Bitcoin and The Bank of England: Is It a Match? #10
Market Meditations | September 4, 2020
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Today’s Meditations:
Bitcoin and The Bank of England: Is It a Match?
The Difference Between “Buying the Dip” and “Catching a Falling Knife”
Ethereum Wallet Service Metamask Mobile App Now Available on Android and iOS
Jump Trading Invests in Decentralized Exchange Serum, Signs On as Market Maker
Swiss Canton Zug to Accept Bitcoin and Ether for Tax Payment From Next Year
Bitmex to List Futures for New Crypto Coins for First Time in Over 2 Years
U.S. Unemployment Rate Drops by More Than Expected, to 8.4%
The ‘Apple’ of the Financials
Stock Losses Accelerate, Led by Slide in Nasdaq
The Lessons Of Behavioural Finance
Bitcoin and The Bank of England: Is It a Match?
Very exciting for the governor of the Bank of England to be discussing cryptocurrencies and a good report from cointelegraph on the topic. Cryptocurrencies are booming and this kind of growth seems worthy of attention by macro policy makers.
Bailey has had a tough week. From speaking at the Jackson Hole meeting last week to a virtual conference hosted by the Brookings Institute. During the conference, Bailey took a tough stance on crypto assets. He was not subtle at all with regards to how he felt about digital asset categories. He said that they are just “unsuited to the world of payments”. Bailey qualified BTC as an asset that has “no connection at all to money”. So to answer the question in the title of this section, no – probably not a match.
In fact, Bailey even went on to say that he didn’t believe in crypto assets as a proper investment opportunity because “their value can fluctuate quite, widely, unsurprisingly.” Although, this is true of a lot of investments so doesn’t seem to be the most substantial critique of crypto assets.
Bailey warmed up slightly on the topic of stablecoins. Probably because these are typically linked to the value of an underlying asset. The governor commented that it could offer some “useful benefits” such as reducing friction in payments but he did emphasise that if they were “to be used as a means of payment, they must have equivalent standards to those that are in place today for other forms of payment types”. In short, they would be subject to regulation. In particular, the governor was keen to ensure there were “protections to ensure they can be redeemed at any time 1-to-1 into fiat currency”. The governor was of the opinion that anything with global reach should be getting global attention from a regulatory perspective to ensure it is of the right standard.
The tone on stablecoins was very “let’s not run before we can walk” so readers should not expect anything to happen overnight or even in the short term. However, there was some interest, provided the proper standards could be met.
This is the latest significant development in a series of events surrounding macroeconomics and stablecoin. In March, the BoE published an in-depth discussion paper devoted to CBDCs (central bank digital currency), which analysed the rapidly changing payments landscape and the potential role for CBDCs to support the bank’s task of managing monetary and financial stability. Also in June, UK based blockchain firm L3COS submitted a proposal to the BoE for a blockchain based operating system to power a CBDC.
The Difference Between “Buying the Dip” and “Catching a Falling Knife”
“Strong opinions weakly held”
As traders, we must be able to detach our emotions from the charts. We use price data to form conclusions, these are the foundation of our trading decisions.
I’ve been openly bullish for a while, the market structure has been clear, long and print money. But with prices dropping across the board we’ve finally reached the point where we are testing key structural levels. When the market structure is no longer clearly bullish, on your relevant timeframe, you transition from “buying the dip” to “catching a falling knife”.
This is precisely why when executing any trading idea we need to have a clear invalidation point. Today meditators, I will share with you my key structural points on multiple assets. If we lose these levels, we should expect the market to cool down for a while.
BITCOIN / DOLLAR
Three Day
ETHEREUM / DOLLAR
Three Day
CHAINLINK / DOLLAR
Three Day
LITECOIN / DOLLAR
Three Day
Ethereum Wallet Service Metamask Mobile App Now Available on Android and iOS. Metamask, by far the most popular tool for interacting with blockchain-based applications on Ethereum, has launched a mobile app that will be available to both Android and iOS users. Metamask was founded in 2016 and has been a browser extension so far. The mobile app was in beta since July 2019 and has now officially launched, aiming to make it easy to interact with the Ethereum blockchain without compromising on user security by providing users with a key vault, secure login and token wallet. Read more.
Jump Trading Invests in Decentralized Exchange Serum, Signs On as Market Maker. Jump Trading, a market maker for Robinhood, Bitfinex and Bitmex and one of the world’s leading liquidity providers across the financial ecosystem, has made a significant investment into decentralized exchange Serum and will provide market marking and liquidity services for assets on Serum’s platform. Sam, CEO of FTX, announced the news himself through yet another tweetstorm, where he mentioned that only 7 days after the official launch Serum is probably already the most liquid on-chain DEX in the world. Read more.
Swiss Canton Zug to Accept Bitcoin and Ether for Tax Payment From Next Year. Switzerland is known as one of the most crypto-friendly countries and the canton of Zug announced it will accept bitcoin and ether for tax payment starting next year. Starting in February next year, companies and individuals will be able to pay their taxes in BTC and ETH up to ~$110,000. Zug city, the capital of the canton, was already accepting bitcoin for tax payments since 2016. Read more.
U.S. Unemployment Rate Drops by More Than Expected, to 8.4%. . Some much needed good news out of today’s data. The U.S. labour market rebound extended for a fourth month in August, offering hope that the economy can continue to recover despite a persistent pandemic and Washington’s standoff over further government aid to jobless Americans and small businesses. Nonfarm payrolls increased by 1.37million according to today’s Labour Department report. This means market sentiment was pretty much bang on. No mean feat when it comes to Non-Farm Payrolls which have always been significant but very volatile and hard to predict. We saw the dollar and 10 year Treasures climb after the report and the S&P 500 followed suit. The likelihood of further gains will depend on the control of coronavirus infections and the end to the stalemate in Congress over another stimulus package (post the good news, this may lose urgency). Speaking of stalemates, the drop in unemployment rate to single digits comes 2 months before the November election and could give a boost to President Donal Trump. Read more.
The ‘Apple’ of the Financials. CNBC Trading Nation reports of the ‘Apple’ of the Financial Services sector. They have identified a particular stock that could be about to break out. The stock is JPMorgan. JPMorgan is down 27% this year as bank stocks have struggled to climb back from the coronavirus sell-off. In fact, Financials are the second worst performing sector this year but some traders think it is about time for bank stocks to rise. This is simply because they have underperformed the broader market, they are relatively cheap compared to the rest of the market and their underlying business is quite good. JPMorgan has been identified as one of the best looking companies inside the sector: it’s been consolidating from the March lows and a move above $105 would open the door to $110 on this stock. Rates need to turn higher before diving headfirst into the banks but JPMorgan is definitely one to cast an eye on. Read more.
Stock Losses Accelerate, Led by Slide in Nasdaq. The biggest U.S. tech shares continued their slump as traders looked past a better-than-forecast jobs report to focus on concerns about excessive valuations for some of this year’s best performers. The Nasdaq recently reached record highs and this did raise some eyebrows and cast some doubt over whether we were experiencing a tech bubble. Or at the very least, as to whether these stocks are overvalued. Losses for Amazon, Apple, Microsoft and Facebook were what pushed the Nasdaq 100 to a 2 week low a day after the gauge’s biggest drop since March. This drop seems to represent an attempt by traders to find appropriate valuations for tech stocks and to understand the health of the US economy (an economy that continues to feel the pressure of coronavirus). Read more.
Tradingview’s Growth Director Explains How to Run a 6-Figure Business While Trading and Working Full-Time
You can find the link to our podcast here.
This week I had the pleasure of talking with David Belle (@macrodesiac_). He’s currently the UK director of growth for Tradingview and founder of Macrodesiac, a popular newsletter providing actionable and easily digestible macro insights. He is also an independent macro trader himself.
David shares his worst and his best trades. We talk about different macro trends and how he manages his time while doing multiple jobs at once. David also explains why he takes a longer term approach to the markets and why most people should not be day trading at all. David share his wealth of experience in different markets with us and we hope you enjoy the episode!
If you would like to check out David’s newsletter you can do so here at a discounted price. We are not sponsored by Macrodesiac nor do we receive any commission from them.
The Lessons Of Behavioural Finance
My followers will know I am passionate about psychology and how our mental state interacts with and reinforces (or hinders) our success as traders. Behavioural finance is an area of academica that goes into great depths to identify the irrational behaviours of players in the financial markets. My followers may also know I am an advocate of reading; when you read a book, you are gaining a summary of the hundreds (if not thousands) of books the author read in the process of writing the book. For almost any topic in the world, you will find someone has already done all the heavy lifting and has condensed everything into what you need to know. The same is true of behavioural finance.
Among other important topics (which will certainly feature in other issues of Market Meditations), A Random Walk Down Wall Street has a great chapter on behavioural finance. I will provide a summary here of the main manifestations of irrational behaviour in finance. I hope this way you will be able to identify when you are treading down these paths, hopefully in time to take a U-turn.
Herd Behaviour. Avoid following the crowd. Herd behaviour is as prominent now as it was in the past. It was true of gold in the early 1980s and Japanese real estate and stocks in the later 1980s. It was true of Internet related stocks in the late 1990s and early 2000 and condominiums in California, Nevada and Florida in the first decade of the 2000s. Invariably, the hottest stocks or funds in one period are the worst performers in the next. And just as herding induces investors to take greater and greater risks during periods of euphoria, so the same behaviour often leads many investors to simultaneously throw in the towel when pessimism is rampant. Bottom line: don’t purely rely on the ‘wisdom’ of the crowds.
Overtrading. Behavioural finance specialists have found that investors tend to be overconfident in their judgements and invariably do too much trading for their own financial well being. Allow logic to drive your decision to undertake or not undertake a trade; do not be swayed by emotion or overconfidence.
Sell Losers, Not Winners. People are far more distressed at taking losses than they are overjoyed at realising gains. Thus, paradoxically, investors might take greater risks to avoid losses than they would to achieve equivalent gains. Investors are likely to avoid selling stocks, in order to avoid the realization of a loss and the necessity of admitting that they made a mistake. On the other hand, they are willing to discard their winners because that enables them to enjoy the success of being correct. The decision not to sell a losing stock is exactly the same as the decision to buy the stock at the current price. Do not let your pride get in the way of making the correct decision when it comes to selling losers.
These 3 are only a few of the many irrational behaviours that have found their way into investment making decisions both historically and today. It is important that we educate ourselves and do not repeat the well-known mistakes that have been documented for us in the field of behavioural finance. I recommend all traders to familiarise themselves with these studies.
