The Wolf Den #124 - All Markets Correct
Bitcoin Thoughts And Analysis
We had no idea when Bitcoin would correct... we just knew that it eventually would, like any market. I have been pounding this point home over and over again, so I know that everyone here was prepared for this drop. I have no idea how far the market will correct, if it is already done, or if this is just the beginning. It does not matter to me much as an investor, but is interesting to watch as a trader looking for opportunities to make money or compound our Bitcoin holdings. So far it has dropped about 17% from the top. 30%+ is very common for Bitcoin in a bull market.
The Fear & Greed index was at extreme greed, normal people in my life that have always laughed at Bitcoin were buying, and there was a general sense of euphoria in the market. While I continued to trade through it (and took some late losses), I also took profit across the board last week, recognizing this euphoria in myself and others. I am about at about 30% USDC, USDT and USD at the moment.
At the moment I am not trading or buying Bitcoin (outside of normal DCA). My bias is a bit more downside, but my bias is irrelevant. Whales are sending coins to exchanges, which usually means more selling, and the bounce so far has been weak in my opinion.
Trading legend Peter Brandt continues to be very bullish on Bitcoin. I agree with his sentiment above. I actually had a 90 minute chat with Peter recently for my new YouTube show Trade Gods, and both of us were somewhat expecting that we would see this drop at some point in the coming future.
MONTHLY CHART
The purple level at $17,178 is not that important, but it would still be nice to see the month close above. I have mentioned a few times, $13,863 was never really retested as support, even with the candle break being right at that point. I would not be surprised to see price come down there on the December candle. I would HATE to see it go down there before this month ends, because that would make for a hideous wick. A couple more days to avoid it!
WEEKLY CHART
Not the best weekly candle so far, but also not the worst. It actually bounced perfectly off of support on this time frame at $16.174. Above that there's still not much to worry about on this time frame, even if it wicks below.
DAILY CHART
The daily chart shows that price bounced just above demand for now. You can see the purple line from the monthly that I have shown before on the daily from 2018. Gun to my head, I would think that price would at least sweep yesterday's lows and hit that demand before heading back up, if we are going to reverse in the present area and not go down to retest lower levels.
4-HOUR CHART
I shared this idea yesterday. It is still what I am watching (hoping) for to signal a likely reversal. We had candles close oversold yesterday, so this is definitely a real possibility.
This really does not look good to me. It looks like bearish consolidation at the bottom of a drop. You usually see lower volume during consolidation, which is clear here after the significant selling volume. Further it did not even make it to the 50% retracement, but was rejected EXACTLY at the 38.2% Fibonacci level. And that rejection came on an ugly candle with more selling after. We are seeing a lot of upwicks on the past few candles, indicating strong selling pressure. The 200 MA on the 4-Hour is also in confluence with the demand area I drew on the daily. Worth watching that area for a more significant bounce, in my opinion.
HOURLY CHART
I rarely zoom in this far, but wanted to show this very clear resistance. A break of that would be a break of the bearish consolidation for the moment, so keep an eye on that. If it breaks up, it could easily make a local higher high and form a more defined bear flag (ascending channel). We would not be out of the woods.
It is hard to draw a convincing support here. It could be a descending channel, which is a bit more bullish, or an ascending line - a bear pennant. On some exchange there are equal lows - so a descending triangle.
Altcoin Charts
ETH/USD (STINK BIDS)
Start placing bids in the untested demand zone (green box)
The above setup was shared 2 days ago, courtesy of Altcoin Psycho. I just wanted to share it again - click on it and advance the chart. Those "stink bids" that seemed so unlikely filled in less than a day. What a call.
Here it is:
Link Trade Review
I shared the following LINK setup a few days ago in the newsletter. I have not been trading very much with current market conditions, but I do like to share a few after they conclude. This is effectively journaling a trade, which all of you should be doing. Here's how I approached this trade and how it ended up.
My entry for the trade was $15.10. As discussed, I was looking for a close above $15.75, which did happen but barely, and only for one 4 hour candle. It was nothing but down from there.
I did not change anything on this trade - I simply let it happen. That is usually a good thing. However, in this case I would normally raise my stop as time goes on, because it is below an ascending support. That's the best part about a trade like this - your stop gets tighter as time passes.
