Laser-Eyed Folks Be In Triage Right Now
FG Trade/E+ via Getty Images
DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
To answer this question, first, we shall declare our own stance on cryptocurrencies; you can use that to interpret the rest of this note which will help you decide whether this work is of any use to you!
In short, whilst we are no spring chickens here at Cestrian, neither are we boomers. This gives us, we think, some degree of neutrality as regards the utility and longevity of crypto as an asset class. Nobody here uses crypto as anything other than an investable, tradable security, because no one knows why they would need to actually ever spend it. In consequence, nobody here has ever owned crypto in its native form, preferring to gain exposure to it through funds (Grayscale Bitcoin Trust (OTC:GBTC), Grayscale Ethereum Trust (OTCQX:ETHE), ProShares Bitcoin Strategy ETF (BITO)) or stocks (Coinbase (COIN) at present; Marathon Digital (MARA) and Riot Blockchain (RIOT) in the past). (We can give you all kinds of high falutin reasons for this, but in the end, it’s because we just know that we will lose our cold wallets and be that guy combing through the municipal landfill to find what was meant to be his future Lambo but is now just a soggy USB stick covered in carrot mush).
To us, the asset class is something of a curio. We neither see immediate personal utility, so we aren’t true believers; nor do we think “bah humbug, this scam will end badly for those pesky kids”. Mainly though, as career tech investors we long ago learned that writing off the new-new thing is usually a mistake. So in investing generally we lean toward growth and our interest in crypto is from that angle.
Amongst the laser-eyed community, you will find a clear division drawn between “fiat currencies” and “decentralized crypto”. Fiat, they argue, is a scam, being government-controlled, deflatable at will by central bank policy, and so forth. Old folks on the other hand believe that crypto is no more than a grand pump & dump scheme which will inevitably end in disaster because the fundamental value of any particular crypto is zero.
Neither of these extreme views is quite true, of course. The value of any currency is formed only by consensus, just as is the case for the value of any particular security. What is the correct price of the SPDR S&P 500 Trust ETF (SPY)? There is no correct price! The correct price is what market participants are agreeing to pay one another at the current time. You can have an opinion about what market participants may decide to pay one another in the future, and you may invest or trade on the basis of your opinion, but nothing about this calculation is based on any kind of immutable physical reality; it’s just opinion.
Actually, the common term ‘fiat’, usually used to mean currencies not pegged to physical goods like gold, can also be dispensed with here because, what is gold worth? Again, it’s just worth what folks agree to pay one another at any particular time.
So let’s use a different lens. Let’s talk about state-backed currencies like the dollar or the euro or the yen, etc., and then about crypto.
The rise of state-backed currencies was, as the name suggests, a function of the rise of the nation-state. And the rise of the nation-state was a function of the ability of those who sought to obtain and maintain political power to be able to centralize and enforce that power through actual or threatened violence which they deemed to be the sole form of legitimate violence. If you want to read the long-form version of this theory, you could start by reading the OG, Thomas Hobbes, whose Leviathan may have been written in the seventeenth century but remains a pretty darn accurate portrayal of what the state is and why. If you’re busy, however, just watch the Clint Eastwood western, Hang ‘Em High, which makes all the same points.
State currencies are only valuable because somebody says so. In the Middle Ages, the sovereign. Today, federal governments and market participants.
Cryptocurrencies are only valuable because somebody says so. Since Satoshi never did wield any centralized power, Bitcoin’s (BTC-USD) viability comes down to its market participants.
To us, it’s that simple.
The question is, will market participants decide that crypto will be worth more, or less in the future? The whole ecosystem just got slammed as risk appetite was reduced, and the minor coins in particular have been roadkill. We suspect most of them will remain that way because they lacked the critical mass to be self-sustaining when trouble hits. Per Hobbes, life has indeed proven nasty, brutish, and short for many of them.
Our own interest is in Bitcoin and Ether (ETH-USD), the two major cryptos by market capitalization. So far they have been damaged by the selloff but no more than your average too-hot-to-handle growth stock. So let’s dig into these some.
Now for some other out-loud statements of our own prejudice. We believe that at a minimum, two cryptocurrencies will survive and probably prosper long term.
Bitcoin, because it is the closest to the gold standard amongst crypto. It is truly decentralized, doesn’t have a guru (or furu!) type leader espousing its potential to change the world or change your ability to fund your kids’ college fees, and it has been around a long time now. Institutions have started to invest in Bitcoin in reasonable number and they have most likely done so as they follow the changing demographic of their clients. If GNUs Not Unix, Bitcoin Is Not Beenz.
