The Wolf Den #385 - Does Maximalism Make Sense?
Bitcoin Thoughts And Analysis
Bitcoin experienced a major correction over the weekend, dropping on low liquidity late on Friday night, while many exchange executives and traders were partying in Miami. I was actually with quite a few of them, in a venue with no phone service when it happened, and experienced the widespread panic as many whales attempted to figure out what was happening.
We saw yet another monster leverage cascade, wiping out open interest and resetting derivatives exchanges. The dip went as low as it did because of the timing (low liquidity) and amount of leverage.
This caught almost everyone by surprise, myself included. At this point, my shorter term bullishness has been canceled - you have to reset your bias when new information is presented. Losing 53K was meaningful for me, and the depth of the dip was surprising.
While I still believe this is a macro bull market and that much higher targets are in play, I would be remiss to start screaming that every dip is the bottom, because we can clearly still go lower. I will be looking for more clarity as the dust settles.
NONE OF THIS matters if you are an investor. Keep buying. If you are trading or have money that you need at risk, it's worth paying attention.
From a fundamental perspective, perhaps the best indicator that this was coming was the massive deposits by whales over the past few weeks into exchanges, which I was unaware of. Whales have to have coins on exchanges to sell them.
This will be an indicator worth watching in the future.
MONTHLY CHART
I did not anticipate that we would be discussing the EQ of this channel again as support, but here we are. It is very early in the month, so no real reason to look at this yet, but it is notable that price is once again interacting with that dashed line. Every single time that it has broken up or down, price has visited the top of bottom of the channel. I still expect to see that, but anything can happen.
WEEKLY CHART
The weekly chart is the most compelling to me at the moment, because it shows very clear levels worth watching and considering. As you can see, price is trading at the 50 MA on the weekly, a level that has not been broken since the covid crash in 2020. Price is also trading just above the descending blue line that signaled the breakout to new all time highs.
Interestingly, the candle two weeks ago found support almost exactly at 53K (slightly above, which was the "front run" we discussed)and last week found support at 42K, which was the next major level. I did not think we would visit it again.
Market structure since the 28K lows a few months ago remains definitively bullish. We have a series of higher lows and higher highs, and the currently drop remains within that framework. Counting candle wicks (I do), we need to see price stay above $39,600 to prevent a lower low.
This is arguably the most important thing to watch.
DAILY CHART
Rejected repeatedly at the 50 MA, bouncing above the 200 MA for now. Huge volume on the drop the other day, the biggest we have seen in ages. Price is currently at support, which is a demand area left behind before a recent pump. This has already been pierced, so it is not as strong.
Price is trading well below the lower bands, meaning that we should at least get some relief and a mean reversion back inside. The rejection at the centerline was repeated and ugly, with the bands starting to expand downward. This looks like more downside could be in store, once things settle a bit. Hard to tell when there's this much volatility.
The daily STILL has not closed oversold. I thought we would be there with these prices, but RSI continues to bounce just above. It's time to get this over with, so a slightly lower close will likely get us there. That does NOT mean it is the bottom, but it does mean that we eventually start the trip back to overbought. RSI can go quite oversold, and that could come with much lower prices. As you know, I will be watching for bullish divergence to signal a bottom.
As I said at the end of last week, our bull divs were canceled across the board by hidden bearish divergence, a signal that continuation was likely.
4-HOUR CHART
We have a clear resistance at $49,777 that has been formed after the drop. This would be the first signal of a potential bottom. This is also the 50% retracement level after the drop. I talk about this ALL THE TIME. After any major move up or down, you expect a knee jerk 50% bounce because of standing orders and market reaction. This was exact, again. For now, we do not have any clear reversal signals, just a normal bounce after a major dip.
A close below $46,588 would put another bullish divergence in play on the 4-hour chart.
BOTTOM LINE - I do not like the fact that 53K was lost and that price went so deep. I remain short term neutral to bearish below that level, and would not be surprised if the bottom is not in yet. For now, we are effectively ranging between 42K and 53K, so a break of either would give us more information.
Altcoins
Now is not the time to be sharing altcoin charts and setups, as the market corrects and coins see major drawdowns across the board. If you are a long term investor looking to buy dips on your favorite projects, understanding that they can still go way lower and that you may have to hold through it, then I cannot blame you for starting to look at coins. But as a trader, there's nothing to see here until the market calms.
Can The IRS See What You Are Doing?
The IRS wants undeniably wants to be in your business, but they can’t see everything you do. Every exchange/platform user in the crypto space will fall into one of three buckets when it comes to what the IRS can see (regardless of where you land, you still owe the man). The first and most visible bucket is users who use exchanges that report activity to the IRS. If your exchange issues you a 1099-B tax form, then they also issue one to the IRS with the exact same information.
The second bucket involves users on exchanges that don’t send the IRS a 1099-B form. The IRS can still gain access to your activity if they choose to do so. This is usually a battle between the exchange and the IRS, but I wouldn't hold your breath that the exchange is able to hold off the government.
The third bucket is foreign platforms that the IRS cannot gain access to (for now). This means that your activity is hidden and will remain so, and it’s entirely up to you to report what you owe (you ALWAYS should).
The money you make will inevitably flow back to your bank at some point and the IRS can see this. Reporting crypto taxes is difficult. Each platform you use will inevitably offer a different calculation of what an individual owes when presented with the same set of information. Just do your best. If you are paying for a tax service, you are probably already doing more than most people.
Crypto Is An Inefficient Market
As much as we want to believe that crypto is strong enough to stand on its own, our market is still in its infancy. A shaky week in global markets set up the perfect scenario for a crypto shit storm. Omicron fears mounted, Evergrande FUD returned and the FED hinted at tapering, all while Bitcoin flirted with a drop. In the background was an unprecedented number of leveraged longs hoping for a Bitcoin breakout. Right when liquidity was at its lowest near the end of the week, disaster struck, and Bitcoin saw a 30%, near-instantaneous drop. Some exchanges with thin order books saw Bitcoin go even deeper, taking out more traders and causing an even further correction.
Our market is still extremely inefficient. All markets took a hit, but none saw 30% drawdowns outside of ours. Sam Trabucco from Alameda Research wrote an incredible thread explaining how and why our markets are inefficient, which is linked above. If you were liquidated from this and lost a serious amount of money, it’s time for a new game plan. This won’t be the last major dip before the end of the bull run.
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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. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.