Now is the Winter of Our Discontent….

Hyper-volatility may make crypto a trader’s paradise, but it can be gut-wrenching for those of us in this game for the long run. December mania has become March despair. We’ve watched the prices of most altcoins get clubbed like a seal, with even the blue chips being bludgeoned. Mainstream money poured into the sector waking regulators to the threat that Bitcoin and other cryptos pose to the Empire they protect — namely, big banks, big corporations, and big government. Together, these factors produced a waterfall of selling.

Before we place the blame for the ensuing price plunge on clumsy regulation or imperial efforts to cuff and castrate crypto, let’s make one thing clear: markets are profoundly complex. There’s a reason Big Blue can beat any human chess player but likely couldn’t produce repeatable alpha and beat the market year in, year out.

Besides nearly endless and constantly evolving inputs and variables, markets also have one overshadowing factor that computers and AI haven’t been able to grasp: human emotion. From a trader’s perspective, psychology is the linchpin in crypto, an asset class that doesn’t fit neatly into existing buckets. With less liquidity, no fundamentals at times, and an immature market and trading population, psychology’s twin towers of greed and fear are many times magnified in cryptos on the way up — and unfortunately on the way down. That’s why we’ve seen the soaring prices brought by speculation and the ensuing trapdoor.

Mania breeds despair. Gluttony becomes starvation.

Few things are tougher to overcome than buying based on price action, especially after that price action has become wildly exaggerated. The insider nickname for that as you know is FOMO, fear of missing out. It’s when you don’t have a plan, and greed takes over. You’re suddenly in hot pursuit and willing to pay any price. Conversely, on the downside, if you’re not following a well thought out plan, the negative price action can produce vision flashes, perspiration and nausea. They don’t call it the ‘puke’ for nothing. With the layers of newcomers that came into the sector and bought the climax, that overhang of ‘dead money’ will have to be worked out before the market can make any meaningful advance to new highs. It won’t be done in a month, and it will likely take a series of grinding, rounding bottoms before we eat through the overhead supply and march towards new highs.

As a team that’s traded collectively for close to 100 years, we’ve learned more than a few lessons along the way. One is a bit counterintuitive since markets are the sum of millions of independent actions. The lesson is this: whenever it seems “too easy” and someone with no experience or education can come in and print money just by throwing darts at a wall, that never lasts long. When the headlines are all butterflies and sunshine, that’s when the retail investors are piling in, unaware that the big push upward is over for a spell because there’s little capital left to drive prices higher. In other words, when everyone ‘knows’ we’re going higher, that’s when the Trading Gods typically yank the rug.

Those same Gods have a dark sense of humor, and their painful lesson is that the inverse emotion and price action on the downside will be just as dramatic.

However, solace can be found in an age old investing maxim : “Markets climb a wall of worry.”

Just as sunshine in the market can mean falling prices ahead, markets tend to move higher when things are looking bad. It’s the ‘darkest before dawn’ school of trading. That’s because the market likely already reacted and priced in the bad news choking the headlines before the public was even aware of it. And we’ve certainly had a wall of worry in February and March. Renewed focus on regulation, exchange hacks, and plunging prices have had the bears dancing in the streets.

So with those counterintuitive factors in mind, and our own ‘gut intuition’ which comes from decades of pattern recognition and experience, we’re watching the “blood in the streets” closely and think it’s time to buy Bitcoin. Two outside indicators that tell us now is the time to accumulate in this $6000-9000 range as well:

The first is the Bitcoin Misery Index that was designed as a trading tool for investors to take advantage of volatility in BTC exchanges. The second is the Mayer Multiple that is calculated by dividing the current price by 200-day moving average.

BMI is calculated on a scale of zero to 100, taking into account factors such as volatility and the number of winning trades out of the total. When the indicator is low, the buying opportunity is at its best and vice versa. When the Bitcoin Misery Index is at ‘misery’ (below 27), future returns are very good. At the moment, the Bitcoin index is at 18.8, which puts it at its lowest point since Sept. 6, 2011.

The Mayer Multiple measures how far above or below BTC is trading compared to the 200 day moving average. The lower the number, the more negative the market sentiment. Its a reversion to the mean valuation metric. The Mayer Multiple recently hit 0.82, lower than it has historically been more than 85 percent of the time.

This is our cue to buy, and it’s quite different from the situation late last year.

The bull stampede we witnessed beginning in November was brought by reams of new money coming into the space as the masses woke to this new crypto paradigm. December was the ultimate feel good top, but it left a lot of dead money trapped above because the spiral straight up created a lot of air pockets down below. Just as a house needs to be built on a solid foundation, those gaps need to be filled in order to create a sustainable move up going forward.

The next wave will likely need some assurance of security and regulatory certainty for another bull run to begin. Not that lawmakers and regulators need to do anything “good.” They just need not to do anything really bad, or stupid. Spring will tell us if we set the expectations bar low enough. That said, there was positive news on the regulatory front in recent weeks that made us think we might be closer to a new uptrend.

All this said, there is, again, the wildcard of human emotions to consider. Markets tend to frustrate the most people possible, leading to erratic investing. In light of this, we could see several months of false breakouts higher only to be followed by false breakdowns lower, a vicious “chew some capital and spit it out” pattern seemingly designed to murder short-term traders.

In the intermediate to long-term (which is what we preach again and again here at CIQ) we think there is no question that Bitcoin and some of the other standout projects move higher. The factors that attractively made Bitcoin feasible and what it is today: a finite deflationary supply, tamper-proof, censorship-resistant, permissionless money haven’t changed. The only thing that’s changed is the growing recognition by those in power that decentralization and monetary sovereignty are direct, existential threats to the gravy train they’ve been riding for the last 50 years. Bitcoin primarily, and to some extent, other coins and blockchains, will disrupt and change all aspects of our society, including derailing that gravy train. But this more than likely means you’ll have an investing experience that is at times equal parts thrilling and terrifying.

That’s why there’s nothing more critical than proper risk discipline and money management and to make sure you’re around for the long term. It’s why we employ techniques like ‘dollar-cost averaging (see box) and have the overwhelming majority of our portfolio in BTC and other blue chips. It’s too easy to trade yourself into a hole, trying to time exact tops and bottoms. While parabolic spikes should always be sold (at least some portion of a position), it’s a little trickier trying to time bottoms, especially in altcoins, some or many of which may not exist 2 years from now. What will exist 2 years from now is Bitcoin, and the implementation of Lightning which we’ve been writing about for the last several months is a game changer. That’s why we don’t panic when Bitcoin gets cut in half. We think it’s going higher, much higher over the intermediate term. So if we’re putting money to work in the name, I’d much rather be able to buy twice as much as I could just a month ago. Because in 6-12 months, these buys below $8K will look like steals.