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Bitcoin Becomes a “Regular” Investment… What’s Next?
Last Friday, Luke Lango and Charlie Shrem made an observation in the Crypto Investor Network that I’ve previously noted in this newsletter:
“Cryptos are increasingly being treated as risk-on, rate-sensitive assets,” they said. “The ‘inflation hedge’ argument for Bitcoin and cryptos has fallen apart as cryptos have struggled in this risky environment.”
In a sense, Luke and Charlie were right to wait to publish their assessment. Bitcoin’s (BTC-USD) historic 25% correlation with stocks meant little as long as there was also outsized growth in the equation. If stocks go up by 10% while BTC rises 1,000%, anyone obsessed with their positive correlation is completely missing the big picture.
But Bitcoin’s direction isn’t the only thing mimicking stocks and junk bonds anymore. Its returns are also moving in the same direction.
BTC investors may still do well over the long run. But those looking for Moonshot returns will know to look elsewhere for outsize gains.
The Cheap Cryptocurrencies Rising on Bitcoin’s Recovery
As Bitcoin’s daily price swings moderate, high-frequency traders have increasingly turned to margin buying to boost returns. According to CryptoQuant, the cryptocurrency’s leverage ratio reached 0.224 in January, more than twice the level from the year before.
That’s increasingly turned Bitcoin into a zero-sum game. Retail investors using 1 Bitcoin to buy 100 BTC contracts on exchanges like BitMEX have a payout profile that looks more like a game of black-or-red roulette.
Meanwhile, longer-term investors like Charlie and Luke are pivoting to high-quality altcoins. And two recent underperformers in particular look poised to break through.
Tactical Trade: Polygon (MATIC)
The Crypto Investor Network has been carefully following protocol updates for Polygon (MATIC-USD), a Level-2 scaling solution based on the Ethereum (ETH-USD) blockchain:
“Polygon and Filecoin expanded their partnership this past week, announcing a collaboration wherein the two will provide support for non-fungible tokens (NFTs). The move is widely considered a more concerted effort from Polygon to increase its metaverse exposure. We view it as bullish, and are big fans of Polygon at current levels.”
Regular readers will know I’m a fan of Polygon — as a tactical trade. Though Ethereum’s “2.0” version will deprecate MATIC’s scaling solution, the transition will take more time than most realize.
Polygon’s relatively tight trading band has also given momentum traders an edge; its broad appeal among professional investors means the dips have typically been followed by strong recoveries.
But timing these moves has become increasingly difficult because of January’s price spike. I suspect many MATIC investors have high entry prices and will sell the moment prices recover (Even professional investors hate turning paper losses into real ones).
That makes Momentum Master’s “$2.05” price target an important psychological hurdle to watch. Investors should wait for this important milestone before jumping back in.
Long Term Buy: Filecoin (FIL)
Meanwhile, Filecoin (FIL-USD) offers better longer-term prospects for buy-and-hold investors:
“Filecoin is a decentralized data storage system with the mission to ‘store humanity’s most important information.’ And since its founding in 2017, it’s done just that.
“Today, Filecoin has over 800,000 storage deals and a 600-petabyte capacity. It’s also cheap, particularly for ‘cold’ data that doesn’t need constant retrieval. Users can store data for under $0.30 per terabyte per year, or 0.01% of the cost of Amazon S3, if you exclude read/write costs.”
In other words, this coin is a Web3 play. By scattering partial copies of its blockchain across thousands of servers, Filecoin has created a way to securely store information without creating unnecessary copies of data.
Filecoin’s low price has also created a strong buying opportunity. Prices have decreased from almost $200 in April of last year to $20 today.
The coin’s recent stagnation also means that prices need only reach $21 to signal a buy, according to Momentum Master’s Variable Moving Average (VMA) indicator. Investors waiting for a breakout moment should watch the coin carefully.
Tron Continues to Flounder
Though investors are rightly moving towards second-tier cryptocurrencies, not every cryptocoin will turn to gold. Loopring (LRC-USD)… BitTorrent (BTT-USD)… the list of cryptos I’ve avoided goes on and on.
But one candidate awkwardly stands out: Tron (TRON-USD).
In December, controversial Tron founder Justin Sun announced he was leaving the crypto’s foundation. Prices would immediately drop 7%.
It wasn’t the first time Mr. Sun had made waves. In 2020, he called Tron a “Sh*tcoin” during an interview. Several months later, The Verge would label him “hype man of the century” after allegations surfaced that he had plagiarized much of his cryptocurrency’s white paper.
“The company’s internal business strategy was … [to] copy Ethereum,” noted The Verge, and “get the pump on the coin.”
But it turns out that Mr. Sun leaving was even worse for Tron. Since his departure, updates to the Tron protocol have ground to a halt. Updates to the open-source code are down two-thirds compared to six months ago.
Tron’s community may eventually pull the cryptocurrency out of its slump. But lacking star power, TRX investors are better off seeking opportunities elsewhere.
Bitcoin Needs Regulation
In the aftermath of the financial crisis, traditional banks found themselves squeezed by new capital requirements. Some of these regulations would prove so onerous that firms such as Wells Fargo (NYSE:WFC) would withdraw from relatively “safe” banking, from mortgage origination to personal loans.
In their place, an entire host of non-banks have proliferated. Fintech lenders now make up nearly half of all personal loans, according to data from the TransUnion consumer credit database.
These new startups have created their own versions of financial risk. In January 2021, stock trading firm Robinhood (NASDAQ:HOOD) was forced to restrict trading in popular meme stocks after failing to meet margin requirements. And high-profile thefts have rocked crypto exchanges and their unknowing investors.
The rise of crypto as a real-world medium of exchange has created yet another headache for banking regulators. Last week, trading volume of the ruble spiked on Binance as ordinary Russians moved to evade sanctions and capital controls.
Some will cherish the moves. To them, Bitcoin and other cryptocurrencies represent the libertarian freedom to live life as you please.
But investors will soon begin to find that these freedoms also come with real costs. Don’t be surprised if Western governments begin tracking Bitcoin ownership with greater care. And don’t be shocked if they succeed.
P.S. Do you want to hear more about cryptocurrencies? Penny stocks? Options? Leave me a note at email@example.com or connect with me on LinkedIn and let me know what you’d like to see.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.