In this case, I did not do this. In fact, I had an alert go off when support broke, but convinced myself not to close the position because the other descending line was still there and "still could hold." THAT WAS NOT MY ORIGINAL PLAN. Further, I was sitting at my desk when price retested the ascending line as resistance , which would have effectively allowed me to close the position for a completely insignificant loss - almost even. Instead I took a .5% portfolio loss, which is about as much risk as I try to take on alts at this point.
I consider this a bad trade. Not because of the loss, but because I changed my plan for no reason and had a chance to take a smaller loss. I convinced myself that the "other line" was important and did not raise my stop.
Remember, the number 1 rule of trading is to PROTECT YOUR CAPITAL. I failed to do this as well as I could have.
Looking at the chart now, it's obviously a relief that I am not longer in it. Price continued to drop hard and fast. But that does not justify my poor trade management.
90% Vs. 95% Vs. 99% Losses
Not all losses are created equal. There is a vast difference between recovering the value of an asset that has dropped 90% vs. one that has shed 99% of its price. Recovering from both is a long road, but the journey back from 99% is 10x harder than from 90%. Let’s take a $100 stock for example. If it fell to the respective amounts above, it would be worth $10, $5, and $1. The positions of their bottoms may not seem far apart, but their roads to recovery are vastly different.
For the $10 stock to recover its lost value, it needs a 1,000% gain. For the $5 and $1 they need a 2,000% and 10,000% gain respectively. Bitcoin’s drop from ≈$19,800 to ≈$3,200 constituted an 84% drop. That means Bitcoin needed a 620% increase to recover from its all-time low. From Ethereum’s high of $1,410 to its low of $83, it experienced a 94% drop, needing a 1,700% increase from its low. Ethereum has roughly 3x the overall distance to cover to return to all time high compared to Bitcoin when the difference in their drop was only 10% points. To spare you the math, XRP’s recovery is 4.7x the difficulty of Bitcoin’s. If you hold an altcoin that experienced a massive drop, we encourage you to find out the difficulty of its return using the above formula. Keep in mind, this only considers the numbers so the “difficulty in recovering” measure is limited in its application and is not a holistic understanding.
First Principles 101
By Sahil Bloom:
Many of the world's greatest thinkers and doers tout the importance of first principles thinking. But what is "first principles thinking" and how does it work? Here's First Principles 101!
First, a few definitions. A "first principle" is a foundational assumption or proposition - it is foundational in that it cannot be deduced from other assumptions or propositions. Think of a first principle like an element. It cannot be broken down further. It is pure.
"First principles thinking" (or "reasoning from first principles") is a problem-solving technique that requires you to break down a complex problem into its most basic, foundational elements. The idea: to ground yourself in the foundational truths and build up from there.
When we encounter difficult problems, our tendency is to rely on base level assumptions we have been told are true (or believe to be true). It's quick and easy to do so. But it also leads to unimaginative, linear solutions that closely resemble all that has been done before.
This is called "reasoning by analogy" - it leads to solutions that are like something else. It can be a useful heuristic when speed is required and novel solutions are not the goal. But it falls short when dealing with complex problems in need of imaginative solutions.
Imagine the solution to a problem as a house. The foundation is the assumptions upon which the solution rests. If the foundation is shoddy, the house will collapse. If the foundation is sturdy, the house will hold up. First principles form a sturdy foundation for the house.
To illustrate the flow of first principles thinking, let's look at a classic example. The case of Elon Musk and his original SpaceX rocket. The complex problem? Sending a rocket to Mars. The logical first step: to obtain a rocket.
Musk discovered the cost of buying a rocket was otherworldly (sorry, couldn't resist!). Buying a rocket for $65 million was not only untenable, it was also grounded in assumptions of how rockets have always been built and what they should cost. He turned to first principles.
He asked and answered basic, foundational questions. What is a rocket made of? Aerospace-grade aluminum alloys, titanium, copper, and carbon fiber. What is the value of those materials on the open market? Just ~2% of the typical rocket price. So he decided to build his own.
Rather than accepting the "truths" he had been told about the cost of a rocket, Musk grounded his problem solving in first principles. Today, SpaceX rockets are safely delivering humans to space and the dreams of a Mars voyage are alive. Score one for first principles!
