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In This Issue:
The Market Is A Weighing Machine
Bitcoin Thoughts And Analysis
Altcoin Charts
Legacy Markets
Free Top-Tier Education
Lightning Strikes At Coinbase
The SEC Is Playing Hardball
Wormhole Has A Successful Debut
Bitcoin Cool-Off: Here Is How Macro Will Affect The Price Of Bitcoin
The Market Is A Weighing Machine
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
This gem from Benjamin Graham, the pioneer of value investing, succinctly captures the essence of market dynamics, later distilled by Warren Buffett into its current form. Graham originally offered a more nuanced perspective, suggesting the market is influenced by both rational and emotional factors, rather than being a purely mechanical assessor of value.
“The market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, where on countless individuals register choices which are the product partly of reason and partly of emotion.”
I've seen some semantic debates with scholars getting hung up on whether Benjamin Graham would have agreed with Buffett's condensing of the quote, but that's beside the point. The quote that matters today is the following:
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
A great way to grasp the essence of this quote is by revisiting a classic analogy that highlights the wisdom of crowds concept—guessing the weight of an ox at a fair. Imagine a fair where there's a competition to estimate the weight of a prize ox, which actually weighs 1,400 pounds. The range of guesses is broad: from 792 pounds to 2,008 pounds, including figures like 1,123 pounds, 1,662 pounds, and so on, with guesses such as 1,387 pounds and 1,432 pounds getting impressively close. Despite the wide variation, the average guess remarkably hits the nail on the head, exactly matching the ox's true weight. This is often how markets operate, reflecting a collective accuracy in valuation over time despite individual estimations' variability.
Wikipedia fairly points out that “not all crowds are wise,” so we shouldn’t assume markets always work this way.
“Not all crowds (groups) are wise. Consider, for example, mobs or crazed investors in a stock market bubble. According to Surowiecki, these key criteria separate wise crowds from irrational ones:”
Crowd psychology becomes even more interesting when you observe the reasons for why crowds fail. These reasons include factors such as, “homogeneity, centralization, division, imitation, and emotionality.” Crowd psychology is its own lengthy topic.
Let’s jump back to the voting machine.
In the dynamic and ever-evolving landscape of the stock market, its immediate behavior often mirrors that of a popularity contest, heavily influenced by the ebb and flow of news cycles and compelling narratives. This environment can sometimes elevate the valuation of assets based on their hype and perceived popularity rather than their foundational fundamentals. A quintessential manifestation of this trend is observed in the phenomenon of meme coins—digital currencies that, despite lacking substantial utility or a solid foundation, see their valuations soar to dizzying heights purely on the back of transient social media buzz and investor frenzy.
This pattern of valuation based on ephemeral popularity rather than enduring substance raises questions about the rationality and efficiency of markets in the short term. However, as time marches on, a remarkable transformation occurs. The market begins a gradual but inexorable shift towards aligning the valuation of assets, including both cryptocurrencies and meme coins, more closely with their intrinsic value. This shift signifies a collective recognition of the assets' actual utility, foundational technology, and long-term potential, moving beyond the fleeting whims of market sentiment.
The intricate dance between sentiment-driven "voting" and the fundamentals-based "weighing" of assets is an ongoing process, evolving with each market cycle. Over time, the weighing mechanism gains prominence, as market participants accumulate knowledge and develop a deeper understanding of the assets in which they invest. This evolution in understanding is akin to a contestant at a fair who, after learning the actual weight of an ox, gains valuable insights into its worth, enabling more informed future guesses or evaluations.
In the specific context of cryptocurrency, traditional financial evaluation metrics such as earnings or book value often fall short in capturing the true essence of digital assets. Instead, alternative indicators emerge as beacons of value, including the level of adoption by users and businesses, the total value locked (TVL) in decentralized finance (DeFi) protocols, the vibrancy of developer activity around a project, and the patterns of institutional investment and support. These factors serve as more relevant and robust measures of a cryptocurrency's value, gradually diminishing the impact of short-term market sentiment.
Amidst these market dynamics, the U.S. Securities and Exchange Commission's (SEC) cautious stance on approving an Ethereum ETF can be interpreted not as a hindrance but as a calculated pause. Given the current stage of market development, where the broader investment community is still familiarizing itself with the concept and implications of Bitcoin, introducing an Ethereum ETF prematurely might risk saturating the market with complexity before it has had the chance to fully digest and embrace Bitcoin. Postponing the launch of an Ethereum ETF, therefore, could align with a strategy to ensure a more measured and widespread adoption of digital currencies, potentially nurturing a healthier and more sustainable bull market. This approach allows for a deeper institutional and advisory understanding of these innovative asset classes, paving the way for a more informed and mature market environment.
