The Wolf Den #506 - To Catch A Falling Knife
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In This Issue:
To Catch A Falling Knife
Bitcoin Thoughts And Analysis
Legacy Markets
Circle Of Competence
Stats About Crypto In The U.S.
Don't Throw Away Your Money
The Wolf Of All Streets Podcast Ft. Tim Draper
The Wolf Of All Streets Podcast Ft. Jeff Booth
My Recommended Platforms And Tools
To Catch A Falling Knife
There's a reason they call buying an aggressive dip "catching a falling knife." Because it's dangerous. In trading, we use this saying to refer to the attempt by a trader (not investor) to buy a dropping asset at or near its low point of a significant move.
Here is what I wrote about it in the past.
"This often occurs when someone is trying to make up for a loss caused by a large move, in an effort to average down at the lowest point and ride the asset back up. It is unwise to attempt perfectly timing the bottom and far safer to wait for confirmation in the form of a resistance to support flip or a bullish divergence with an indicator (that is my personal system). Some also use confluence with oversold conditions to help determine a likely bottom.
The point is, simply buying on the way down without a reason or plan and hoping to find the bottom is a losing strategy.
Trading within a movement is far less risky than attempting to buy the bottom and sell the top. The meat of the profit that traders make is simply by selling higher than they buy - whether they buy the bottom or not. This usually happens somewhere in the middle of the entire movement.
Investors can largely ignore this rule. They can dollar cost average and buy dips with a long time horizon."
Is "catching a falling knife" ever worth the risk as an investor?
Part of being a successful contrarian investor means ignoring the urge to let the “dust settle” before deploying capital. When a bubble bursts, it's standard practice for conservative investors to wait until the uncertainty resolves. While they are parked on the sideline, they are often missing the best opportunities.
By the time the knife has stopped falling, you can be sure that the best bargains are gone. There's nothing wrong with that. You do not have to buy the best sale.
After a bottom, the asset becomes comfortable to invest in again, which means that the price has risen and the vultures have already picked through the best meat.
Howard Marks has a good quote on knife catching in investing: “a hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron.” In other words, it is effectively impossible to be wildly profitable and comfortable at the same time.
Warren Buffet is currently deploying the mountains of cash that he has been saving for just this opportunity. He put on his thickest gloves and is catching falling knives left and right. He can do this, because he has a long time horizon (he expects to live to 400 years old, I guess) and is focusing on companies with dividends who's price is clearly below their long term value.
He catches the dull knives, but knives nonetheless.
You can catch a falling knife if you are willing to watch the knife continue to fall and are patient enough to wait for price to return.
Only the best investors make a career out of catching falling knives. They do it with great precision and caution. They know value better than anyone else in the world and are willing to stomach the pain.
This does not mean that you should go start buying every dip. Many assets will continue to suffer, especially in crypto where they can literally go to 0. But there are deals on the table, if you have the patience and guts to start shopping.
Bitcoin Thoughts And Analysis
There is very little to look at on the Bitcoin chart at the moment. Ever since the massive drop to $25,500, we have seen Bitcoin effectively range around $30,000. Not bad, not good. Just chop as new reality sets in and global markets continue to show weakness. Now is a rough time to trade, unless you are a scalper on low time frames taking advantage of this small range.
DAILY CHART
This is the only thing that I currently find interesting... a battle of divergences. As you can see we just had another confirmed hidden bearish divergence (red). That invalidated the last bullish divergence and is a signal of continuation down. Now we have yet another potential bullish divergence. That means up again, if confirmed. Here is a chart on how to read them.
Legacy Markets
The rollercoaster continues. Snapchat fell 28% after earnings, causing yet another irrational panic in the market. What a time to be alive.
