates dropping further to stimulate the growth & inflation that central bankers want and need.
I have chosen uk gilts to express this view, the uk is in a particularly difficult space with covid-19 as they are currently in a national lockdown (of sorts) before christmas alongside this there are real economic headwinds being created by brexit and the prospect of a no deal brexit.
the boe has started to warn the market of the prospect of negative rates at recent boe meetings.
if this was to come then clearly the value of any bond with positive yield rates will dramatically increase.
“Dont dig for gold, when you can sell shovels” – unknown
one of the best performing sectors right now is the gold miners index as any companies who are mining gold are making a significant profit, and the outlook is that they will continue to make this profit for the foreseeable future.
gold can be mined for approximately $1000 per ounce, while its currently selling for $1900 at the time. nearly double the breakeven price.
now this post isnt about gold…. its about bitcoin.
nobody is focused on the future of crypto miners, in the same way that gold miners are currently selling their product for approximately twice its cost to mine, so are bitcoin miners. it currently costs around $8000 to mine a bitcoin, at the same time they are selling for $16,000 each
the difference is how young the crypto market is comparatively to the gold market of course and how much potential it has to grow further.
I think anybody can easily say if crypto / blockchain technologies become mainstream then the prices of things like bitcoin can easily be 10x the current levels.
at that stage we are talking about companies mining an asset that is selling for 10x or more their cost price. the early movers in that market will be huge winners, maybe even more than the people who hold bitcoin directly?
so if you don’t want to be buying and holding bitcoin directly, then get some shares of some bitcoin miners such as riot blockchain.
Our analysis is showing a possible dollar bounce from the current levels. we always base our analysis in the long term timeframes so the image here is showing us approximately the past 20 years price action. We have identified 3 different zones where price will need to reach to generate more liquidity, alongside the current 6 year price action zone.
The reasoning behind this projected move is backed with market dynamics. We’ve just seen a “stock rotation” following the virus news and generally a bounce in stock markets with many investors getting long into some value stocks.
Alongside this we’ve seen a general risk on mood where most of not all stock markets have been rising.
as anyone who has traded in financial markets for a period time will tell you, the market won’t let you win for long. so this is where As most traders either directly (through the fx market) or indirectly (through commodities or stocks) are now short the dollar, an unexpected stronger dollar will create a short squeeze in these markets causing most “weak holders” to be stopped out or take losses before the true move happens.
This bounce in the dollar will also get FX traders long the dollar as it rejects an established zone bottom.
These long traders will be caught long in the bear move to search for move liquidity.
In volatile markets you should only take the trades you know you can win…
It’s more profitable to stay on the sidelines in a market you are not sure about than enter and lose money.
The mentality that should drive you is that if you were only allowed 20 trades a year, would this be one of them you would take? Or would you wait for a better opportunity?
I can tell you from experience that when you have that mindset, you only take trades when you have fully researched them, you know what you are looking for to happen and (sometimes) more importantly you know what you are not looking for, in other words… you know what can go wrong in the trade.
This isn’t a mentality to stop you from taking trades but it’s the mentality to make you complete ‘due diligence’ on every trade. Its the same that every investor makes when they invest into a company… on the first pitch they see everything that can go right and say YES I will invest etc etc… but afterwards there’s a period of time (sometimes months) where they go through all the finances of the company they have agreed to invest in before they actually put their money into it.
If you do have this approach to trading I GUARANTEE you will make more money than you are right now.
GBP bearish – UK Stocks bearish – safe haven flows bullish
Boris Johnson announced that the UK will go into a (at least) 4 week lockdown closing all non essential shops. This is a double blow to businesses as not only are they to close, but also close at one of the most profitable times of year in the run up to Christmas.
The furlough scheme will be extended while the national lockdown is in place. At an estimated cost of £14 Billion a month, this alone will be bearish for the GBP as it increasing national borrowing.
Most UK workers will be told to work at home where possible. This will be a negative for energy demand (Oil) and high street commercial real estate companies will become under more and more pressure.
I expect to see more small business bankruptcies but I also expect the BoE to respond with additional stimulus or even an unplanned rate cut. Remember negative rates being discussed a couple months ago? 👀
And let’s not forget that Brexit still needs resolving….
When we consider that this move is fuelled by AUD weakness its important to note that the AXY (Australian Currency Index) hasn’t yet broken support levels and many AUD charts such as AUDUSD & GBPAUD are still within key levels.
AUDUSD in particular is approaching a retest of the key 0.7000 level
We could start to see some AUD buying enter the market around these levels.
Lets keep watching the price action and we will of course keep you updated with any developments.
Theres a huge disconnect between the financial economy (stock markets) & the real economy (jobs, GDP etc), this disconnect is apparent throughout the world’s major economies. These disconnects cannot exist forever, so eventfully either the stock markets in the world will fall to reflect the major unemployment and real economic problems left by the pandemic OR we will see all the economic readings improve to pre pandemic levels or higher to meet the performance of the financial markets.
in probability terms, its going to be much more likely that the financial markets fall to better reflect the current economic struggles. Where this is most likely to happen first is in Europe as most if not all major European countries are seeing daily virus cases rise past previous levels set in the first wave, many countries already have or are currently considering additional lockdown restrictions to curb these rising virus numbers.
This is why I have chosen the GERMANY30 to express this trade idea and place my short.