Reassessing Crypto – time to turn Bullish?

As you could see from my previous post, I was worried about crypto for a while. I had gotten out of the space completely in April as the altcoins were beginning to skyrocket while Bitcoin was rolling over. This turned out to be early, missing the recent peak and plunge in that part of the space.

In my previous post, I was concerned about a possible blowoff top – which is a formation where a really hyped stock goes parabolic, crashes down, then starts to drift lower for a while. I bought 1 ETH on the big drop last Sunday with the idea of dumping it on the oversold bounce the next day, which I did for a 25% gain.

After hearing the infamous crypto bull Rauol Pal on the RealVision daily briefing yesterday, I started to rethink a some things in the space. The biggest reason I was spooked about crypto to begin with was the stories of excessive leverage in the space – and if that leverage was mostly wiped out last weekend it should be very bullish. As for the charts, remember that every asset class behaves differently.

As someone who’s been involved in the gold space for over a decade, I can tell you that it does not move at all like your average stock. Gold tends to move much more slowly with a lot more short-term fakeouts that leave you wrenching if you’re unprepared. It also tends to run up big in a short time and then consolidate lower for months – whereas stocks tend to run up slowly over months with sharp downside moves in between. Anyway, time for a crypto chart:

A couple things to note on this chart:

  1. Log charts are essential when dealing with charts that have enormous price ranges, such as a multi-decade stock chart or anything involving fast-moving Crypto. With stocks, a linear scale makes the crazy 60% swings of the 1970’s look tiny. Looking forward though, you care about the percentage moves in your portfolio, and a log chart adjusts for this by making a double the same size whether it’s $1k to $2k or $30k to $60k.
  2. Volume needs to be thought of in relative terms on a chart like this. Cryptocurrencies are much more accessible and widely traded now than they were 4 years ago and you have to separate the expanding adoption noise from the panic sell or fomo buy signal when viewing this. That is why I think the recent volume profile could just as easily match the summer 2017 mid-year correction as the December 2017 prior top.
  3. The 2017 top may look relatively small, but it’s no joke. Riding that down lost you around 83% from the peak over the next year and took a full 3 years to break even. These cycles will not go up exponentially forever, so there’s no guarantee of a rebound just from waiting. That being said, I think there’s a high probability that we are about to see the last breathtaking wave ride out, and I plan to put a small portion of my portfolio toward that possibility.

How I’m planning to play this:

As I write, the Crypto market is continuing a low-volume price crash. The big players know that they can effectively move the market in these low volume periods, and they typically push down with the intent to trigger stop-losses and margin calls. An enormous number of these were washed out last week, which pushed ETH to a crash low of $1,737 last weekend. I expect this weekend to try to tap below the $2,000 ETH level to hit any triggers there, but it will be a higher low followed by higher highs next week. Same deal next weekend.

As such, I am looking to put in $5,000 at the low (probably in ADA, possibly in the more volatile LINK). I will be watching the charts next week and I’ll probably reduce significantly ahead of the weekend in hopes to re-buy lower. I expect this choppiness to continue through Labor Day weekend where we will see the next significant low but at a much higher level – similar to the 2017 blip we see in the bitcoin chart above. After this, I will really try the diamond hands thing (I’m a trader so it’s not easy) until November. I plan to completely exit the crypto space by mid December at the latest.

During this time, I will be watching Bitcoin as the signal that will roll over quicker in a correction and watching Etherium as the bellwether measure for the altcoin space.

THE REST OF MY PORTFOLIO

Last week I successfully played around with short-dated QQQ puts and decided to size it up a bit this week. Right now these positions are looking terrible. I’m hoping for a pullback next week to reduce these into, but I’m not expecting the pullback to be big. While I realize that the crazy rise in all of the stock market indices can’t last forever, I also realize that the fed is still easing.

