The past week was a brought in more waves of selling across the entire cryptocurrency market, which lost 50% of its value. I would also point out, that on my 18+ years of Wall Street, this asset class has the highest volatility I have ever seen. The highs are seemingly endless, and the lows seem like they are never ending. It would appear that we are in the lows portion of the trade now.
That said with all that has gone on globally, across all asset classes, I will share knowledge and observations on markets I follow, and not just cryptocurrency markets.
Please take a look at some of the prior market updates, as I have mentioned many times that December 17, 2017 was one of the watershed events in the cryptocurrency world. Many will look and see that was the day Bitcoin, BTC, made an all time high of $20,000. That is true, look further, it was 6:00, Eastern Standard time December 17th was the day the CME Group launched Bitcoin Futures. This allowed any entity who had to trade BTC, the leverage was initially 2.5x, which it tiny in relation to many other futures contracts, but now all one had to do is have a futures account, (many can be started with as little as $10,000,) to trade Bitcoin with a reasonable liquid bid ask. One no longer needed to go to Coinbase, or any other cash for crypto entry point, and one did not need to pick an exchange to trade or deposit their currency either.
Fast forward one week, and on Christmas Eve, December 24, 2017, BTC had dropped nearly 40% to $12,000. Now today, February 5, 2018, the Cryptocurrency leader is $6,200.
Markets are global, especially cryptocurrency, many of us, especially in the USA trade in markets that are foreign, and the market participants range from quants with 10’s of billions of US Dollars, to a first-time market participant who has $10. After this week, and especially the past 48 hours in the States, it has become more apparent that the cryptocurrency market is becoming a more widely followed entity than ever before.
I will try not to get into all types of Wall St. jargon, but some of the largest players in these markets are funds, and trading shops with huge bankrolls. The great majority of whom tend to follow trends.
With the digital currency market being one of the smaller asset classes which is followed, small amounts of capital can make huge movements. At firms and funds in Capital Markets and trading, the risk manager is looking at a “global book” with 1000’s of different assets under there watch. The developed currency market, fixed income and equities account for the largest majority of that.
I come from a derivatives-based background, so futures and options are second nature to me, but the most important parameter in any asset class especially the three I just mentioned is volatility. The CBOE’s VIX is the most watched and widely followed. I won’t bore you with detail, but its basically a measure of various short dated option volatilities combined into a tradeable number.
When the VIX is low, (which it has been for the better part of two years, with a few one-off events,) many people and firms just decide to sell options. Think of options as Insurance for your equity portfolio. Well, as equities make all time high after all time high, more people buy equities more etf’s come to market, and more small equity brokerage houses start letting small accounts sell puts.
Note the huge rise in US Equity Volatility based ETF’s since 2008. Also look at the number of 2x and 3x US Equity, Currency, and Volatility based ETF’s.
You have had years of length in US Equities and years of short VOL trades that just got wiped out in the past 48 hours.
How does this pertain to Bitcoin and the cryptocurrency market ? Just look to December 17, 2017. It was this day that futures market traders, funds, firms could readily access this as part of their portfolio. Now BTC is on the radar of risk managers who prior to that may have not followed the asset.
Fast forward to the past week, US Equities have a major sell off, the VIX more than doubles in 48 hours. He starts giving the tap on the shoulder to managers and traders and hits the liquidate everything button, well that’s the process that we are in now. You will read many stories of firms blowing out, etf’s losing 99% of their value.
Since December 17, 2017, interest rates globally had been going straight up. US Equities had been grinding to all time highs, The US Dollar had been doing straight down, while the Chinese yuan had been going straight up. Oh, and the VIX had been flirting in the 9 handle a few times a week. The 9 handle was at or near decade lows depending on which measure you look at.
Please note, I am simply presenting opinion and observations from my decades of experience. Markets are global. Markets are intertwined far more than each of us can imagine. With the current sell off in crypto currencies, a lot of wealth has been destroyed and many coins with positive stories and tremendously bright outlooks have been sold, as many of the speculators who bought all-time highs a few weeks ago, panic, dump everything only to create a major bottom. Bottoms need extremely high volume, a “spike low,” and then a close in the green.
In closing, look back at the total market cap of crypto’s in November of 2017. It hit an all time high at nearly 300 billion US Dollars. Here we just two months later and it is in the same place. If you had no contact with the outside world since late November and tuned in today and all you could see was the price of the total market cap and it was the same as when you last looked just two months ago, that would seem like a reasonable probability to me.
As the crypto markets mature, they will gain notoriety, and become even more widely followed. My personal take is that the wealth creation in BTC and the rest of the digital assets has been nothing short of amazing. Always remember that volatility works both ways, if one is looking to turn $100 into $100,000 buying something they heard in a chat box on TV, there is a very high likelihood it will not happen. One should always have and entry and an exit on every position. One should ask why they have invested in a certain asset. How much do you know about that asset, about the other market participants, the drivers, the correlations, etc. Finally ask yourself this. If you had no positions at all, would you re buy or sell your exact allocations at today’s current prices.
As always, I wish you all the best in each of your investments, whether they be Digital Currencies, or anything else.
I have attached far more charts than normal, with everything ranging from BTC to the Yuan, to the VIX. Please take a look and the charts may help you see some of the links between markets you may have not looked at, and you will see how crowded many of these trades have been.
The One 888