Insider Newsletter 10: October 2022
Financial markets are down double-digits across the board. It’s not the time to sell.
Instead, expect sometime between now and the next 12 months to see the bottom of this current cycle.
This time is not different. It’s just another market cycle, which means you have an opportunity for long-term wealth generation.
People generally only experience a few cycles that can really make a difference in their lives long-term. Whether it’s through crypto or some other investment, take a hard look at the actions you can and are willing to take over the next year.
After the bottom, we may see a fast rise back up. This could be catalyzed by inflation returning to 2% faster than expected, the resolution of events in Ukraine, or something else entirely.
Data across the board is mixed. There is good and bad macro data, on-chain data, and technical data. This is consistent with the volatility and difficulty as recessions set in. We previously noted all recessions (under the original GDP-growth definition) have lasted 1.5 to 2 years.
That means we may not fully resolve economic issues for the next 12 to 18 months, but the bottom will be in before that.
If you try to time the bottom, you are likely to miss it. So take a more measured, pragmatic approach.
- All markets are down, so consider investing aggressively (what you can afford) on a monthly basis across the board.
- During times like this, minimize consumption and maximize long-term investing.
- For crypto specifically, pick a few high-quality assets and invest in them every month.
- Ensure as many investments as possible are earning compound interest.
If you’ve been an Insider for a while, you know this is consistent with the messaging we’ve been sharing since the markets dropped into fear.
- How to Stake With a Ledger to Earn Crypto
- How to Stake Ethereum on Ledger
- Simple Ways to Earn Interest on Your Crypto Holdings
Once the markets shift into greed, we’ll switch to measured approaches for wealth preservation.
How we’re playing this market
Here’s the summary of our actions since June (extreme fear):
- Moved fully from stablecoins to crypto
- Moved into private long-term non-custodial wallets
- Investing in Bitcoin at regular amounts and intervals via auto withdrawals
- Staked all eligible coins
While it’s possible we’ve already seen the bottom, we’re mentally prepared for the markets to drop further and will see it as a way accumulate at even better prices.
Given the stability of Bitcoin price, the story for Crypto-ML data remains the same. Critical levels have not been broken. The market sentiment remains bearish, which means we should expect volatility but also good prices for long-term investors.
Bitcoin has stubbornly remained below the regression model that fuels our Price Channels. This has been true for the last two months.
You’ll notice most analysts on Twitter and other platforms have faced this issue too and have simply redone their models to fit the new data.
Given our model has otherwise accurately tracked Bitcoin since the start, it may mean that this growth model simply will no longer apply to the future stages of Bitcoin. More time is needed to determine how this plays out.
Rather than modifying our model, we are monitoring underlying metrics, such as active address growth to determine the maturity of Bitcoin and its potential to regain this logarithmic growth view into the future.
Zooming in, we can see the two critical levels this chart highlights.
So far, Bitcoin weekly has held above the $19,000 line. It does show a worst-case scenario of $11,700. This will be further touched on in the technical analysis section.
As a measure of market sentiment across social, search, and exchange action, the Market Index has remained solidly in a Bearish condition for the last couple of months.
This indicates moderate fear and that it is a good time to make long-term investments in a measured manner. You should also be prepared for continued volatility.
Looking at the Bitcoin Market Index, it exited Extreme Fear levels in mid-July. But it has yet to inspire greed.
The macroeconomic picture remains challenging with big players taking defensive actions. However, pockets of positive data as well as a path out are beginning to emerge.
Economic concerns remain
As we’ve discussed in prior Insider posts, observing the actions of large companies can you help understand what’s coming. These companies have access to unprecedented amounts of data and analytics.
- Intel is planning thousands of job cuts in face of chip slump (Bloomberg). This indicates expectations of lower demand for electronics across the board.
- Microsoft does its second round of 2022 layoffs (Seattle Time). Microsoft cited “macroeconomic challenges such as a strengthening dollar, the ongoing war in Ukraine, and manufacturing shutdowns in China” as its reason for lower earnings.
- Hiring freezes have also been put in place for Meta, Salesforce, Netflix, and many others (Protocol). Meta is also preparing for layoffs (Business Insider).
Amazon announced a revenue miss, including retail and AWS, citing “uncertain economic” times are forcing cuts across the fulfillment network. As a result, the stock dropped 18% overnight, down 50% for the year.
“Global economies have started to slow down as central banks including the Federal Reserve work to combat inflation by tempering consumer demand with higher interest rates. Recent earnings reports have started to reflect the pressures—and it’s been particularly bad for technology giants. On Tuesday, Alphabet stock plunged after the Google parent missed third-quarter sales and profit expectations. Then on Wednesday, Meta posted similarly disappointing results—pushing the social media firm’s shares down nearly 25%.”Forbes
The common root cause is macroeconomic factors, which are a) already impacting companies and b) expected to continue to impact companies for the foreseeable future.
