The Wolf Den #152 - Invest More, Trade Less
Bitcoin Thoughts And Analysis
Bitcoin is an unstoppable force of nature. During my livestream last night it dropped a few percent and looked a bit weak. I woke up today, 41K. Really unbelievable. Disbelief does not begin to explain it.
These are the updated 4 hour levels, and price is currently retesting the freshest resistance as support. Literally nothing has changed on higher time frames. Bitcoin continues to push through potential bear divs, hit records on how overbought RSI can go and more. Betting against it now is a fools errand. Buy the dip until proven otherwise.
40K could be a nice psychological level for a long.
Circle Of Competence
By Sahil Bloom:
Warren Buffett and Charlie Munger often reference the importance of knowing the boundaries of your circle of competence. But what is a Circle of Competence and how does it work? Here's Circle of Competence 101!
First, a few definitions. A Circle of Competence is the set of topic areas that align with a person's expertise. If the entire world of information were to be expressed in a circle, an individual's Circle of Competence is the small sub-circle that represents their expertise.
The idea surfaced in the 1996 BH annual letter. "You don’t have to be an expert on every company...you only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital."
A Circle of Competence is built over time. It is built through experience, reading, dedicated study, and effort. It is dynamic, not static. It can expand as you deepen your knowledge in new areas. It can contract if you fail to nurture your existing areas of expertise.
To engage this mental model in your life, there are two key processes to go through: (1) Identify what falls within your circle, (2) Identify the boundaries of your circle. (1) is all about figuring out what you know, while (2) is about humbly admitting what you don’t.
Let’s look at a few examples of where we see the Circle of Competence in action and how it can help you win. In investing? Berkshire Hathaway provides the classic example of investing success from sticking within the boundaries of your Circle of Competence.
Warren Buffett and Charlie Munger have consistently passed on investment opportunities that fell outside of their respective Circles of Competence. At times, it has led to what might look like big misses, including failing to see the potential and invest in Google and Amazon.
But while you hear about these misses (“the anti-portfolio”), you don’t read about all of the bad decisions it saved them from making. As Munger once said, you can become a consistent winner by “trying to be consistently not stupid, instead of trying to be very intelligent."
In business? The best operators know their core competencies and are honest about their incompetencies. The visionary CEOs hire field general, execution-focused COOs. The field general CEOs hire visionary product leaders. Own your competencies, outsource the rest.
So how can you implement the Circle of Competence model into your life? First, identify your circle and its boundaries. What topics do you know more about than most people? What topics do others look to you on? What are you constantly excited by and learning more about?
Next, be ruthlessly honest with yourself about that circle and its boundaries. Build checks into your decision process that pressure test whether you are remaining true to your Circle of Competence. Consistently sticking to your circle will lead to good long-term outcomes.
Finally, keep expanding and deepening your Circle of Competence. Embrace intellectual curiosity! Is there a new topic you are excited about? Read everything you can get your hands on. We live in an unprecedented era of access to information.
You no longer need to pay a big tuition bill to learn something new. You can seek out thought leaders, ask them questions, read their articles, listen to them speak. It is truly remarkable. Take advantage! You may just find that your Circle of Competence begins to grow.
A Bitcoin ETF Approval Could Hurt GBTC
The Grayscale Bitcoin trust is publicly traded and offers Bitcoin exposure to the average investor. This has been a phenomenal alternative for the crypto space since an ETF hasn’t been approved by the SEC. It functions very similarly to an ETF and is probably the easiest way to gain exposure to Bitcoin price action without having to worry about custody. However, I believe there are a number of hidden risks associated with GBTC if a Bitcoin ETF were to be approved. Granted there have been many attempts at approval for years now and all have been denied, but the SEC will have a new chairman and regulators are beginning to open up to crypto, leading me to believe an ETF approval could happen in the near future.
First, is important to understand exactly what GBTC is. It appears on the stock exchange like any stock would with a ticker, but it is not a stock or ETF. It is a grantor trust, meaning Grayscale retains full control of the assets inside. The first risk associated with GBTC is its volatility that can be independent of the price of Bitcoin. At first glance at the GBTC chart, on a large time frame, it looks almost identical to Bitcoin’s price history. Due to GBTC trading at a premium and trying to balance its premium with market swings, it is possible for GBTC to decrease while the price of Bitcoin increases. This is a rare occurrence, but happened back in mid-2017 for two months. Furthermore, on days that Bitcoin is extremely flat and ranges sideways for an extended period, investors moving in and out of the trust can cause extra volatility that Bitcoin holders don't experience.
The second drawback for GBTC is that it is expensive - the trust charges a 2% management fee every year to run the fund. Investors don't directly see the 2% detraction from the investment. It is handled in house and is figured into the premium that investors pay when buying GBTC. The premium ranges based on the value of the share in correlation to how much Bitcoin it represents. At times the premium has been over 100%. A quick explanation of the premium. There is a concept in investing called NAV - Net Asset Value. The premium is anything above NAV (the actual price of Bitcoin).
