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In This Issue:
The Problem Of Indexing
Bitcoin Thoughts And Analysis
Legacy Markets
The DOJ Duped Us
Crypto Companies Hit The Brakes
American Investors Are Blindly Investing
The Problem Of Indexing
One of the most challenging aspects of navigating the crypto market is a dangerous mentality that many traders and investors fall victim to. This phenomenon, which we shall refer to as the "Problem of Indexing," is not widely recognized and does not have an official name.
It is uncertain how the Problem of Indexing originated, but it is likely a result of the intense appeal of crypto to retail investors, its extreme volatility, and the culture and mission of the crypto market, which is vastly different from anything else in the financial world.
A shout-out must be given to crypto trader Flood, who recently brought attention to this issue in a tweet, which inspired this discussion. Although I have written about this problem many times in the past, the current market conditions make it an appropriate time to revisit the topic. Flood's thread can be found HERE.
The Problem of Indexing occurs when an individual emotionally attaches their net worth to a specific high or low point in the value of their cryptocurrency holdings. These set points carry emotional baggage that distorts future thinking and leads to pointless self-comparisons.
For example, an individual might say:
"In November 2021, I went long and accumulated a record amount of BTC."
"In late 2018, I successfully shorted to accumulate a record amount of Ethereum."
"In November 2022, I was able to invest in more BTC each week."
"Last week, my Ethereum stack size and USD value were a record low."
While these statements may be factual, they do not serve as valuable guides for traders or investors. When an individual compares their current situation to a particular point in the past for any reason beyond observation and improvement, they open themselves up to biased judgment.
Comparing your current status to the best possible scenario (all time high) is futile and implies the expectation of perfection at all times. This is unrealistic and dangerous.
What makes this problem so normalized is that everyone has ingrained their portfolio's high and low points in their mind, and it is difficult to forget these benchmarks. This creates an impossible point of reference that ultimately clouds one's ability and goals. Even die-hard gold bugs or Tesla stock traders do not internalize their net worth as the number of ounces or shares they own.
In practice, this causes a trader or investor to hope the market moves in a particular direction so that their portfolio can return to its previous state as quickly as possible. In this mindset, desire kills off any chance of clear thinking, as losses and gains are chased, creating even bigger problems.
The only cure for this phenomenon is to forget the past. Once a trader or investor breaks free from this line of thinking, benchmarks become irrelevant, and decision-making is vastly improved. It is a complete paradigm shift in thinking that will set your portfolio free.
Bitcoin Thoughts And Analysis
Nothing has changed on my view, which I shared earlier this week. I am looking for a retest of the 200 MA on the daily chart as support before any further movement. Daily RSI is still overbought, but has dropped from 90, which is about as high as it can usually sustain, even for a short period of time. My expectation is further drop, a push up and then some bearish divergence at some point.
The bearish divergence on multiple time frames with overbought RSI has seemingly played out across the board, with Bitcoin price dropping yesterday to almost $20,000. As you know, I have been anticipating this drop, viewed the pattern as a bearish rising wedge and still would not be surprised to see some further retracement.
RSI on the 4 hour is now around 50, which is the line between bull and bear. This will eventually get to oversold.
Interestingly, RSI dropped massively from overbought with a somewhat minimal move in price, which is something bulls can hang their hats on. I am still looking for a move to the 19Ks (may not get it) to retest the daily 200 MA (not shown).
Nothing sinister here, for now just a healthy retrace after a super over heated move.
Legacy Markets
Equities declined and Treasury yields fell as signs of a global economic slowdown raised investor concern that the start-of-the-year rally in risk assets may have gone too far. Contracts on the S&P 500 Index dropped 0.4% after the benchmark slumped the most in a month Wednesday amid weaker-than-expected economic data. Reports from the US showed declines in consumer demand and business investment, boosting the probability of a recession in the world’s largest economy. The selloff spread across global markets, from Japanese shares to oil contracts.
Key events this week:
US housing starts, initial jobless claims, Philadelphia Fed index, Thursday
ECB account of its December policy meeting and President Christine Lagarde on a panel in Davos, Thursday
Fed speakers include Susan Collins and John Williams, Thursday
Japan CPI, Friday
China loan prime rates, Friday
US existing home sales, Friday
IMF’s Kristalina Georgieva and ECB’s Lagarde speak in Davos, Friday
Here are some of the main market moves:
Stocks
The Stoxx Europe 600 fell 0.9% as of 10:19 a.m. London time
S&P 500 futures fell 0.4%
Nasdaq 100 futures fell 0.4%
Futures on the Dow Jones Industrial Average fell 0.4%
The MSCI Asia Pacific Index fell 0.6%
The MSCI Emerging Markets Index fell 0.3%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro rose 0.3% to $1.0823
The Japanese yen rose 0.4% to 128.42 per dollar
The offshore yuan fell 0.3% to 6.7886 per dollar
The British pound fell 0.2% to $1.2329
Cryptocurrencies
Bitcoin was little changed at $20,784.16
Ether was little changed at $1,527.28
Bonds
The yield on 10-year Treasuries declined one basis point to 3.36%
Germany’s 10-year yield was little changed at 2.02%
Britain’s 10-year yield declined four basis points to 3.27%
Commodities
Brent crude fell 0.9% to $84.24 a barrel
Spot gold rose 0.2% to $1,908.60 an ounce
The DOJ Duped Us
Yesterday morning, crypto markets were rocked by an unsettling announcement: "Justice Department to Announce an International Cryptocurrency Enforcement Action." To add to the fear, a live stream was even set up to make the announcement, and other major agencies were to be present. Speculators quickly began to suggest that something as big as Binance might be on the brink of a major shutdown.
However, as it turned out, the speculation was unfounded. The DOJ's announcement was the shutdown of the Russian exchange Bitzlato, which literally nobody had ever heard of until now. Some on-chain sleuths who looked into the wallets of Bitzlato found just $11,000 in them, with a peak of $6 million. The DOJ fooled both us and themselves with their underwhelming announcement.
Crypto twitter had a field day with the announcement, myself included.
Jokes aside, a win is a win, and if the exchange was criminal, it's one less bad apple in the bunch. Markets may now resume their upward trajectory.
Crypto Companies Hit The Brakes
To alleviate the stress of the market, crypto companies are finding creative ways to cut their expenses. Remember when Coinbase earned operational approval in Japan back in 2021? That is now coming to an end. Kraken also ended its Japan venture early last year, citing "market conditions" and "a weak global market." According to Coinbase's announcement, the company plans to "conduct a complete review" of its business and "halt" operations. Customers have until February 16th to remove their assets.
In addition to Coinbase slowing down, Digital Currency Group (DCG) has decided to suspend its quarterly dividends to preserve cash. According to the letter sent to shareholders, the move will "strengthen their balance sheet by reducing operating expenses and preserving liquidity." Lastly, Amber Group, a crypto trading firm based in Hong Kong, is making significant changes for 2023. The firm has decided to cut its workforce in half, change office locations, and cut support jobs, including IT, risk management, audit, and compliance. Market conditions are still challenging, which is why these companies are willing to do whatever it takes to survive.
American Investors Are Blindly Investing
Cryptocurrency exchange Bybit and media company Toluna partnered to investigate crypto investment literacy, and the results were not as expected. According to the study, more than half of North American investors are entering the crypto market blindly. It is possible that one factor contributing to these findings is the questionable advice that circulates in the space, suggesting that investors should put in a little money and then research after, as they would then have a real vested interest. Below are some of the more interesting findings from the report:
46% of crypto investors are in it for the long run, with an investment horizon of 7 months to over 2 years.
34% of Boomers spend a few days on DYOR (Do Your Own Research), which is 50% more than other generations.
When choosing a token project, 30% more investors prioritize reputational factors as compared to technical factors.
Boomers are generally 20% savvier than other generations, as they focus more on technical factors.
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.