There’s been no great change in the market over the past two months with Bitcoin continuing in the expected corrective mode. That said, also no resting on my laurels on my part, or doing some victory lap on the consolidation that’s been envisaged for some time now. Rather, I’ll keep it real, and look to answer [if answerable] some of the perceived difficulties and weaknesses that might lie at the heart of my over-all outlook on Crypto.
Anyone who has followed my Crypto commentary for any length of time would be familiar with an objection that is sometimes raised against it. On the one hand, I’m looking for a relatively prolonged BTC correction; and on the other I’m looking for the alts to eventually moon. On the face of it, the reader is confronted with a contradiction. And yet, as I hope to illustrate in this article, this is not necessarily so due to the following two points -
It is the aim of the fully hedged trader/ investor to deliberately and strategically embrace a theoretical contradiction, at the practical level, given the uncertainty principle.
That said, this contradiction may be more apparent than real… when a consideration of price dynamics over a period of time is taken into account.
The first point is easier to illustrate, for it only involves the explanation of some concepts and a practical strategy, and so I’ll start with this. I’ll then continue with the second point, a more difficult task as it involves speculation about the future price development of both BTC and alts, and how apparently disparate price predictions may in the end be comparable. As the illustration depicts, pragmatic trading/ investment is more akin to a dynamic balancing act in the real world, with many moving parts, as opposed to being grounded on some static abstraction, where everything is to be solidly founded on a supposed immovable certainty. We may be desirous or such, but it all too often leads to bad faith and self-deception.
Point 1: No Contradiction for Practical Hedging is Built on Contradiction
I’m often asked by followers on Crypto Twitter how it is I can post ‘bullish’ charts on alt coins [such as XVG and ICX] when I’m simultaneously posting ‘bearish’ charts on Bitcoin. There seems a conundrum here, how can alt coins pump if Bitcoin dumps? First of, my response to the binary/ extreme language used here. As I described in a previous article, a sober view of the market requires a ‘de-escalation’ of this kind of binary language. Though it might be suitable for those that see themselves in a particular camp looking to bolster market sentiment [‘the perma-bull’], it is entirely inappropriate for the pragmatic trader/ investor. The pragmatist, when looking at price and the chart, will put to one side all fundamentalisms, enthusiasms, not to mention marketing. Pragmatists, devoid of certainties, and fully hedged in an uncertain world, do not identify themselves as either bulls or bears. Rather, they will be bullish at times and bearish at times depending on price development. Indeed, they may be both at the same time depending on the particular time-frame they are looking at; for example, bearish on the shorter-term, and bullish on the longer-term. The outlook is always relative to the context [to be further illustrated in Point 2]. No room for time-less binary abstractions here.
When the above point is taken into consideration, you can see that some of the critical objections directed towards the seemingly contradictory chart observations of mine derive from the projection of a mindset onto those chart observations. The eagle-eyed critic is quick to swoop down on a perceived discrepancy…. and yet due in main to having first inhabited too rarefied an atmosphere, that sphere of abstraction by which everything’s imagined to be disclosed, made clear and distinct on a two-dimensional plain far below us. Yet in the world of reality, this picture is delusional [the God’s eye view]. The reality is that all of us, traders, investors, chartists and critics alike are earthbound, and though we might aspire to the heights, we find ourselves, in our metaphor, only in the foothills of a rising range, where the next peak often serves to hide the following one.
Further along these lines, the critic is often lulled into the logical law of the excluded middle, the either/ or, where one must either be a bull or a bear. Logic is all very fine, but markets belong to the real world of experience, not to the world of abstractions, and in markets the savvy trader/ investor does not put all his chips on one color. That would be the reckless action of either a gambler or a fundamentalist - the gambler relying on blind luck, the fundamentalist relying on certain doctrinal truths. Eschewing both these extremes of impoverished blind chance and the imagined luxury of dogmatic certainty, rational investors chart a middle path, a path that entail bot confidence and uncertainty. And given the uncertainty, the most rational policy will be to hedge.
