The Wolf Den #110 - Keep Calm And Carry On
Bitcoin Thoughts And Analysis
I closed my Bitcoin long yesterday on the drop with a manual trailing stop. As you know, when I have a position in profit I generally move my stop losses up into profit and continue to do so as it rises. That said, price is currently trading higher than where I exited. It happens.
I still have orders both above and below the current price.
Let's take a look at the charts.
MONTHLY CHART
The monthly candle closed JUST below resistance, forming a slight potential bearish SFP - meaning that liquidity may have been engineered just above that line, where tons of buy orders were likely sitting, as well as stop losses on shorts (also buy orders). I am not worried about this for the moment, because it's the monthly and would really require a definitive move away from that line in the coming month. This is the little wick above the blue line. At the moment, it looks more like price is consolidating just below that line, which usually leads to a strong break above. My bullishness remains very much intact with price anywhere above the $10,500 area. A break above the blue line should lead to a retest of the all time high - there is no monthly resistance above that level. Intense, I know. I will be adding aggressively with a clear flip of $13,868.
4-HOUR CHART
The weekly and daily don't offer much extra information that we can't see on the monthly or 4-hour, so I decided to skip them and zoom in. The premise of my last long was a bounce off of the 50 MA on the 4-hour just under $13,100. You can see that price broke below temporarily but has once again flipped it so support with a nice big candle. Price is also now trading above the local support at $13,687.
Price is trading in a clear ascending channel (blue). This is NOT A BULL FLAG, which must be descending. Bitcoin has a tendency to break up from ascending channels and wedges. If we do see a break of the bottom, it would target the area where my bids have been sitting for quite a while - around $12,500. I have shared this area a number of times. It was a major resistance and has not been retested as support. A drop to this area and successful retest would be VERY bullish.
The divergences on this time frame have been fun to watch, as always. Bear divs have been reversed by hidden bull divs and vice versa. The most recent div is a hidden bull div, which helped predict this movement up. RSI is full reset now from overbought, so there's plenty of room in either direction for movement. In a vacuum, this looks very bullish right now.
Bottom line: I am interested in buying Bitcoin on a drop to the $12,500 area or a break above the monthly resistance. I am not interested in getting cute and trying to short any of that movement.
IntoTheBlock: The UNI Token Crash
In this report, we bring to you the latest in on-chain cryptocurrency analysis. We look at the blockchain directly and analyze balances, transactions, and the overall activity of market participants. This gives us a unique insight into the future of the market.
This section is written in conjunction with IntoTheBlock (ITB). ITB is an intelligence company that leverages machine learning and advanced statistics to extract intelligent signals tailored to crypto-assets. IntoTheBlock tackles one of the hardest problems in crypto: to provide investors with a view of a crypto asset that goes beyond price and volume data.
The Wolf Den research team uses IntoTheBlock to dig deeper and get the most important insights about the crypto market.
This Week: The UNI token Crash
Decentralized finance (DeFi) tokens have been struggling to recover since the September crash. While DeFi tokens took the spotlight in the summer, the market has not been in their favor with their tokens being some of the worst performing in October and September. When compared to Ethereum’s performance — where most DeFi DApps are built on top of — DeFi governance tokens hit a monthly low.
The ratio of DeFi tokens’ market cap (excluding oracles) to Ethereum went from being around 25% in late August to just over 14%. During the same period, Ethereum has also dropped, meaning that DeFi tokens have fared relatively worse in the last couple of months.
Uniswaps governance token (UNI), has been one of the tokens that got hit the hardest. The token was launched on September and in just 24 hours it reached an ATH of $8.4. Since then, it has been falling nonstop, hitting a low today of $2.06.
Using some of the top IntoTheBlock’s indicators, we will analyze the fall from an on-chain perspective.
The number of active addresses has been falling continuously since September 16
Uniswap took the market by surprise, as every address who had used Uniswap prior to September received a minimum of 400 UNI tokens, with a value of just over $800 at the moment of writing.
Based on Uniswap’s official announcement, there were just over 250,000 user addresses eligible to claim their free UNI. Although some of these addresses have yet to claim their UNI, it appears that most simply sold. By looking at zero balance addresses — addresses that transferred out all of their tokens on a given day — we can confirm that most UNI claimers either sold or transferred all of their stake immediately.
After reaching its highest point on September 16 with 178 thousand active addresses, UNI’s network activity has been dropping, reaching an average of only 4,000 daily active addresses on average during the last month.
Although the network activity is at its lowest level, it’s important to say that the number of UNI holders has been growing steadily, reaching an ATH yesterday with 92.76 thousand addresses with a balance in UNI.
Perpetual Swaps Open Interest is down along with the Price.
As can be seen in the graph above, UNI’s perpetual swaps open interest is decreasing along with the price. This trend suggests that long positions are being closed, but the decrease in the total amount in outstanding contracts points out a possible trend reversal.
Today, the dollar amount in outstanding contracts reached its lowest number ever, with $15.69 million.
