Bitcoin Contagion

Cryptos have reached critical mass.  It is now so heavily owned among investors, including hedge funds, that a big correction has contagion effects on stocks.  Its not big enough yet to cause lasting effects, but it has enough influence to affect the market for a few days if there is heavy selling, like we saw from the weekend to Wednesday.  At $1.5T for total crypto market cap, with this kind of volatility, it will cause forced selling not only of bitcoin, but of the other assets these funds hold.  It was $2.5T just a couple of weeks ago.  So a 40% drawdown in 2 weeks, yes, that will cause some reverberations in the stock market. 

Most of these bitcoin investors with deep pockets (not talking about the odd lot YOLO and HODL Bitcoin maximists) are long both stocks and bitcoin, most are not hedged enough with shorts to make up for the carnage of a margin call induced liquidation type market, which we got a short preview of in the morning.  

 

 The BTCUSD chart looks awful, but this morning, 5/19, it held the psychological $30K level, which is roughly a 50% drawdown from the top.  Also, $30K is the level where the first deep pullback in January held that level.  It could very easily go right back towards that $50K level once the panic selling subsides and the dust settles.  Its reached enough critical mass where it won't go out like an ARKK or the various speculative EV/biotech/meme stocks where the supply is growing much more quickly than the supply of cryptos.  

 

I have no skin in the game, except potential opportunity cost.   I don't have much interest in getting long, except for occasional knife catching opportunities like in the morning when it plunged on forced liquidation down towards $30K.  

 

The big trade I am waiting for is a big blowoff top to get short.   I missed the latest short sell opportunity because it wasn't a clean blowoff top situation that could be easier to game.  I see potential for the last up wave in the coming fall/winter which could take it towards the $90K-$100K zone.  I am just an interested observer for now.  

 

The SPX is turning into an interesting market now.  The uptrend has reached a level where there is resistance for investors to just blindly take it higher.  It is no longer lingering at the highs and giving investors a lot of time to sell up there.  Its testing the top of the range and getting right back down.  It spent very little time around 4180 on Friday and in the overnight session yesterday.  A change of character from the previous 2 months.  Still believe that BTFD is the best strategy to use, but now you have to be better at timing exits as yesterday's big drop in the afternoon and follow through selling in overnight markets shows.

 

There is some caution out there, although I see very little fear, except in BTC.  Even in those stocks that are down 60-70% that all the momo traders piled into in January and February are mostly clinging on with their diamond hands and rock for brains.  

On the topic of diamond hands, and Reddit wallstreetbets traders, I find it funny how they want others to not sell so that they can later sell at a higher price.  They somehow think that trading and investing is a team game, and if they join a "team", they will be more successful traders.  Trading is not charity work.  You don't get a medal for losing money by holding the bag so that insiders and other traders can get out at higher prices.  

Millennials may be the dumbest generation in the past 100 years.  At least the baby boomers speculated in higher quality stuff: real estate, tech stocks, etc.  The millennials somehow think they've found the key to making money by buying things with no intrinsic value (cryptos) or massively overvalued stocks of companies that don't make any money and have almost no prospect of ever making money.  And somehow they are proud of showing that they have diamond hands in the face of big losses, when in reality, they are just holding bags in some of the worst stocks out there.  

 

Lots of negativity today, with the big drop in bitcoin, and the taper talk coming from the Fed minutes.  Monthly opex is this Friday, so that could keep the market under pressure until then from all the negative gamma exposure. 

 

Luckily was able to sell most of my long SPX position yesterday before the big swoon, still had some left over, which I just decided not to sell in the hole this morning.  I will be looking to buy dips around last week's lows, SPX 4040-4050 area.  Basic view on this market is that its range bound, with SPX range of roughly 4050 to 4200.