At the heart of hedging is a contrarian frame of mind [something I’ve delved into in more detail here]. The contrarian here is not so much just diametrically opposed to the market sentiment, however perceived, but contrarian to themselves - the hedge involves something like a ‘negative capability’, where though one might hold a major thesis [toward Bitcoin] for example, they could hold an anti-thesis [or more strictly, a contrary one] at the same time also, one that hedges against the main outlook. And of course, the two need not absolutely negate each-other. Much progress has been made in both the worlds of thought and practice by synthesis, where a combination of two disparate elements leads to further growth and development. So much for the theory, now for how this works out strategically in practice and as relevant to apparently contradictory charts.
The reader should by now of course be prepared to not be surprised by a perceived contradiction. This is because contra-diction lies at the very heart of hedging. In the practical world of the investor, where there is no certainty [most often an illusion], where no safe circle has been drawn around everything and all risk banished [supposedly], everything rises from the uncertainty principle. In this scheme, one entertains contingency and complexity as opposed to just absolute simplicity. One is now beyond the domestic and private walls of what they know, and out in the public marketplace, and in a sphere that should be considered akin to an arena of warfare, where combatants risk what they have for more. Given the uncertainty here, a strategy is called for, not some set of comforting truths with which you could cocoon yourself. And so to move onto the general strategy, and to the various tactics employed toward Bitcoin on the one hand, and the alts coins on the other.
The strategy [or System] has been outlined for quite some time, and is here for the reader that is as yet unfamiliar with it. In brief, a core of BTC is held that serves as ‘ballast’ to one’s more speculative alt trades. As the nearest thing we have to certainty is volatility [as opposed to Bitcoin to the moon], the volatility of the alt coins is to be traded against USD, where the accumulation of USD on those trades serve as your hedge against long Crypto. In this scenario, you’re naturally going to be predisposed to look for alt volatility to both sides, buying low and selling high, and on various time-frames. Given the near certainty of ongoing volatility, part of this thesis is that alts will ‘leverage’ the volatility of Bitcoin, and so make for the better trade…. while Bitcoin may make for the better hold/ investment in the aggregate. If however, with the hedge in mind, the whole Crypto market fails for one reason or another, you’d have offset possible losses in long Crypto in the counter-balancing trade of the more volatile alts for USD. You’d have gone some way toward covering all the bases as far as is possible…. with the possibility also left open to hitting a home run.
Finally on this first point [and perhaps most significantly], in hedging you want to compartmentalize or isolate your various assets unless they all go down with the same ship. Just as technical analysis on the chart of BTC brackets out all other extraneous factors [TA as a discipline], so too should the alt charts bracket out all other factors including one’s present interpretation of the Bitcoin chart. This is what I call alt autonomy. The hedging principle here is one of dividing your forces [just as you would in warfare]. Again, consider a large ocean-going liner with a hull sub-divided into bulkheads - if one is breached, the whole ship will not go down. And of course, the traders of old, who made sure to spread their risk in backing various ships lest their fortune be lost with the sinking of just one. This is the world of practical trading/ investing that’s a million miles away from those with an overly doctrinaire or theoretical outlook.
Of course, the reader, if they have lasted this long, might think that this could all be a convoluted subterfuge, a mass of verbiage to hide the fact that the circle can not be squared, that the alt charts are way too optimistic given BTC in a corrective mode. And so in the next section, I’ll look to outline some scenario in which the alt charts and the BTC chart could line up. Keep in mind that all charts are highly speculative, and if I were to describe how the alts and Bitcoin charts will in fact play out, I will have achieved something like a trifecta of trifectas, i.e.; something highly unlikely though still a possibility. Also keep in mind, that the strategy employed so far has enabled the taking of profit on alt volatility [into real assets], the establishment at lower levels of many an alt position, and all while maintaining a core position in Bitcoin. A policy or strategy of skimming off the frothy profit.
Point 2: Consideration of Possible Price Dynamics
Due to the points made above about hedging and strategy, alt coins are largely charted autonomously. Where I tend to have a more positive disposition to the alt charts, or rather to their upward volatility that may leverage Bitcoin’s, my disposition toward the Bitcoin chart tends to be more conservative. Of course, this is in keeping with my views outlined above about negative [or contrary] capability, all part of the practicality of a hedging strategy. Where on the main page I might envisage the idea of the well-known head and shoulders pattern, which could take Bitcoin prices to a currently unimaginable [as far as sentiment goes] 25K, I also allow for a more bullish picture of an ascending triangle, which might only see price as low as 35K. Common to both views is a continued correction though of differing degrees. Due to unit bias [otherwise known as money illusion], we can think of the 15K decline in price from 50K to 35K as a massive amount and yet it is only 30% as the chart below depicts. And 30% volatility is not a lot in the world of Crypto, especially when you consider the recent price rise of 1000%. In real and relative terms, a 30% nominal decline would amount only to a 25% retracement of the recent run-up as is shown on the fib measurement. If price corrected such on the BTC chart, and the percentage of that correction was somewhat leveraged on the alt charts, the alt charts [our example here ICX] could feasibly absorb such a correction as the following charts illustrate.
Alt coins, such as our example of ICX here, have shown resiliency and elasticity in price action recently… even as downward pressure is exerted on price with BTC caught in a sideward range. The example chart shows a 40% correction in price that would not damage the technicals of a longer term bull market [as depicted in the chart below]. Indeed, a further re-test of the lower 0.61 level on the fib would only be the further playing out of the fractal as already mapped out. In the more macro sense, you would still see a series of higher lows building towards the formation of that ascending triangle that so often portends much higher prices [and as charted for quite some time now].
So not so much of a problem here. The possible problem, and the real stress-test [read risk management] for our alt charts, is a possible head and shoulders playing out on the Bitcoin charts that could see prices break down to the 25K area. This would add up to a 50% nominal decline from current levels [and just over a 40% real decline of the recent move up]. And so to look into the so-called abyss.
The best method to compare what such a move in Bitcoin would do to ICX is simply to compare them on the chart. Also crucial to this comparison is to take account for a time dynamic that may well serve to dampen the effect of a 25K price for ICX - nothing moves in a straight line.
Keep in mind that we have here something close to a ‘worst case scenario’ for Crypto here [the stress-test]. I ‘interrogate’ worst case as it would also only be in effect a severe correction in an ongoing [secular] bull market. With the charts placed on the same logarithmic/ geometric scale, we can see the move up in our alt of choice [ICX] is double that of what we saw in BTC. Notice how the extra volatility of ICX works to both sides [and which is why we trade the alts]. A correction of BTC to an eventual 25K would entail a 38% correction in real/ logarithmic/ geometric terms. If we grant that ICX will also leverage BTC on the downside overall [given that price is also more elastic/ resilient at times], then this would give an eventual target of 0.61 for ICX.
As we can see on the ICX chart below that would give a double local low. It would also be hitting a significant area of horizontal support, while also counter-balancing to the downside the out-performance of recent price as relative to the long term curve/ men of price. Also of interest is the time fib measurement - the length of time the correction took would have equaled the move up. Sentiment-wise if something like this played out it would no doubt be traumatic [not to mention BTC to 25K] to those that have not considered it as a possibility.
The reader may feel, after wading through the qualifications, scenarios and possibilities as posed in this article, a little bewildered. But Dave, they might say, all we desire to know is what price will do. My response to which, as always, is to interrogate such desire, for such desire [for certainty] near always gets us into trouble. Instead of staying alert to various outcomes in an undetermined future, we fall prey to imagined certainties. Kicking the habit of that frame of mind also enables you to see my own scenarios as depicted here also only possibilities [this is analysis and risk management not clairvoyance]. And being aware of possibilities is what enables you to develop a strategy… just as a general would when confronted by an uncertain theater of war. A strategy is always a messy affair dealing with a messy world, and is not to be evaluated on the perfection of its abstract principles but on its over-all performance, on its outcome. In employing a strategic outlook on the market, you’ll be prepared for various eventualities. And though you might initially lose a few forces at your disposal, you’ll be much better equipped to win in the long run, where winning would take the form of a substantial increase of your material means in the real world.
For more on investing and trading the alt coins, feel free to enquire via a DM to my Twitter account - @davthewave