Crypto, correlations and cautious investors

I’m in a bit of limbo at the moment.

Times like these are purgatory for the cautious investor.

That’s why I shared Rashpal’s latest insights and the ALPH4 Model with you on Monday.

In times of hesitation or uncertainty, that is the perfect time to look to the models and trend-following strategies for a guide.

I’ve been very cautious about the progression of this current bull market for some time.

And while I absolutely love writing to you, identifying threats and opportunities in the markets, it’s an odd task for someone who wants to think as long term as possible, and who doesn’t think now is a superb time to be invested in many things.

One thing I’ve learned over the past year is to never be more than 60% confident about anything in this line of work.

Psychologically, confidence in investment is a death sentence.

And probably financially too.

That’s how Bill Hwang’s Archegos Capital Management went so wrong – because he was too confident in the direction of travel. It may be great on the way up, but it spells disaster at the first sign of trouble.

I look at various things to keep myself tethered to reality. The ALPH4 model is one of them, and a really brilliant one too.

Another, oddly, is bitcoin.

Source: Koyfin

As you can see, bitcoin (in yellow) has tracked the tech-heavy Nasdaq quite closely over the past couple of years (although it’s on a different scale, its moves were more extreme).

Why have they been moving in tandem, and why do they make it a good indicator?

A ton of stuff really – but two main points stick out.

Firstly, that one key factor is driving them both up: the central banks’ extreme response to the Covid-19 lockdowns.

Stock markets are cheered on by continued quantitative easing (QE), low rates and supportive commentary. This is especially true of the Federal Reserve in the US, hence why the Nasdaq has done especially well.

So for stocks, at the moment, excessive Fed support is a good thing.

But for bitcoin, it’s the fear that the Fed and other central banks are going too far that drives them higher. It stokes fears that the value of our savings will diminish, and this forces us to seek a return outside of bank deposits and bonds, which offer very meagre returns over the short, medium and long term.

So stocks are boosted by cheering at the Fed, while bitcoin gains significance because of fear of the Fed.

The second angle to look at this is that both are enjoying speculative booms, driven by psychology more than underlying value.

And that when speculation is as rife as it is today, when the crowd is chasing prices higher, it tends to be indiscriminate about how it does so.

Bitcoin, in this argument, is simply the best, most volatile, most responsive asset at the end of the risk curve. Stocks, growth stocks, tech stocks, call options, bitcoin…

When people are jubilant and greedy, they buy all those things. And when they are fearful, they sell all those things.

The crowd is moving the markets in unison, at least in the tech/growth/crypto space. And while there is nuance, and pockets of disobedience, the broad brush is that speculation is ubiquitous.

And bitcoin, trading 24/7 in every country across the world, is the most sensitive to retreating sentiment and dwindling speculative fervour.

About three weeks ago, the value of using bitcoin as a sentiment indicator was brought home to me.

I was panicking. A powerful rotation was underway. Clean tech names were getting battered, bitcoin fell a dramatic 25% in under 48 hours (58k to 43k), and the technology-based Nasdaq index was faltering.

However, bitcoin also steadied and began to recover, even while the Nasdaq still looked to be in immense danger of breaking down lower.

Seeing this might have been enough to convince me not to lose my head.

Anyway… for those two reasons I think bitcoin is worth keeping a close eye on, as an indicator.

Meanwhile, zooming out to the much bigger picture, Sam Volkering, Techno King of Southbank Investment Research, said this in Exponential Investor:

The banks and their convoluted, contrived and corrupted system have had it far too good for far too long. It’s time to rip that control back.

It’s time to seize your own financial power and hold it fully in your own control.

I see there being only one way to achieve this.

Fortunately, that way is now possible. Ten years ago, it wasn’t possible. Five years ago, it wasn’t possible.

But now for the first time in history individual people like you and me have the tools, the technology and the determination to take back control of our own money.

We are on the cusp of a financial revolution that will rip the power from the very heart of the traditional system. It’s thrilling, exciting, and it could also turn around your own personal wealth.

He’s prepared a much-anticipated presentation on The Race to Bitcoin $1 million, looking into one part of the crypto space that could be even more significant than a Coinbase IPO, or any short-term correlations between bitcoin and other financial assets.

It went live yesterday at 2pm – but don’t panic!

You can still watch it… right here.

Click the link above to see what Sam, the best mind in crypto that I know, is looking at for the months and years to come.

All the best,

Kit Winder
Editor, UK Uncensored

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