There is no set way to establish first principles. "Socratic questioning" - a technique where you use systematic questioning to drill-down to fundamental truths - is one method. Farnam Street has a great primer on this in their article here.
Some questions you might ask... Why do I believe this to be true? How do I know this is true? How can I support this belief? What alternative viewpoints might exist? In short, become an endlessly curious child again! Question anything and everything. Ask why!
The world is filled with unimaginative, copycat solutions to problems. These (predictably) lead to linear outcomes. Leveraging first principles thinking is difficult and time consuming, but it is also a pathway to devising creative solutions that lead to non-linear outcomes.
Aristotle defined a first principle as, "the first basis from which a thing is known." The greatest thinkers and problem solvers agree: when solving a complex problem, ground yourself in first principles and build your solution up from there. It will not lead you astray.
So that was First Principles 101! I hope it was a helpful primer on the topic.
The Bitcoin Reformation
In a time when thinking and learning about our history is hyper-relevant, we wanted to share a special report that mixes both Bitcoin and our past. Tuur Demeester, a popular Bitcoin advocate, and master historian wrote an amazing report 2 years ago about the parallels between the 16th-century Protestant Reformation and Bitcoin. Not that this relates to Thanksgiving, but it is a fascinating study about the reformation’s separation of church and state and Bitcoin’s separation of money and state. Summarizing the report wouldn't do it justice so we went ahead and linked the original report.
You can also find a TLDR on twitter here: https://twitter.com/TuurDemeester/status/1192534287989583873
Binance Is Finally Giving Americans The Boot
The above letter has been sent to almost every American that has been trading on Binance. They "kicked Americans off" in the summer of 2019, but never enforced that removal in any way, allowing us to continue trading on the main Binance platform.
Americans are going to be forced to liquidate their holdings on Binance and remove them from the exchange within 14 days of receiving this message. Some coins are tradable elsewhere, of course. But many are exclusive to Binance, so this really isn't great news. I have already sold off my Binance coins (many at a loss, hooray for tax harvesting) and moved them off exchange. Keep this in mind when I am sharing my trades - I will likely be looking at some different coins and on USD pairs (not ideal for me) since this is what is largely available on US compliant exchanges.
I will still share setups for all of you that I cannot personally take.
Depending on how closely coordinated these letters are going out, it could provide a bit of selling pressure on coins that Americans have been exposed to but need to sell. Not a huge deal for now, IMO.
Coinbase Is Down!
Not actually at this moment, but Coinbase functionality has been suffering through the recent crypto volatility at an alarming rate. Anytime Bitcoin or a major has made a large move, Coinbase has expectedly, right on schedule gone offline. We have been seeing this for years, so no surprises. The surprise is that they "somehow" cannot fix the problem. Still.
Yesterday during the Thanksgiving dip, Coinbase went in and out for a couple of hours and failed to accurately show funds when it returned. Customers planning to buy the dip on Coinbase likely missed out on the lows because they were quickly swallowed up and then Coinbase magically came back to life. We do find Coinbase to be reliable in terms of it being a “household name” but if it is your only option moving into 2021, we suggest exploring new platforms like Voyager. The worse thing possible in crypto is trying to make a trade and the platform working against you.
This is truly unacceptable.
Whales Moving Coins To Exchanges
A rapid BTC recovery could be in doubt as inflows of Bitcoin to exchanges from large wallets has increased to an 8 months high. Not ideal. This action usually precedes further price appreciation. If you are a trade who watches on-chain metrics, this is generally considered meaningful.
Chinese Police Seized 4.2B PlusToken Coins
The PlusToken saga never seems to end. Chinese police have seized 4.2B worth of crypto assets in total from the PlusToken scam. That's a lot of tokens!
My Recommended Platforms And Tools
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Binance is finally available in Florida!
Concierge Phone Service for Americans that protects your from SIM Swaps and other phone related hacks. I cannot stress enough how amazing this service is.
Follow me on Twitter at @scottmelker. This is where I am constantly updating my trades and sharing ideas.
On-chain and fundamental analysis, research, predictions and indicators, all in one place. Highly recommend.
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.