Daniel Pinto, who leads the world’s largest investment bank (JPMorgan), made the following statements last week (cnbc.com):
- “I think putting inflation back in a box is very important. If it causes a slightly deeper recession for a period of time, that is the price we have to pay.”
- “I don’t think we’ve seen the bottom of the market yet,” he said, adding that corporate earnings expectations were still too high.
- He called cryptocurrencies a small asset class that is “kind of irrelevant” at the moment.
“Recessions do have a silver lining in that companies that shouldn’t exist stop existing,” wrote Musk.Elon Musk (finance.yahoo.com)
This quote applies to companies but also cryptocurrencies and other crypto-related businesses. As crypto investors, this is the time to focus on a core set of cryptocurrencies that have real-world use cases and durabilities, such as Bitcoin and Ethereum.
Similarly, Jeff Bezos commented, “Yep, the probabilities in this economy tell you to batten down the hatches.”
Looking at the S&P 500, we see:
- A return to established growth trend.
- It has dropped 25% from $480 in January of 2022 to a low of $358.
- A likely worst-case drop to 330 would signify a 33% overall drop.
Now for the really bad news.
The trend in personal savings and debt is creating a situation that could create a debt crisis if job losses accelerate.
Individuals are not prioritizing savings or investing. This will damper retail demand for crypto investing.
On top of all of this, we have the continued factors of:
- Energy prices in Europe are at record levels and winter is almost upon us.
- The War in Ukraine is dragging on.
- Interest rates and inflation are still going up. Wages are not.
On the flip side, there is some indication we may be nearing extremes on key metrics.
JPMorgan is projecting we have hit peak inflation already and there will be downshifting of interventions from the Fed (seekingalpha.com).
This will likely be driven by price drops in housing (finance.yahoo.com). Housing “shelter” makes up about one-third of CPI (the consumer price index), which is used to measure inflation. The Fed targets 2% inflation.
As we previously noted, housing was the last major sector to drop. While it likely will not crash, just reverting back to mean will rapidly get inflation back to the Fed’s target. This could happen within months.
In addition, Credit Suisse projects the Inflation Reduction Act will deliver $1.7 trillion into the economy over the next 10 years (The Atlantic). That is based on the Act catalyzing private investing. To be clear, that is not just government spending, it is actual economic growth.
Bitcoin transition to a hedge
Bloomberg Senior Commodity Strategist is seeing indication Bitcoin may finally be transitioning away from a speculative asset (like a tech stock) to a risk-off (hedging) asset like it has been envisioned.
To be clear, this means Bitcoin becomes a hedge against uncertainty. It ideally hedges currency risk, government risk, and general economic risk.
“Returning to its propensity to outperform most assets may be a matter of time, as mainstream adoption progresses and adaptive changes in US accounting standards give it a lift,” he said.Mike McGlone – Senior Commodity Strategist for Bloomberg Intelligence
Drawing the same S&P 500 lines on a Bitcoin chart, we see Bitcoin has not only returned to the past trend but has already flirted with the bottom. Just like the S&P 500 lines, these exclude the extreme drop from COVID (2020) and the extreme free-flow of capital post-COVID.
This supports the “leading indicator” hedge concept.
- Bitcoin peaked in November of 2021 at $69,000.
- It dropped 74% to a low of $18,131.
There is plenty of bad news and uncertainty. Companies and leaders are preparing for a tough year ahead. But there is good reason to expect the market bottom may come sometime in the next 12 months.
If this is the case, people buying great assets over the next 12 months will be positioning themselves for wealth when the market reaches its next cycle peak.
Be prepared though, there will be plenty of volatility as this plays out. So try to avoid short-term decision-making.
There is as much conflicting data in on-chain metrics. Miners are in a difficult spot and may be forced to liquidate Bitcoin, which could trigger large price drops.
Just as with the last couple of Insider posts, the on-chain trend is that holders are holding. Addresses that are not considered short-term (traders) are simply not selling. This is further indication that Bitcoin is operating more and more like a hedge or savings vehicle.
Liveliness is a way of tracking the accumulation (buying) and distribution (selling) of longer-term holders. This metric increases as long-term holders sell coins. It decreases as they accumulate.
As you can see in the chart, we are in an accumulation phase for long-term holders. That is, people who believe in Bitcoin believe this is a good time to build their positions. Just like with our indicators, you can see they are buying during fear and selling during greed.
New address growth has remained fairly flat, which is expected in suppressed markets. But bringing on new, active users is key to growth. Whether this growth comes from investors, savers, or cash users in emerging markets, we need to see active address growth to propel the next stage of value and establish the long-term use case of Bitcoin. This is critical for the adaption of any new technology.
Pressure is on for miners
- Bitcoin prices are suppressed relative to difficulty
- Energy prices are increasing
- The largest public Bitcoin mining firm, Core Scientific, issued a bankruptcy warning and has lost around 97% of its value (cnbc.com).
- Capital investment firms are canceling plans to fund and invest in Bitcoin mining, which will push firms into negative cash flow. Argo saw a $27M funding round fall through this month (coindesk.com). Argo’s value has similarly dropped 92%.
- In good news, Binance Pool (binance.com) has announced a $500 million lending program to help public and private miners, as well as the ecosystem.
When the economy is tough, it shakes out weak companies and forces innovation. Just like weak crypto financial firms have begun failing, weak altcoins are failing, we will also see mining firms with unsustainable approaches either innovate or fail.
This will allow for a newer breed of players to enter the market, perhaps with more sustainable (such as CleanSpark), efficient solutions that are able to take advantage of locations with energy surpluses.
What does that mean for the price of Bitcoin?
Miners are currently holding a record amount of Bitcoin, in fact 10x from just three years ago. Miners are in a tough position. They could sell BTC to meet cash shortfalls, but large-scale selling would cause the market to drop, hurting their own balance sheets and valuations.
However, in a worst-case scenario or bankruptcy, miners may be forced to sell. That could be the trigger to the $11K price level. This may be avoided by transferring assets to emerging miners.
Certain indicators, namely the reliable monthly MACD, point to a market bottom. However, the worst-case scenario of $11K is still in play.
Bitcoin as a $19K stablecoin: bearish?
The narrative that Bitcoin is holding stable but on declining exchange volume is gaining a lot of traction on social media. However, upon further inspection, it depends on the exchange you view. Stronger exchanges have seen an increase in volume, such as Coinbase shown here.
This narrative says that Bitcoin has stabilized but on diminishing volume, which must be bearish.
Aggregate views tend to show flat or increasing overall volume, but many are estimates.
Worst-case scenarios continue to point to a drop to around $11,000. For example, this chart shows the similarity in drops between not and 2018. An 84% drop would take us to $11,040.
Of course, there are numerous differences in the way the rally happened. And you cannot say one past example will dictate future scenarios. That said, core market sentiment does tend to follow similar patterns and given that multiple methods point to this $11K zone as a worst-case, it is good to prepare yourself for the possibility. We have shown other methods of arriving at $11K throughout our previous Insider posts and our Price Channels reveal the same levels.
On the positive side, the monthly MACD has flipped. This is an extremely reliable indicator. This flip happened in:
- March of 2015, signaling the bottom of that bear market
- February of 2019, signaling that bottom
- April of 2020, signaling that bottom
- Has happened now in October, 2022
We held off on releasing this Insider newsletter to see if the month would close on light red, and it appears it will.
Putting It All Together
We are still in a bearish market, but there are emerging signs of positivity that may lead us out. Be prepared to see the cycle bottom within the next 12 months. It may have already happened or we may see one more leg down.
To the extent your investing plan allows, stock up on high-quality crypto at regular intervals. Automate investing if you can. Averaging in now will become wealth when this market cycles up.
Current Crypto-ML Portfolio
Here’s the monthly view of our portfolio.
- During earlier periods of Extreme Greed, we slowly exited about 30% of our crypto positions to stablecoins.
- Over the last few months (June through July mainly) during Extreme Fear, we deployed out of stablecoins fully into crypto.
- We are actively dollar-cost-averaging into crypto every month.
- We are continuously working to ensure each position earns interest.
That last point is important. We are not relying on appreciation alone. Earning interest also means our investments are buying back in like-kind each month. Even if we don’t explicitly invest, these positions are growing and cost-averaging on their own.
Stablecoins: 0% (flat)
- This balance has been completely phased out during “Extreme Fear.” It originally consisted of profits that were booked during “Extreme Greed.”
BTC: 40% (flat)
- Long-term hold
- Investing bi-weekly
BNB: 42% (-2%)
- This position continues to be a strong earner through staking
- Monitoring for optimal time to “right size” this position, considering macro environment and tax consequences.
ETH: 15% (flat)
- Earning interest through staking
- Long-term hold
- Earning interest through various means
- Long-term hold
- Earning interest through various means
- Long-term hold
Other: <1% (flat)
- This group consists of 15 altcoins.
As always, ensure your crypto portfolio is an appropriate percentage of your overall savings and investment plan. You need to determine your goals, risk tolerance, and ideal allocations.
Questions and Comments
Do you have thoughts, comments, or criticisms of this analysis? Let us know in the comments below!
Subscribe to the Newsletter
Join 7k+ working professionals to "The Five-Year Plan". Every Saturday morning, you'll receive one actionable tip to create life-changing wealth in crypto.