Getting to Grips with Bitcoin and Stock Market Correlation

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Today’s Meditations:

1. Getting to Grips with Bitcoin and Stock Market Correlation

2. Tech Worries Weigh on U.S. Equities

3. U.K. House Prices Jump to Highest in 5 Years

4. Euro Drops and European Stocks Rise as Lagarde Primes ECB for More Economic Stimulus

5. Crypto Exchange Ftx to Offer 24/7 Tokenized Stock Trading

6. Bitcoin Transaction Fees Rise to 28-Month High as Hashrate Drops Amid Price Rally

7. Forbes: Leaked Document Details Binance Plan to Avoid U.S. Regulatory Scrutiny

8. Jack Tao: Ex Morgan Stanley VP Aims To Build The Best Cryptocurrency Derivatives Exchange

9. The Map Is Not The Territory

Getting to Grips with Bitcoin and Stock Market Correlation

Today, the price of Bitcoin abruptly dropped 4% from the day’s peak as the uncertainty in the stock market intensified.

An unwelcome change in what was an exceptional upward trajectory and also given that this might be evidence of an increasing correlation between bitcoin and the stock market. Readers of the Market Meditations will therefore increasingly benefit from being kept up to date on macro trends.

With five days left to the U.S. presidential election, Bank of America suggested a 20% drop in the stock market is possible. Whilst the correlation between Bitcoin and stocks has declined in recent weeks, the slump of risk-on assets could negatively impact cryptocurrencies.

It is important to note that it is not the election itself that could cause the markets to rattle due to uncertainty. That is, the markets could still rally regardless of who wins the election. Many traders and analysts have had ample time to familiarize themselves with each candidate’s policies and consider their trading decisions and positions in each scenario.

What will rattle the markets is a contested election. A landslide victory for either Trump or Biden and rapid election conclusion would likely be welcomed by markets. A severely contested election could see a risk off.

Given that more Democrat than Republican voters are requesting mail in ballots, it is quite possible that Mr Trump could be leading on the night and then Mr Biden moves ahead as postal votes are counted. That “blue shift” scenario could mean days and even weeks of furious disputes, from polling stations, through county, city and state electoral administrations, to state and federal courts.

In a still worse case, the result could end up hanging on a decision of a Supreme Court whose composition is itself the subject of fierce partisan disagreement: a repeat of Bush vs Gore, but on steroids. In the worst case of all, controversy could stretch into January 2021 amid possible violence, market panic and worldwide dismay.

For Bitcoin, it is difficult to decide whether a potential prolonged equities dump would cause a pullback. After all, since Oct. 12, while U.S. stock market indices declined 5-6%, Bitcoin rallied by nearly 16%. Further, In the last 18 days, BTC rose from $11,167 to $13,290, massively outperforming gold, stocks and the U.S. dollar.

But the confluence of Bitcoin facing a multiyear resistance level at $14,000 and the lack of certainty around risk-on assets could slow BTC’s momentum.

If the market uncertainty persists after the election, there is a higher probability that it would place BTC in the low $13,000 region for a prolonged period, which wouldn’t necessarily be unhealthy.

In any case, we will find out very shortly.

• Tech Worries Weigh on U.S. Equities. The global markets today: big tech earnings have disappointed. Apple fell after iPhone sales missed and the company didn’t give a forecast for the holiday quarter. Amazon slid after its operating income forecast missed, as increased shipping weighs on profitability. Facebook slipped after North America users declined and it warned of uncertainty. Twitter tumbled after it added far fewer new daily users than expected. The S&P 500 dropped 2%, bringing the weekly decline to more than 6%. Weakness in tech shares is adding to volatility that may remain high heading into the election. Global equities are on course for the worst weekly decline since March as lockdown measures and the stimulus stalemate dent sentiment. The dollar slipped and Treasury yields ticked higher. Investors look to the U.S. election as the end of the week draws. More than 82 million ballots have been cast, 59.5% of 2016’s total, with Texas and Hawaii topping their past count. Read more.

• U.K. House Prices Jump to Highest in 5 Years. U.K. house prices posted their biggest annual gain since 2015 this month as a revival in the housing market defied a wider economic malaise. A pleasing result for any of my followers who have exposure to UK real estate either directly or through REITs. Values climbed 5.8% from a year earlier to an average of £227,825 or $294,000. The report comes a day after Bank of England data showed mortgage approvals reached a 13 year high. The stand-out strength in the housing market is in large part due to a government decision to suspend a tax on home purchase until the end of March. There’s also evidence of pent-up demand following the lockdown, as well as desire for bigger properties as people work from home more regularly. Many analysts say gains will reverse next year as unemployment rises and aid packages come to an end. That could be compounded by more severe restrictions to control the spread of the virus. “The outlook remains highly uncertain and will depend heavily on how the pandemic and the measures to contain it evolve”, said Robert Gardner, Nationwide’s chief economist. “Activity is likely to slow in the coming quarters, perhaps sharply.” Read more.

• Euro Drops and European Stocks Rise as Lagarde Primes ECB for More Economic Stimulus. ECB President Lagarda said yesterday that there is “little doubt” that policy makers will agree on a new package of monetary stimulus in December as coronavirus infections and renewed lockdowns threaten a double-dip recession. “The euro-area economy recovery is losing momentum more rapidly than expected,” Lagarde said. “We agreed that it was necessary to take action and therefore to recalibrate our instruments at our next Governing Council meeting.” The impact on the market: the euro dropped to the low of the day and European stocks climbed. New coronavirus lockdowns announced by Germany and France in the past 24 hours have highlighted how the euro area’s outlook has darkened considerably since the ECB’s September meeting. The summer rebound has given way to a possible double-dip recession, forcing governments to provide more aid and pressuring the central bank to keep borrowing costs low. Read more.

• Crypto Exchange Ftx to Offer 24/7 Tokenized Stock Trading. After some cryptic tweets by FTX’s CEO Sam Bankman-Fried, the crypto exchange announced that it is making a move into traditional markets and will offer tokenized equity trading. Users that have passed level 2 KYC verification will be able to buy fractions of shares from big firms such as Tesla, Amazon and Apple. In order to make this work, FTX has partnered with German financial services firm CM-Equity, and Switzerland-based tokenization solutions provider Digital Assets AG (DAAG). The new offerings, that will be trading 24/7, will go live next week. “CM-Equity custodies the stocks. Tokens on them are then traded on FTX and are redeemable for the underlying stocks,” said Bankman-Fried. “CM-Equity is a licensed entity and conducts compliance on all of the participating customers and trades.” Read more.

• Bitcoin Transaction Fees Rise to 28-Month High as Hashrate Drops Amid Price Rally. Transaction fees on the bitcoin network have been rising significantly as the network suffers its worst congestion in nearly three years. On Thursday, the 7-day average transaction fee was $6,8 according to data from The Block. The average cost of sending a transaction on the bitcoin network has increased 573% in the past 12 days alongside bitcoin’s move upwards from $11,200 to $13,800. A recent decrease in hashrate seems to have played a big role in causing the network congestion. The mining power dedicated to approving transactions and mining blocks has gone down amid the price rally, boosting waiting times and network congestion. Read more.

• Forbes: Leaked Document Details Binance Plan to Avoid U.S. Regulatory Scrutiny. A document that seems to have been leaked contains details of crypto exchange Binance’s efforts to avoid scrutiny from U.S. regulators. In an article on the report, Forbes wrote: ‘Binance Holdings Limited, the world’s largest cryptocurrency exchange conceived of an elaborate corporate structure designed to intentionally deceive regulators and surreptitiously profit from crypto investors in the United States, according to a document thought to be created by its senior executives and obtained by Forbes.’ The so-called source is a 2018 document which is not publicly available at the time. As a response to the accusations, the CEO of Binance Changpeng Zhao (CZ) tweeted: “FUD. The statements and accusations in the article are incorrect. The whole article hinges on a 3rd party document. The said document was not produced by a @Binance employee (current or ex). Anyone can produce a “strategy document”, but it does not mean Binance follows them.” Read more.Jack Tao: Ex Morgan Stanley VP Aims To Build The Best Cryptocurrency Derivatives Exchange

CLICK HERE FOR EARLY ACCESS

Jack (@jack_Phemex) is the co-founder of Phemex, a cryptocurrency derivatives trading platform. Earlier in his career, Jack was a VP and software engineer at investment bank Morgan Stanley where he gained experience that currently helps him build the most trustworthy exchange in the space. He holds a bachelor in computer science and a master’s degree in computer software engineering from Fudan University.

In this episode, we dive deep into how Jack came up with the idea of building a cryptocurrency exchange and why he believes they are better suitable for it than most. Jack shares what it takes to run a small company efficiently, talks about the importance of establishing a company culture early on and what Phemex looks for in new hires. Later in the episode, we take a look at Jack’s personal life where he shares his favorite books, how he tries to maintain work-life balance and what he believes to be the best investment one can make.

Things I learned:

• Sometimes you learn something and it will remain a single dot. Sometimes you can connect those dots to be aligned. “You can’t connect the dots looking forward; you can only connect them looking backwards.” – Steve Jobs

• In traditional markets, the derivatives market is often times 100x bigger than the spot market. Jack believes this will become true from crypto as well.

• Maintain the relationships you have built throughout your career. You never know when you will be able to work together again. Knowing each other’s values can be a tremendous time saver.

• It’s very important for a small team to know each other. Establish a company culture at the very beginning. People who get hired should align with the company values. Otherwise, it’s a bad investment for both.

• In the financial world, reputation is everything. People sometimes put their life-savings on the exchange so you have to make sure that security can be guaranteed.

• Proper regulation can have benefits that nobody can deny. Exchanges don’t want illicit actors to take advantage of their platform to monetize their wrongdoings. That said, too much regulation can be a huge barrier to innovation if it is not managed properly.

• Jack’s three favorite books:

  How to Win Friends & Influence People by Dale Carnegie

  Peak by Anders Ericsson

  Thinking Fast and Slow by Daniel Kahneman

• Nowadays, doing things alone is very hard. Looking for win-win situations (mutual benefits) is the best way to build relationships long-term.

• Everybody has only 24 hours in a day. Save your energy to work on the most important stuff.

• Investing in yourself yields the best returns. You get paid every year with a 100% guaranteed return.

The Map Is Not The Territory

’The map is not the territory’ is a phrase coined by Alfred Korzybski. The perception of the world that is created by our brains is our map. Actual reality is the ’territory’. Even the best maps are imperfect or incomplete, as maps are a simplified version of the terrain. It’s important to know that our map of reality is not reality itself. How can this subtle difference help us make better decisions?

In a tweetstorm yesterday, Shane Parrish wrote an informative thread on why this mental model is a useful concept to understand everyday life. Although he starts by explaining that all maps are flawed, they can nevertheless be useful. The example he provides makes the difference clear: “The best way to grasp the difference between a map and a territory is to think of a resume. A lot of people look good on paper and fail to deliver in real life. There is a difference between the paper (map) and reality (terrain).”

Our brains use maps and models everywhere as they help reduce the complexity and uncertainties of the world. We can’t possibly process all information that is available to us all the time. It’s these ‘shortcuts’ that our brain uses that make us susceptible to cognitive biases and why we get into trouble when we confuse the map for the terrain. Shane sums up three key lessons:

• Our brains choose the wrong map over no map because it is lazy. Instead of using no map at all, it prefers to use the wrong map. This is what makes us susceptible to biases and other thinking errors.

• We confuse maps with reality. In order to verify, we need to be in touch with the terrain. Learning theory and models can be useful, but only by applying it in the real world will you truly learn (the exceptions).

• Reality has a surprising amount of detail. You don’t understand the map until you understand the hidden variables and assumptions. A concept that was widely popularized in Nassim Taleb’s book The Black Swan.
  
  

Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.