Mad Hedge Bitcoin Letter
February 10, 2022
Fiat Lux
Featured Trade:
(BITCOIN SECURITY ON THE UP)
(BTC)
Crypto and Bitcoin aren’t a perfect asset class, and it doesn’t pretend to be.
It’s still an emerging currency that still has holes to caulk.
One major item on the list that needs to be taken care of is security.
Bitcoin (BTC) itself is secure, but the exchanges that do business with you and I aren’t and that’s the underlying problem here.
When exchanges aren’t secure, they are ripe for hackers to raid and that is what happened to Bitfinex and Mt. Gox in Japan.
This is why I pound on the table to urge readers to get into the most secure crypto exchanges out there.
The exchange you do business on could go a long way in determining if you keep your crypto fortune in the future.
Just as crypto has boomed in popularity, the Feds have backed up the boom by acting like a good cop and tracking down the bad guys.
The Justice Department announced it seized more than $3.6 billion in allegedly stolen cryptocurrency linked to the 2016 hack of Bitfinex.
As part of the operation, authorities detained a New York couple on allegations they planned to launder the digital goods.
It has been recorded as the largest financial seizure ever by authorities.
The second largest theft came from the Japanese exchange Mt. Gox that got swindled in February 2014.
The exchange lost 850,000 bitcoins, worth about $474 million, but later found 200,000 of those bitcoins.
It still is a mystery as to who stole the coins at Mt. Gox and the exchange is in liquidation proceedings.
Let me also chime in by saying that the easiest way for theft to occur is an inside job in many of these cases as these web engineers know the system inside and out.
Despite the bad press and billions lost, crypto has continued its rise and adoption as a real alternative to the U.S. dollar and equities.
But security breaches are a reminder of the vulnerabilities of cryptocurrency technologies.
Every hack is also an opportunity to learn and grow resilient.
A bitcoin is actually just a secret number or piece of code. To transfer a bitcoin, a person must verify a planned transaction with a private encryption key. But if the private key is stolen, the attacker can steal the bitcoin.
Because all bitcoin transactions are recorded in the public blockchain, it is possible to follow the movement of stolen coins.
Bitcoins are transferred between 34-character alphanumeric addresses, which appear in the blockchain.
Bitcoin addresses don't reveal information about who controls the funds. But stolen funds are often difficult to convert to fiat currency. Exchanges usually have strict identification requirements for account holders to comply with anti-money laundering regulations.
Suddenly cashing out a large quantity of stolen bitcoins at a reputable exchange from a closely watched bitcoin address is unfeasible.
Even though the billions were stolen, the perpetrators' fingerprints were all over this crime as mentioned above, it’s hard to cash out stolen crypto because it can be tracked.
The couple who stole the Bitfinex funds found out this the hard way as Ilya Lichtenstein, 34, and his wife, Heather Morgan, 31 were arrested.
Authorities accuse the pair of trying to launder the proceeds of 119,754 bitcoin that were stolen from Bitfinex’s platform after a hacker breached Bitfinex’s systems and initiated more than 2,000 unauthorized transactions.
Prosecutors allege that the transactions sent the stolen bitcoin to Lichtenstein’s digital wallet.
He should have just given them back since the authorities knew where the coins were sent.
Officials said they were able to seize more than 94,000 bitcoin, which was valued at around $3.6 billion at the time of seizure. In all, the total stolen bitcoin is presently valued at approximately $4.5 billion, according to the agency.
The arrest should deter future hacks because of the unlikelihood of cashing out once the secret bitcoin number is tracked to an individual wallet.
It will be years until hackers can get around this ID problem and as long as the Feds show they are serious about rampant crypto theft, then it should keep the crypto markets in check.
This is an unmitigated win for crypto and the security of it.
The playbook for crypto traders and investors should be to move to higher ground and only buy and sell on the biggest and best exchanges.
Some of the exchanges I might recommend are Coinbase, Kraken, Binance, Robinhood and Webull.
I probably wouldn’t deviate too much from these strong American exchanges that have the rubber stamp of approval from the overall consensus.
Caveat Emptor!
“Intelligence is the source of technology. If we can use technology to improve intelligence, that closes the loop and potentially creates a positive feedback cycle.” – Said American Writer Eliezer Yudkowsky
Mad Hedge Bitcoin Letter
February 8, 2022
Fiat Lux
Featured Trade:
(BITCOIN MOMENTUM PICKS UP)
(BTC), (ETH), (TSLA)
One might pontificate that the recent bullish price action in Bitcoin is because Bitcoin and other cryptocurrencies are finally starting to decouple from equities.
I don’t agree.
For the past few months, Bitcoin has been relegated to a status of just another lousy tech stock as the price movement mimicked the Nasdaq index but in a more exaggerated form.
I would argue that the decoupling moment hasn’t materialized yet and the industry needs to mature to exhibit more idiosyncratic characteristics.
Once they shake off that convenient moniker, it will allow the incremental investor to define it by its merit.
Defining it through the prism of its current strategic position relative to an entirely different industry just doesn’t make a whole lot of sense.
Bitcoin has roared back from the dead and it’s about time.
The bears can’t hold down the secular drivers underpinning the asset forever.
I believe the outperformance of late that has seen Bitcoin elevate into the mid-$40,000s is more of a result of interest rate expectations being pushed to the upper limit in the short-term and investors expecting a small reversion to the mean.
The U.S. 10-year Treasury yield is now a smidge below 2% after a pulsating move from 1.3% in the past 3 months.
The 35% move down had a funny way of distorting pretty much every asset class as consumers rushed into real estate, sold off technology stocks as fast as they could, and triggered a flight to safety.