As we observe Ethereum currently being evaluated more for its viral appeal than its underlying technological and economic value, it's clear that a transformation in market perspective is underway. Navigating these shifts requires a nuanced understanding of the balance between immediate market sentiment and the long-term intrinsic value of assets. By appreciating this balance, investors and market participants can make more informed decisions, steering through the complexities of investing in a rapidly changing landscape with both caution and foresight.
Bitcoin Thoughts And Analysis
Bitcoin confirmed that symmetrical triangle or bull pennant that I was looking at yesterday by holding the low at support that existed when I shared
Today’s candle is trading a bit higher, so we will look to build on support and attack resistance.
Still nothing to do here, chop until we get a breakout or breakdown.
Altcoin Charts
For those who are new here, I share SETUPS and not SIGNALS. These are ideas that I am watching - if a certain thing happens, then the trade triggers. I am not telling you what to buy or when. I am showing you how I am watching certain charts and what has to happen for me to take a trade.
I did an entire stream yesterday with Wick about altcoins - my general feeling is that this is a time to sit on the sidelines (for traders) and wait for more clarity. This can change overnight.
Watch below.
Legacy Markets
Stocks and Treasury yields saw gains following Federal Reserve Chair Jerome Powell's reassurance that the central bank plans to initiate interest rate cuts this year. Powell's comments, which suggested recent inflation data does not significantly alter the Fed's outlook, helped lift European and U.S. stock futures while reducing Treasury yields from a four-month high. This news also contributed to the Bloomberg dollar index's decline. Despite some strong recent economic data, the Fed appears poised to begin easing, though swap markets indicate uncertainty about the timing and extent of rate cuts.
Concerns remain due to high March private payroll numbers, suggesting the upcoming non-farm payrolls report might also show strong job growth, potentially complicating the Fed's plans. Notably, Atlanta Fed President Raphael Bostic predicts only one rate cut in the fourth quarter of 2024, while several other Fed officials are expected to speak soon, possibly offering further insights into the central bank's policy direction.
In Europe, bond yields fell in anticipation of the European Central Bank initiating policy easing sooner than the Fed, with expectations of several rate cuts by the end of the year. Meanwhile, commodity prices are stoking inflation concerns, with oil, copper, and gold prices rising, driven by supply constraints and strong demand. European equities, particularly mining stocks, benefited from the surge in commodity prices, while in the U.S., tech stocks, especially chipmakers, showed resilience following a recent earthquake in Taiwan, with major suppliers reporting no significant damage.
Key events this week:
Eurozone S&P Global Services PMI, PPI, Thursday
US initial jobless claims, Challenger job cuts, Thursday
Fed’s Loretta Mester, Alberto Musalem, Thomas Barkin, Patrick Harker, Austan Goolsbee speak, Thursday
European Central Bank publishes account of March rate decision, Thursday
Eurozone retail sales, Friday
US unemployment, nonfarm payrolls, Friday
Fed’s Michelle Bowman, Thomas Barkin and Lorie Logan speak, Friday
Stocks
The Stoxx Europe 600 was little changed as of 11:09 a.m. London time
S&P 500 futures rose 0.3%
Nasdaq 100 futures rose 0.4%
Futures on the Dow Jones Industrial Average rose 0.3%
The MSCI Asia Pacific Index rose 0.7%
The MSCI Emerging Markets Index rose 0.5%
Currencies
The Bloomberg Dollar Spot Index fell 0.1%
The euro rose 0.2% to $1.0857
The Japanese yen was little changed at 151.72 per dollar
The offshore yuan was little changed at 7.2474 per dollar
The British pound was little changed at $1.2662
Cryptocurrencies
Bitcoin rose 0.6% to $66,163.63
Ether rose 0.7% to $3,331.48
Bonds
The yield on 10-year Treasuries advanced one basis point to 4.36%
Germany’s 10-year yield declined two basis points to 2.38%
Britain’s 10-year yield declined three basis points to 4.03%
Commodities
Brent crude was little changed
Spot gold fell 0.2% to $2,294.62 an ounce
Free Top-Tier Education
Investor memos can be difficult to access, often requiring client status with a certain amount of assets on a platform just to read the valuable content. However, my good friend Matt Hougan from Bitwise has made the gracious decision to make his memos publicly available, including the entire archive. I spent some time reading some of his most recent posts and suffice to say, I am hooked. Spoilers coming below.