Hypothetically, if Bitcoin were to remain flat for a year, GBTC would lose 2% of its value in that year rather than remaining identical to Bitcoin’s price. This 2% fee combined with the premium and increased volatility equates to GBTC lagging behind the recent expansion in Bitcoin. To explain in numbers, GBTC peaked at $29.66 during the 2017 peak but now is priced at $44.97. This is a 1.5x from the all-time high. Bitcoin peaking at around $19,800 during the 2017 peak now sits at about $41,000 which equates to over a 2x from the all-time high. The point here is that Bitcoin holders have significantly outperformed GBTC holders profit-wise and will probably continue to do so the entire duration of Bitcoin’s cycle.
Now I want to talk about why a Bitcoin ETF approval could hurt GBTC as a warning for investors currently exposed to GBTC. ETFs are governed under different rules that grantor trusts are not subject. These laws are preventing large institutions from investing in GBTC or any trust. An ETF approval would open the doors for a lot more institutional money to enter into Bitcoin because a grantor trust isn't something they can legally invest in. On top of these doors opening, the ETF would likely be much cheaper than 2%. This competition would drive investors from GBTC over to the ETF. New money entering the ETF and current money leaving GBTC for the ETF would bring the price of Bitcoin up and the price of GBTC price down. Since the premium for GBTC has been so high, it is possible this could reverse and GBTC sees a drop in its price, equivalent to the premium in the downward direction - essentially a huge discount. This is speculation but is reasonably possible. To make matters worse, this could all happen while the price of Bitcoin increases.
Aside from the risks involved in GBTC, it is still my number one pick for new investors on the legacy side looking for price exposure.
That said, I have personally invested in a GBTC competitor called Valkyrie, which is focused on both ETF and trust products. Their trust will trade far closer to NAV, eliminating the absurd premiums that are structurally built into GBTC. And knowing that the approval of an ETF would likely end the trusts, they are focused there as well. We will talk more about that down the road.
This segment stemmed from the YouTube video linked above, so shoutout to Heresy Financial for providing this insight and covering the topic.
FinCEN Is Experiencing Strong Pushback
As you know, FinCEN is proposing new legislation regarding KYC legislation for cryptocurrency exchanges. On the surface, the legislation sounds like an attempt to combat illicit activity, but it brings severe consequences to the crypto community. Opposed to the friction these new requirements bring to DeFi, emerging markets, and privacy, the public banded together to peacefully disagree with FinCEN, leaving public comments for the government to read. The comments were set up to guide FinCEN on drafting the legislation, but our passionate crypto community submitted 65,000 comments. Aside from the comments, multiple advocacy groups have been working tirelessly to fight the legislation and inform FinCEN of the consequences that could result if the legislation passes. Below are some of my favorite phrases compiled together from random comments, enjoy:
“freedom trampling regulation”
“This regulation will hurt a growing, disruptive global industry”
“This is literally an attack on every American's personal freedom”
“The proposed new rules impose unprecedented financial surveillance”
The strength of the crypto community is a force not to be reckoned with. I could not be more proud.
Google Searches For “Ethereum” Are Outpacing Searches For “Bitcoin”
Google Searches for the word, “Bitcoin” are at half of their all-time high from 2017. Searches for “Ethereum,” on the other hand, have surpassed the top search rate from 2017. Known as the “folk metric” this measure is a bit surprising, knowing that Bitcoin has far outpaced Ethereum in terms of price. In the last bull run, Litecoin was being equated to silver and Bitcoin to gold. Because of this, Litecoin received a lot more attention and set higher search values while Ethereum remained in the shadows. Because Ethereum set a lower bar, it was easier to achieve its all-time high. Plus, total searches for “Bitcoin” are still outpacing “Ethereum” searches on 5:1 basis. Now that institutions are only publicly buying Bitcoin and Ethereum, both are receiving a lot more attention than Litecoin. Litecoin today is at only 6% of searches from 2017. This is all further proof that all eyes are really on Bitcoin and Ethereum.
Bakkt Cryptocurrency Exchange May Go Public
It is rumored that Bakkt is in “deep discussion” to go public through a merger. According to the rumors, it is believed that the official announcement could happen as soon as next week, with sources speculating the merger to be worth $2 billion. Bakkt offers Bitcoin futures, so an IPO would be good news for the crypto space and offer a good opportunity for investors seeking diversity.
My Recommended Platforms And Tools
This is where I trade with leverage and can also trade spot with no fees.\
This is where I spend my days teaching and learning! Our Discord group is a one stop shop for everything you need to learn to trade and control your emotions. Feel free to DM me on Twitter or respond to this email for questions.
This is where I invest, commission-free. They now let you earn interest on your Bitcoin held in Voyager, so you can compound while trading. Not only that, you’ll get $25 in free BTC when you download & fund.
Rewards Code: Scott25
I use RoundlyX to buy small amounts of Bitcoin every single day. They automatically round up my credit card purchases (with 10x multiplier) and invest them in crypto. Absolutely brilliant. Passively invest money you don’t need without a thought. Further, they have integrated with Voyager (see above) to offer commission-free purchases.
Rewards Code: WOLF
The platform I am using for my taxes. My trades were automatically imported after setup and displayed nicely. The tax report was quick and easy to create in the app. I can also track the performance of my assets in the app. With Blockpit, I no longer have to worry about realizing profits or losses in time.
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.