At the current price of $2.14, only 0.5% of the addresses holding UNI are profitable
Asides from the high inflation rates, it may come as no surprise that tokens that rise 10–20x in price tend to subsequently correct by 60–80+%. This is due to natural market forces and profit-taking. By comparing the number of addresses making profits at a certain price level, we can estimate that DeFi token holders have been closing their positions. By using IntoTheBlock’s Historical In/Out of the Money, it is evident that fewer holders are profiting at the same price level before the crash.
The image above shows that the number of UNI holders in the money, or profit on their positions, at a price of $2.14 is only of 0.05% or 50 addresses. The graph shows that after the token hit its highest level on September 16, every address that has been buying the token after that is currently underwater.
Altcoin Charts
I have exited my altcoin positions, aside from my leveraged Ethereum longs. I took a small loss (.08% of position) on LINK/USD, broke even on ALGO, broke even on YFII (which never triggered from the setup I shared) and took a small gain on VOX, which I shared last week.
It is difficult to get a read on the market, alts continue to suffer and its election day. We can revisit trades on Thursday or next week, when the dust settles.
As I said on Friday - "I EXPECT TO LOSE ON EVERY POSITION I AM TAKING. My positions are small, my stops are set, and it’s well within my risk management profile to take these losses and move on with my weekend. For now, I view them as likely scalps on an alt bounce, and will reassess as the next few days unfold. I am trading these pairs because I believe the upside far outweighs the downside, EVEN IF THE DOWNSIDE IS MORE LIKELY. Good risk/reward ratio."
It did not work out thus far. No big deal. If you entered any trades this weekend, your expectation was to take a small loss.
There are still a ton of bullish divergences on alts, they are largely still oversold. We should see some relief soon, but we are still catching falling knives. I'm not overly pessimistic, just not interested today while the world is watching the election.
Let's take a look at Bitcoin Dominance.
BITCOIN DOMINANCE
Dominance was at resistance last week at 64, and has broken through today with a sizable candle (so far). This is a reflection of altcoins seeing continued downward movement. As I said before, I expected an eventual trip to the red line and then above to likely fill the gap shown on the left.
This is why alts are so risky right now. Let's wait and see if it gets rejected at the red line or if it can break through.
Legacy Markets
I am not trading stocks right now, I see no need with so much uncertainty. That said, it's always fun to take a look at the dollar, since all assets movement somewhat inversely.
DXY (DOLLAR INDEX)
Here, once again, is the monthly chart that I have been sharing for ages. As you can price broke down the decade long channel, retested as resistance and is now dropping. Further, it's forming a clear bear flag, even on the monthly chart.
Not good for the dollar - really good for everything else if it plays out.
From AltcoinPsycho:
This is a no trade week for me. There are three major events happening:
1) The Election:. This one should be obvious. The election brings a lot of uncertainty, and if there's one thing that the market hates, it is uncertainty. In one of my recent tweets, I talked about how markets will likely not actually care which candidate wins. It will more so care about uncertainty or gridlock. I only see the market crashing if Biden wins by a thin margin and Trump refuses results or Trump wins but Dems win house & senate (since this would imply 4 years of policy gridlock.
2) FOMC: FOMC is a Fed committee meeting that happens 8 times a year to discuss the direction of monetary policy specifically by directing open market operations. This is where they announce things like changes to interest rates, or discuss quantative easing.
3) NFP: Also known as the Non-Farm Payroll Report, NFP occurs on the first Friday of every month. It is known to be one of the most significant trading days of the month in the forex world as it usually brings high volatility. NFP in short is a report that gives insights in to the state of US employment and unemployment, which the market sees as one of the most reliable indicators of economic growth or contraction. While many traders have different strategies, I tend to not trade the days leading up to FOMC and NFP. Volatility usually spikes in these trading sessions which can chop up even the best of traders. While it does present good scalping opportunities on lower time frames, these sessions are typically not worth the risk.
Trade Review - LINK/USD
I exited my LINK position at a loss yesterday, so figured it would be a good moment to review the trade for both myself and all of you. I always make a practice of revisiting my trades as a learning moment - especially the losers.
Above is the zoomed out view of the trade.
The intention was to play a retest of the descending line as support, one of my favorite places to enter a trade. In addition we had the ascending line that would make for a clear invalidation, as well as a TD9 on TD Sequential on the 12 hour chart. This is a buy signal. The LINK/BTC pair was also sitting just above ascending support, which offered a bit more information and justification for a tighter stop. Here was the original trade and description from Friday:
Below is the LINK/BTC chart that I referenced. At the time, this pair was trading above the ascending blue support and the black horizontal support at 0.00079452.
In reviewing the trade, I believe that my premise for entering was sound and have no criticism of my decision. Lots of support, indicator confluence, both pairs agreed. It was a bit of a falling knife, but I like to buy support and a tighter stop was justified.
I averaged into the position, bought a little more higher after it showed a bit of bounce, bringing my cost average to 10.94. My stop loss was at 10.19, the idea being that this gave enough room to account for a wick below both support lines. I came to realize that this was a bit too generous.
