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Investors are Flocking to “Risk-Off” Assets

This week, gold opened sharply higher after Western governments announced a new round of Russian sanctions.

“Gold might be the asset of yesteryears,” wrote InvestorPlace‘s Eric Fry, “until the market looks like it does now.” Surely, gold bugs are sleeping soundly.

Meanwhile, stocks and other risky assets have gyrated wildly. Earlier today, Bitcoin (BTC-USD) would briefly nudge $45,000 before paring some gains. Altcoins from Ethereum (ETH-USD) to Solana (SOL-USD) have seen similar swings.

I’ve long warned that cryptocurrency is an inherently “risk-on” asset that rises during good times and falls during the bad. But investors looking for the best of both worlds still have a viable option that we’ll revisit today.

Terra Luna Rising

Quick… which Top 50 cryptocurrency beat out the other 49 over the past week?

…Metaverse play Decentraland (MANA-USD)? It’s only up 14%…

…What about “Ethereum-killer” Cardano (ADA-USD)? Also 14%…

…Or privacy coin Monero (XMR-USD)? Better, but still just 19%…

Instead, the top performer returned 72%. And its name is Terra Luna (LUNA-USD).

The One Countercyclical Altcoin

I’ve long called Terra Luna a “hedge against falling Bitcoin prices:”

“LUNA’s see-saw link with stablecoin TerraUSD (UST-USD) means that it’s Terra that goes up when people rush into stablecoins… [it] provides crypto portfolios with a counterweight to swinging prices.”

That’s because Terra Luna has an ingenious arbitrage link with UST. By allowing investors to swap $1 of LUNA for 1 UST at all times, the protocol creates a natural incentive to keep UST pegged to the dollar.

• UST = $1.2, users swap $1 of LUNA for 1 UST.
• UST = $0.8, users swap 1 UST for $1 worth of LUNA.

In other words, LUNA prices mimic stablecoin demand — theoretically giving it an inverse relationship with the rest of the crypto world. And in practice, Terra Luna has seen only a 6% correlation with stock market prices since January.

LUNA’s free float also gives it the potential to rise over time. Investors who started with a portfolio of 95% stocks and 5% LUNA in 2020 would have turned $10,000 into $60,800, versus $11,740 with a similar mix of stocks and gold.

Terra Luna isn’t a perfect hedge, of course. A sudden reversal of risk (i.e., if the Russian military suddenly backs down) will have investors pouring money back into risk-on assets like Ethereum (ETH-USD) and Bitcoin at the expense of stablecoin-backed crypto. And LUNA is already up 160% since I recommended a position in September.

But for those looking to stabilize their crypto portfolios (and keep the window for gains open), then LUNA is the Moonshot Investor’s top recommendation.

Is It Time to Buy Bitcoin?

Cryptocurrency volatility has sent retail investors into overdrive. Trading volume in Bitcoin is up 72% compared to a week ago, according to data aggregation site Bitcoinity. And momentum-based investors would have had some reason to buy back in.

Momentum Master V2

I’ve previously used simple moving averages (SMA) strategies to illustrate how momentum strategies can outperform buy-and-hold ones. When it comes to assets with no quantifiable fundamental value (i.e., cryptocurrencies, NFTs and other speculative assets), price action becomes the single most critical factor for investors.

Over the past several months, I’ve been developing a model to help improve on SMA strategies.

The new algorithm now includes measures of volatility to help capture investor interest. Buy/sell decisions now resemble a variable moving average (VMA) system that academics often favor.

• “Breakouts.” Increase the chance of catching major upswings.
• “False Signals.” Decrease the times where investors buy and immediately have to sell out for small losses.

Under a VMA system, low-volatility assets now need smaller gains to trigger “buy” signals. Meanwhile, high volatility widens the trading band and reduces the chance of getting forced out of positions too early.

What to Do With Bitcoin?

The new Momentum Master algorithm added Bitcoin back to its “buy” list after the cryptocurrency crossed over $42,500 yesterday. The collapse of the Russian Ruble has sent ordinary people scrambling for alternatives, suggesting more potential BTC gains to come.

The cryptocurrency remains a “hold” unless prices drop below $42,000.

Why Does Technical Analysis Work?

At my first job as a commodities trader, I was taught to favor prices ending in “0.06” or “0.01” whenever possible.

The reason: other buyers tend to set stop-loss and limit orders in “0.05” increments, especially in more specialized commodities. $38.50… $50.00… $65.75… and so on.

By pricing my orders 1-cent higher, my “$38.51” lot would get fulfilled before the “$38.5” one, giving me better control over my outstanding orders.

This runs counter to every Finance 101 textbook. To efficient market hypothesis followers, every market looks much like e-mini S&P 500 futures contracts: efficient and extraordinarily difficult to arbitrage.

But time and time again, finance professors and markets have proved that pockets of inefficiencies do exist. This week, spreads on the Russian Ruble rose 8x, essentially granting any remaining unsanctioned RUB/USD exchange a virtual license to print money (The U.S. government has since moved to toughen measures). And the unbounded rise of Terra Luna shows that even the most stoic crypto investors are still influenced by fear and uncertainty.

Though technical analysis is an imperfect tool, it’s still a powerful one when applied to the right speculative assets. Ignore it at your own loss.

P.S. Do you want to hear more about cryptocurrencies? Penny stocks? Options? Leave me a note at moonshots@investorplace.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.