Here are some key events to watch this week:
Eurozone S&P Global PMIs Tuesday
US new home sales, S&P Global PMIs Tuesday
Reserve Bank of New Zealand rate decision Wednesday
FOMC minutes Wednesday
ECB publishes its Financial Stability Review Wednesday
Bank of Korea rate decision Thursday
US GDP, initial jobless claims Thursday
US core PCE price index; personal income and spending; wholesale inventories; University of Michigan consumer sentiment Friday
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 fell 1.1% as of 9:55 a.m. London time
Futures on the S&P 500 fell 1.5%
Futures on the Nasdaq 100 fell 2.1%
Futures on the Dow Jones Industrial Average fell 1%
The MSCI Asia Pacific Index rose 0.2%
The MSCI Emerging Markets Index was little changed
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro rose 0.1% to $1.0705
The Japanese yen rose 0.4% to 127.36 per dollar
The offshore yuan fell 0.4% to 6.6864 per dollar
The British pound fell 0.8% to $1.2484
Bonds
The yield on 10-year Treasuries declined six basis points to 2.79%
Germany’s 10-year yield declined four basis points to 0.98%
Britain’s 10-year yield declined eight basis points to 1.89%
Commodities
Brent crude fell 0.3% to $113.05 a barrel
Spot gold rose 0.2% to $1,857.15 an ounce
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, and 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 about 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, and listen to them speak. It is truly remarkable. Take advantage! You may just find that your Circle of Competence begins to grow.
Stats About Crypto In The U.S.
A survey titled, “Economic Well-Being of U.S. Households in 2021” conducted by the Federal Reserve found some interesting stats about cryptocurrency investors for 2021. I copied them below.
In 2021, most people using cryptocurrencies did so for investment purposes. In 2021, 12 percent of adults held or used cryptocurrencies in the prior year.
Eleven percent of adults had held cryptocurrency as an investment, while a far smaller 2 percent of adults said that they used cryptocurrency to buy something or make a payment in the prior 12 months, and 1 percent used it to send money to friends or family.
99 percent of those investing in cryptocurrency, but not using it for transactions, had a bank account.
Those who held cryptocurrency purely for investment purposes were disproportionately high-income, almost always had a traditional banking relationship, and typically had other retirement savings.
Don't Throw Away Your Money
After immense community pressure, Do Kwan caved to demands and shared the Luna burn address. Sending tokens to this address is like shoveling cash into a fire pit, yet for some reason people are doing it. This is not a fix. Not even a temporary one. There are trillions of Luna now circulating, so a voluntary burn cannot fix the damage that's been done. Don't send your money to it.
The Wolf Of All Streets Podcast Ft. Tim Draper
What countries and businesses will be successful in the future? According to legendary investor Tim Draper, it will be those who prioritize trust and freedom. A huge proponent of Bitcoin and decentralization, Tim joined me for an incredible conversation on The Wolf of All Streets. We discussed why Bitcoin is turning the world upside down, how government adoption plays a role, the future of Crypto, price predictions, and the power of DAOs. Tim has founded thirty Draper venture funds, Draper University, Bizworld, and two statewide initiatives to improve governance and education. This is a conversation you don’t want to miss.
In this episode with Tim, we discussed:
Bitcoin is turning the world upside down
The best world leaders are the ones accepting Bitcoin
Successful countries are a result of trust and freedom
South Korea vs North Korea
The United States is missing a massive opportunity
The U.S. is clinging to a broken system
Generational differences and looking to the future
Holding on is a luxury
Anything Elon touches turns to gold
The next big thing in Crypto
The power of DAO’s
The next 5 years are vital
Thanks to BULLISH for sponsoring.
The Wolf Of All Streets Podcast Ft. Jeff Booth
Deflation is the key to our future. Learn why from guest Jeff Booth - GP at Ego Death Capital. Jeff believes that Bitcoin will help us move from a society run on manipulation to one where we will all cooperate through aligned incentives. He joined us at Bitcoin Miami to discuss monetary policy, the inevitable failure of printing more money, how capitalism is looking more and more like communism, and why Bitcoin is unstoppable.
In this episode with Jeff, we discussed:
Our first live conversation with guest Jeff Booth
Jeff’s trip to El Salvador
Bitcoin’s presence in El Salvador
How entrepreneurs are creating product-market fit
Bitcoin’s marketing problem
El Salvador’s response to US legislation
Monetary Policy and making predictions
The inevitable future failure of printing more money
Increasing institutional adoption
Capitalism or communism?
Bitcoin and building for the future
Warren Buffet and Elizabeth Warren
Free markets and why Bitcoin is unstoppable
Follow Jeff Booth
Thanks to VAULD for sponsoring.
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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.
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