That said, I was watching price action yesterday and saw a very clear break of the ascending white line. Then the descending line broke and an hourly candle closed below. I decided to exit earlier than my stop loss, as my premise was blown and there was no reason to wait. I closed the trade at 10.53. You can see this below on the 4 hour.
Price ultimately continued to drop and hit my original stop loss, so I definitely saved myself a bit of money, taking a .08% portfolio hit instead of a loss greater than 1% of my portfolio. That said, price bounced and reversed just below my stop loss and actually rose above where I exited. There is no scenario where I realistically would have "lost less," because I would have stopped out at 10.19 before price reversed. That would have been a bit frustrating, to wake up and see price well above my stop loss, but for now I believe that I played this right. The move back up appears to be a retest of support as resistance and not a true reversal.
Lessons learned:
Use a tighter stop on an entry based on a support test. 10.19 was well below where true invalidation would have been confirmed, and a wick that low was somewhat unlikely if it was going to close back above.
Avoid adding to a position when alts look generally weak and Bitcoin is indecisive. I should have stayed with my original position sizing. I would have taken a smaller loss.
Credit & Debt 101
By Sahil Bloom
There is so much talk of “credit” and “debt” right now, but as with most topics in finance, the discussion turns complex and leaves most people scratching their heads. What does it all mean? Why should you care? A quick primer on the topic...
Credit is the granting of buying power. Debt is a promise to pay it back at a later date. Contrary to popular belief, credit and debt are not evil - in fact, they can be good! Whether they are good or bad largely depends on what the buying power produces in terms of income.
Take a loan to buy a couch, that is bad. You won’t have income to pay off (“service”) the debt. Take a loan to buy a delivery robot who earns you money, that is good. You have income to service the debt. Income Growth > Debt Growth = Good Debt Growth > Income Growth = Bad
Taking on debt is really just pulling forward future spending into the present. It reduces your future spending as you service that debt. If you are earning more at that future date, that is fine! If you aren’t, you may be unable to service the debt (a “default”).
Economy wise, the key is that spending is used to fund productive activities that stimulate growth and enable us to service the debt. So what’s the problem today? Well in short, we have not been doing that. Since 2000, we have added $185T in debt to achieve $46T of growth.
If that seems unsustainable, it’s because it is. At some point, that bill comes due! Sure, we could print more money (kick the can!), but eventually, if debt service costs exceed incomes, we are in trouble. These are the “Zombie” companies or economies you read about.
Our global credit binge has set our course for a wave of defaults. This is a classic “debt cycle” and has repeated itself throughout history. We play with fire, get burned, then we do it again! So this is where we are and why it matters. This concludes Credit & Debt 101.
PayPal Has A Bitcoin Waiting List
PayPal has a waiting list for access to bitcoin buying. 2-3x greater than their initial expectations. They have only granted access to Bitcoin purchases for 10% of their user base so far. The mob is coming.
China’s CBDC is One Step Closer
China is far ahead in the CBDC race. The digital Yuan just crossed the $300 million dollar milestone in payments. Just one month ago, the digital currency was at half of where it is today. As the project has seen massive early success, rumors have emerged that the 2022 Winter Olympic Games will be the date China announces full deployment - when the games are hosted in Beijing
China’s “testing,” which seems to be more of a public beta, has accelerated drastically over the past months. They first began exploring a digital currency in 2014 and didn't take action until 2017. Aside from the lengthy process, their acceleration appears to be exponential. If China isn’t willing to share their findings and the U.S. isn't taking note of their progress, this is likely bad news for other countries attempting to be first.
A New Application for Blockchain Technology
A new report released findings for an application of blockchain technology that could literally save the world. A 2-year research effort from King’s College in London titled, “The Trust Machine: Blockchain in Nuclear Disarmament and Arms Control Verification,” argued that blockchain can bring a fresh new approach to how regulators are assessing trust in nuclear disarmament.
The report found that a permissioned blockchain is a conceptually analogous system parallel to the modern protocol for nuclear systems. The United States, Australia, and Finland all found unique viability in the technology when replacing modern systems that currently lack trust. This stands as another example of blockchain under the eyes of regulators finding its way into every part of society. For the Wolf Team’s full analysis read the blog linked above.
The Wolf Of All Streets Podcast Ft. Richard Craib
Richard Craib began his career as a quantitative analyst for a hedge fund. During his tenure he formed a vision for a new financial system, leading him to found Numerai, a novel hedge fund that collects trading signals from around the world and pays participants based on their success. The idea is ambitious; Numerai is prepared to be the only hedge fund in the world.
Richard and I further discussed the definition of a quant, machine learning, million-dollar data sets, managing all the money in the world, crowdsourcing signals, beating the S&P, the Numerai Master Plan, a brand new hedge fund system, Ken Griffin and Citadel, poker players and trading, the ethical good in trading, hedge fund exclusion, accredited investor laws, the data + talent secret, and more.
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The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor.