Mad Hedge Bitcoin Letter
May 19, 2022
Fiat Lux
Featured Trade:
(EXCHANGES LOSE CONFIDENCE)
(BTC), (COIN), (TGT)
Where there’s smoke, there is fire.
That is how you need to approach the crypto industry right now as systemic risks creep in.
Withdraw your money from Coinbase (COIN) immediately and switch to trading crypto-based ETFs on the New York Stock Exchange.
Why?
In the event the crypto exchange goes bankrupt, Coinbase says, its users might lose all the cryptocurrency stored in their accounts too.
Coinbase told us “crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings.”
Coinbase users would become “general unsecured creditors,” meaning they have no right to claim any specific property from the exchange in proceedings. Their funds would become inaccessible.
CEO of Coinbase Brian Armstrong is trying to swindle investors out of their money by putting in place the infrastructure to not return funds if bankruptcy happens.
To even talk about this in public is stirring unease and sowing mistrust within the management team there.
If Armstrong wanted a crypto winter, he is doing everything in his power to trigger it by his behavior by killing crypto adoption rates.
Bank accounts in the U.S. are protected by deposit insurance offered by the Federal Deposit Insurance Corporation. In the event a bank fails, the FDIC steps in to protect deposits up to $250,000, preventing depositors from going broke along with the bank.
Crypto exchanges are unsecure and not insured so that’s where the risk is.
As customers had to pay Coinbase a fee for every crypto transaction, the fintech generated rip-roaring growth over the last two years - revenue surged from less than $200 million in the first quarter of 2020 to $2.5 billion in the fourth quarter of 2021. Similarly, net profit increased more than 26-fold from $32 million to $840 million.
Bitcoin dropping to under $30,000 from the high of $65,000 has been a catastrophic disaster for Coinbase.
They essentially rely on higher volume to build growth and when their customers are busy getting impoverished, it doesn’t set the stage for Coinbase to build higher trading volume.
Setting up management to secure a get out of jail-free card for utter failure is another issue I have as an investor.
At the bare minimum, the optics are terrible, and questions arise about fiduciary duty which could result in a tsunami of lawsuits against Armstrong and Coinbase.
Sadly, the price of Bitcoin, which was promoted as an inflation hedge has in fact proved to be the polar opposite.
In times of hyperinflation, people want physical stuff like food, medicine, gas, and housing. Not digital currency.
I do believe cryptocurrency is a great investment when people aren’t paying $6 per gallon of gasoline.
The sudden spike in energy costs was triggered by terrible foreign policy mistakes by the current administration.
Now everyone in the crypto industry is running around with their head cut off scared of potential liability to these digital coins and digital exchanges for which there is no historical precedent.
How does the court behave if a crypto exchange blows up?
Nobody has a clue.
This is where we are at this point in the crypto narrative and the bears are piling in like no other.
Target (TGT) reported dire earnings reporting severe margin contraction because of higher costs.
The net result is yet another ax to risk assets and crypto is one of the most speculative out there.
The rest of the year will be a tough slog for crypto and it won’t work itself out until inflation is back under control.
But as many people understand, the US Central Bank is not interested in taming inflation and is professional at downplaying any risk.
The result is that hyperinflation explodes, risk assets sell-off, and investors go to cash.
Brian Armstrong gleefully telling investors he will fleece us is just another strong signal and supportive data point of my overarching thesis.
Price of Bitcoin is on its way to $20,000 soon.
“A.I. is probably the most important thing humanity has ever worked on.” – Said Alphabet CEO Sundar Pichai
Global Market Comments
May 19, 2022
Fiat Lux
Featured Trade:
(WHY WATER WILL SOON BE WORTH MORE THAN OIL),
(CGW), (PHO), (FIW), (VE), (TTEK), (PNR), (BYND)
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
Mad Hedge Technology Letter
May 18, 2022
Fiat Lux
Featured Trade:
(REDEMPTION WATERFALL)
($COMPQ)
What’s around the pipeline for all these super leveraged tech hedge funds?
I’ll tell you what will happen, and it’s not pretty.
This has direct consequences for your fragile portfolio, so be sure to listen up.
Top quartile tech hedge fund managers wind up becoming liquidity providers due to bottom quartile managers agreeing to redemptions.
Yep, I just said it, we are about to enter a period of extreme redemptions brought on by the massive underperformance of tech stocks by tech growth hedge fund managers.
Apply the same logic to top-performing stocks vs. bottom-performing stocks and people’s penchants for selling winners and keeping losers.
These capital redemptions are about to hit us and don’t think that hedge fund managers have trillions lying around just to return.
Most of their liquidity is already tied up in the market or better saying already lost in the market!
Many of these funds have been laser-like focused on tech growth stocks, just do the research, there are no gold-based hedge funds because they don’t sell well.
Tech has been outperforming the market for this entire bull market cycle and the way that manifests itself inside the hedge fund ecosystem is with more copy-paste tech growth funds.
When the Nasdaq drops 30% nominally like it did in the past 6 months and a fund is laden with the garden variety of growth stocks, these funds are in the queue for returns, and some possibly even shut down completely.
That’s exactly what’s been going on as we come back to reality.
These funds are proving that they aren’t living up to the hype of being nimble and flowing in and out of trades.
Their behavior suggests they are the opposite and just another ETF copycat, repackaged with the hedge fund marketing lingo.
So what’s the deal now?
Buy and hold in the face of accelerating rate rise expectations is hardly ideal, but that’s what these Harvard MBA-supported private hedge funds are doing.
I can’t make this stuff up.
Then even in this case, they overperform relative to a 30% drop in the Nasdaq of let’s say -10%.
Do we believe the incremental capital allocator will jump at a chance to lose 10% because it’s not losing 30%?
Maybe in U.S. President Joe Biden’s world, but not in the world of real people investing where they fight tooth and nail to preserve capital.
Take for instance some of these infamous guys like Tiger Capital which specializes in tech growth.
Back-of-the-envelope calculations based on the reported $35 billion size of Tiger’s overall public equities booked at the end of last year indicate that it has probably suffered a nominal loss of at least $15 billion in 2022.
To put that into perspective, Citadel lost 55% for an estimated $8 billion loss in the 2008 financial crisis.
Given that there were 82 trading days in January-April, this works out to be a loss of roughly $183 million every day that markets were open this year. Or $28.1 million every hour that US markets were open.
That’s what you’re overpaying for - these smart guys to lose your money.
Billionaire investor Steve Cohen’s Point72 Asset Management also removed the $750 million it invested in Melvin Capital Management.
Melvin Capital, the hedge fund at the center of the GameStop trading frenzy, lost 49% on its investments during the first three months of 2021.
Hedge fund managers Cohen and Kenneth Griffin had stepped in to aid Melvin Capital in January last year with Griffin’s Citadel and Cohen’s Point72 adding $2.75 billion to the firm.
What’s the fallout here?
The best employees, if they do exist, leave these cratering tech funds to either get another job at another tech hedge fund or start new tech funds themselves by raising new money.
Soon these funds, if they still exist, must fold because of the brain drain encouraging 100% redemptions; and as I talk to many friends today, this trend is accelerating.
To get redeemed out of existence looks bad on the resume.
Required liquidity due to losses in other funds is where we are now in this economic cycle.
Ironically, this could lead to several Bernie Madoff type Ponzi’s in the worst case, but the best case is after this bear market rally, there will be a sharp sell-off that will take us a leg lower in the Nasdaq.
This could be sped up by the US Central Bank talking up inflation even more frequently, and the market will need to fight through this to keep its levels.
“Well, if you can buy 1,000 of anything, it doesn't belong on Etsy” – Said CEO of Etsy Josh Silverman
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more