No doubt that interest rates will most likely blow past the 2% threshold, but the reversal in bitcoin is signaling that the ensuing pace of yield appreciation will be orderly and smoother than what we just witnessed the past few months as the Fed tries to catch up.
If the Fed can wrestle back the narrative and actually do their jobs, Bitcoin is sitting pretty as we move forward.
The Fed has finally indicated they will finally act and that shakeout penalized crypto as the goalposts narrowed.
The sad fact is that in times of panic, high-risk assets are usually the first to be sold to supplement the losers or a cascade of stop-loss orders being dismantled can cause contagion that overflows into other areas.
As Bitcoin stabilizes and marks a short-term floor of $40,000, we could experience another buying wave as calm waters mean it's time to set sail aboard the crypto speed boat.
There are more green shoots occurring beneath the surface as more organizations are embracing bitcoin.
Earlier today, KPMG Canada, the Toronto-based branch of professional services firm KPMG, announced that it had purchased some Bitcoin and Ethereum.
Even more important, automaker Tesla (TSLA) revealed in a recently filed 10-K that it held almost $2 billion in bitcoin at the end of last year.
Tesla’s 10K SEC filing update was released yesterday, reaffirming notions that Tesla held onto their Bitcoin holdings amidst declines in Bitcoin’s price to the lower $30,000.
Combined with the news of KPMG Canada adding Bitcoin onto its balance sheet, encouraged a sharp rise in positive Bitcoin price sentiment.
These events mean that market confidence is coming back quickly, and people are realizing that we have finally arrived at an entry point.
These events are simply the latest sign of progress for cryptocurrencies.
On the legal front, I believe a huge source of momentum comes from Congress, with many members of the U.S. Senate speaking favorably on Bitcoin.
On Friday, Texas Sen. Ted Cruz disclosed that he invested in $50K worth of bitcoin during its dip back last month and spoke positively about Texas being the next bitcoin mining hub.
Sentiment has climbed back from the dead and we could experience short-term rapid upside price action in this highly volatile asset class.
“Stone Age. Bronze Age. Iron Age. We define entire epics of humanity by the technology they use.” – Said Co-Founder and CEO of Netflix Reed Hastings
Mad Hedge Bitcoin Letter
February 3, 2022
Fiat Lux
Featured Trade:
(DIVERSITY IS STILL KING)
(BTC), (ETH)
Most people here invest only in crypto, because they are already extremely successful or on a similar path and crypto, being an appreciating and depreciating asset, is a means to diversify a portfolio between many different types of investments.
In the unlikely event that a reader is scrounging up their last few dollars to bet on the next speculative crypto big thing, then I would say your prospects are dim.
The unfair narrative of crypto loosely follows one of a fly-by-night operation in which someone can get rich in one day.
That is a complete fallacy.
And sure, I am not saying that getting rich in one day has never happened before, it certainly has, and it will time and time again.
But the odds of that happening are miniscule in cryptocurrency.
Even if someone who could be classified as middle class in the U.S. is now being advised to add crypto, the smart only put a small portion of their savings into it.
High net worth people often say they don’t need to get rich twice in their life.
Allocating small portions complements the diversity in one’s personal finance between crypto, precious metals, 401k or IRA, savings, stocks, and real estate.
This is the base case from which I analyze crypto prices and I am not assuming readers are putting 100% of their net wealth into some altcoin even if they are free to do so.
And when talked about through the prism of just another asset that is part of a bigger portfolio, then crypto and its existence is completely justified and important.
I mean honestly, it is surprising that it took until 2012 to create it, and it’s been a long time coming for the world to have something more advanced than the paper dollar.
I would argue that we are years late on this one and crypto should have been created in conjunction with the internet and computers.
To think it took this long to figure out a digital money that defies international borders and regulation makes me believe that innovation isn’t as fast as it needs to be in the digital ecosystem.
Much of the mainstream media appears to cater towards the delusional retail trader urging people who have $200, $1000, or even $10000 to buy crypto at any price.
Participating in stocks is still attractive to the average person, but the issue here as it relates to its value versus crypto, stocks are unattractive in a rising interest rate environment where the Fed has promised to curtail its balance sheet purchases.
Crypto is just another asset where the price is determined by supply and demand, it is not a magic bullet.
Even though fiscal policy isn’t accommodating in the short-term to crypto price appreciation, crypto will benefit long term as a hedge to inflation which the government has allowed to spiral out of control.
The priority right now for money is the safety of it and that won’t always be the case especially if the pace of rate hikes becomes orderly and manageable so much so that investors feel comfortable putting new money to work in high volatility assets.
So if crypto is the Hail Mary investment that will drag you out of a life of mediocrity then I would say you are poorly informed.
Investors need to treat it without emotion, a price that is set by supply, demand, and a series of evolving external factors.
This is the right way to go about it in order to absorb those massive 10% drawdowns when you’re sleeping at night.
You should be able to sleep at night with a 5% crypto allocation, maybe even up to 10%.
Diversification is for the investors who have accrued some modicum of partial success and want to keep their portfolios more stable.
Remember this is not a sprint, but a marathon.
At the beginning of your journey diversification is more of a problem than real help. Try to learn more about crypto and being an above-average crypto investor will be better than being an average investor in a few different types of investments.
“Sharing is good, and with digital technology, sharing is easy.” – Said American Software Developer Richard Stallman
Mad Hedge Bitcoin Letter
February 1, 2022
Fiat Lux
Featured Trade:
(BITCOIN THE BELLWETHER SHINES BRIGHTEST)
(BTC), (DOT), (DOGE), (SOL)