There are many ways to think of the huge reverse-repo market action in the banking system right now (chart on the right), and what I’ve decided is that it’s a measure of too many deposits relative to treasuries. All of that stimulus money came in and much of it has been deposited into the banking system. The banks need to park a lot of those deposits into tier 1 capital such as treasuries, and there aren’t enough in the system so they have been doing reverse-repo actions to exchange these cash reserves for treasuries. They can’t necessarily park this money elsewhere due to regulatory reasons and other conditions peculiar to the global banking system. At the same time, quantitative easing has been steadily taking more treasuries off the market (left chart), and the treasury has been running down it’s general account rather than issuing new treasuries (center chart). Combine this with the inflation narrative driving demand from investors to sell these treasuries short, and you really have a tight supply overall. How will this reflect in price? Who knows … the federal reserve does not want short-end rates to go negative so they have been expanding reverse-repo action to fill this demand at rates close to zero.

In short, there is still excess money in the system as far as investments are concerned, and that should mute any downside moves in the market for the moment. As for my TLT calls … I’m not planning to add to them unless TLT re-tests 135, but I’m over-allocated to that play as it is, so I wouldn’t add much even then. I’m down about 40% on that trade so far and it’s not a comfortable position, even though I still expect US treasury rates to roll over and re-visit the lows within the next year or two.

Gold and Silver have continued to act well, confirming their breakouts nicely. Unfortunately, these are assets that really need to be followed on longer-term charts so you really can’t expect the kind of overnight zing you get with the much less liquid and more volatile crypto markets. Still, these continue to be my biggest positions and I continue to be long-term bullish on the space. When they do move though, it tends to be in big spikes followed by lengthy downside corrections so my positioning is extremely bullish with a lot of long-dated call options and no covered calls sold on my positions.

Uranium has been doing well lately, and I’m at that point where I somewhat regret selling covered calls on my miners. That is a success problem though, and my strategy of chasing the space and selling covered calls after sharp peaks has done pretty well so far. While I’ve missed some of the upside, I’ve also muted the downside, and I can find dips to re-enter the space when my shares are called. I’ve also chased a bit when I really wanted to restore my allocation, using the strategy of immediately selling 1 month at-the-money covered calls with significant premiums when I know I’m chasing a move higher. There are a lot of reasons to be long-term bullish on the space, but there are also reasons to expect a pullback when the current 1970’s lasting inflation hype backs down.

Cannabis is the only trade I have that is purely buy-and-hold at the moment. While I believe that federal regulations will ease capital restrictions on cannabis at some point and that money will flood into this highly profitable space afterwards, I also don’t think this move is imminent or that we are at a particularly good entry point in this segment. I basically threw in entry stakes in a few companies I wanted to track so that they’d be on my radar when big moves happen. I plan to add more if the market tanks but otherwise just ignore those until the big move gets closer. It kind of makes me think of Uranium in a sense, because I was somewhat following the space after a very compelling Real Vision take in 2019 and CCJ was on my radar immediately after the March 2020 crash. The summer 2020 upside move had me excited but then reversed and got me nervous on the space before it ripped big time. I’m hoping to learn from that and not make the same mistakes when the Cannabis moment comes.

Here’s where my positions ended up for the week:

  • DOWNSIDE BETS (34.3%)
    • 22.5% TLT Calls
    • 5.7% IWM Puts
    • 1.6% EEM Puts
    • 4.5% QQQ Puts
  • GOLD (17.2%)
    • 3.0% WPM & GOLD Calls
    • 3.7% EQX Calls
    • 10.4% SAND Calls
  • SILVER (22.6%)
    • 10.7% AG
    • 1.7% AG Calls
    • 5.4% SILV
    • 1.3% MTA
    • 1.6% RSNVF
    • 1.9% SILVRF
  • COMMODITIES (18.0%)
    • 10.0% CCJ shares (w/ covered calls)
    • 1.1% UUUU (w/ covered calls)
    • 0.4% URG
    • 2.0% ALB (Lithium)
    • 1.5% NMG (Graphite)
    • 2.9% NOVRF (Nickel/Copper)
  • CANNABIS (5.7%)
    • 5.5% split between CRLBF, GTBIF & TRSSF (companies with significant US footprints)
  • CASH (2.2%)

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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