“Lately the crypto markets have been volatile, with bitcoin bouncing between $60,000 and $70,000. The media gets breathlessly worried about every pullback and outrageously excited about every run-up.
My advice? Keep calm and take the long view.
We are all excited about the $12 billion that has flowed into ETFs since January. And it is exciting: Collectively, the most successful ETF launch of all time.
But imagine global wealth managers allocate just 1% of their portfolios to bitcoin on average. It’s not crazy: While past performance is no guarantee of future results, a 2.5% allocation to bitcoin has enhanced a traditional 60/40 portfolio’s risk-adjusted returns in every three-year period in bitcoin’s history.
A 1% allocation across the board would mean ~$1 trillion of inflows into the space. Against this, $12 billion is barely a down payment.
1% down, 99% to go.”
Ethereum and the Zero Price Effect
“Public blockchains like Ethereum are a new kind of computing platform, just like mobile phones and the internet before them. And just like mobile and internet didn’t take off until they had achieved broadband speed, so too have public blockchains been waiting for broadband-like processing speed and costs.
That’s what arrived last week.
The low fees that I’m discussing are on the Layer 2 solutions that exist alongside the main Ethereum blockchain. These companion networks still need to post transactions regularly to the Ethereum mainnet for security purposes, which will keep fees there relatively high.
Besides, as the old saying goes, we’ll make it up on volume. Cell phones cost way less today than they did in 1996, but the market for cell phones is much, much larger.
I cannot wait for the next few years. Riding this new, “effectively free” cost structure, I suspect we’ll see a flowering of countless real-world crypto apps. People will soon be using Ethereum-based apps without thinking about crypto at all.”
If you like these ideas, you can now subscribe to receive the Monday CIO Memos using the link above.
Lightning Strikes At Coinbase
Bitcoin maximalists have long been frustrated by Coinbase's lack of integration with the Lightning Network. However, this frustration may soon be alleviated, as Coinbase has recently partnered with Lightspark to bring the Lightning Network to its platform. This partnership is expected to provide Coinbase customers with the benefits of near real-time, low-cost Bitcoin transactions. Additionally, the collaboration opens the door for further joint efforts in the future. In terms of the division of responsibilities between the two entities, Coinbase will be utilizing Lightspark's remote-key signing implementation. This means that Coinbase will hold the Lightning signing keys, while Lightspark will host their Lightning node.
Shan Aggarwal, VP of Corporate & Business Development, stated, “Coinbase is committed to making the global financial system faster and more efficient. We’re excited to partner with Lightspark to eliminate payment barriers and enable faster and cheaper Bitcoin transactions through support for the Bitcoin Lightning Network.” In response, Lightspark issued a statement saying, “This is another significant milestone for the Lightning Network. Lighting up all Coinbase touchpoints with Lightning will profoundly impact the overall network usage at a time when it’s most needed, given the rising price of Bitcoin and Bitcoin L1 fees.”
The SEC Is Playing Hardball
When an ETF is seeking approval, the SEC typically opens a public comment period close to the application deadline. This allows stakeholders to provide feedback before a decision is made. Despite this, it's difficult to see how this development significantly alters the outlook for the ETH ETF approval in May. The SEC has been notably quiet in recent months, especially compared to their responsiveness with the Bitcoin ETF applications. My stance remains at 30% for May.
Wormhole Has A Successful Debut
The cross-chain bridge Wormhole recently initiated an airdrop, distributing 617 million of its newly introduced governance token, W, to its early adopters. This token made its first appearance on the Solana-based decentralized exchange (DEX) OpenBook, opening at a price of $1.66. This debut priced the token's market capitalization at an impressive $2.98 billion, with its fully diluted value reaching $16.5 billion. However, the launch wasn't without its hiccups; OpenBook experienced notable congestion following the token's release, causing difficulties for some users trying to access the platform. The distribution of airdropped tokens represents 6% of W's total supply. Additionally, 12% of the total supply is reserved for core contributors, and 23.3% has been set aside for the foundation's treasury. While W initially made its debut on Solana, plans are in place for its future availability on Ethereum and various layer-2 networks, broadening its potential reach and utility.
Bitcoin Cool-Off: Here Is How Macro Will Affect The Price Of Bitcoin
I am joined by Noelle Acheson, author of the 'Crypto is Macro Now' newsletter, as we discuss the impact of macroeconomics on cryptocurrency and what to expect from Bitcoin in the near future. Chris Inks will join in the second part to share some interesting trades in crypto and beyond.
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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.