And Ether, because although it most certainly does have a founding guru it also actually has utility insofar as you need it for ‘gas fees’ for transactions on its blockchain… and crucially its blockchain might become a major transaction bus for the Metaverse even as the Metaverse goes mainstream. And by the way we very much believe that the Metaverse is a thing and going to be more of a thing.
Crypto in our view can only be invested in or traded on a technical basis, specifically because it lacks fundamentals. Now, in our own work, we find that trying to invest or trade on technicals is risky in the extreme when dealing with niche assets – which for us means most if not all the altcoins – because the crowd behavior that technical trading methods attempt to measure and predict doesn’t take place in a way consistent with those technical methods. Whilst all technical methods differ, generally speaking, they work best in highly liquid instruments that are freely traded by both institutions and retail alike. We like to use the Elliott Wave / Fibonacci method in our work – not because we believe it is the unique or supremely valid method but because we’ve found success with it. And the more liquid, the larger, the less related to fundamentals of the instrument, the better we find the method works. Take SPY – the S&P500 proxy ETF – for instance. Since the 2016 lows, we find it has moved with textbook clarity according to wave & Fibonacci principles – the extensions up and retracements down have (so far! let’s see how the rest of 2022 plays out) been very predictable in this system. You can open a full-page version of this chart, here. (And before you ask, yes we did call the bottom in March 2020 and yes the top in November 2021, in our subscriber service Growth Investor Pro where those articles can still be found).
SPY Chart (TradingView, Cestrian Analysis)
So let’s take a look at whether either Bitcoin or Ether can be traded using this method. Best guess is that Bitcoin suits the method better than Ether, because it is larger, better known and has more institutional involvement.
First, the past. From the 2018 lows, BTC puts in a Wave 1 up followed by a Wave 2 down that troughs a little below (our) ideal 0.786 retracement. It then puts in a monster Wave 3 up peaking at the 5.618 extension of Wave 1, which is crazy and rarely seen in our world. For comparison, the recent highs in SPY, the Invesco QQQ ETF (QQQ) and ARK Innovation ETF (ARKK) represented the 1.618, 2.618 and 3.618 extensions of their respective prior wave 1s up. Yes, that spooked us out too but it’s true. So 5.618 up is truly extended and investors would have reasons to be fearful at that point. Then comes a Wave 4 down troughing at a textbook 0.618 retracement of that Wave 3 – and then a new Wave 5 higher that peaks just above the prior Wave 3 high. So from the end of 2018 to early November 2021, we can say, yup, this method seems to work quite well.
BTC Chart (TradingView, Cestrian Analysis)
Let’s look at the ‘hard right edge’ now though. Can we use the method to forecast what happens next? In this method, at least as we use it, we like to find a Wave 1 up and a Wave 2 down that conforms to type (specifically a 0.786 retracement of the W1 up) to give us confidence in projecting the period to come. We don’t have that yet in BTC. We think that BTC is in a ‘larger degree’ Wave 2 down, like this (full page version, here)
BTC Chart II (TradingView, Cestrian Analysis)
So far that Larger Degree W2 down found support at the 0.618 retracement of the Larger Degree W1 up. That might prove to be the bottom of the wave but (1) the 0.618 level was breached once already and (2) that A, B, C corrective pattern you see in light blue – if you want a really high confidence statement to say a correction has ended, you want to see A = C, i.e., the price drop in the A-leg is the same as the price drop in the C-leg. We don’t have that yet. A=C would put BTC in the mid-12000s. Countering that you could say, well, that’s below the 0.786 retracement level (17,200) so that’s not likely – but countering that you could say, well, the last substantial W2 down in BTC – the drop into the Covid crisis – troughed below the 0.786 too. Because crypto be like that – super volatile.
Supporting that analysis would be – look at the volume profile. The first high volume node (where a whole lot of volume was transacted) doesn’t start until the 14,200 area – that will likely prove stronger support than the present price which has nothing but low volume nodes around it (indeed the whole move up from the mid-14ks to the high 60ks can be seen to be a fairly low-volume exercise, which can explain why the instrument was so easy-up as well as why so easy-down).
Our conclusion on BTC for now is: we do believe it will ride again, we aren’t sure the selling is done yet, and whilst we hold some BITO recently acquired, we will likely take short term profits should they arise rather than trying to play long-longtime from here. If the 0.618 retrace holds firm then we would change our view but our gut is, a bear rally now, then another leg down, then a true move back up.
Ether Chart (TradingView, Cestrian Analysis)
It may amuse you to see exactly the same pattern as BTC! The Wave 3 up was an even crazier extension but the big Wave One up and the big Wave Two down are now at the same place, i.e., trying to find support at that 0.618 retracement of the larger degree wave one up (that means around 1867 may prove to be of support) but with risk to the downside because the A-B-C correction hasn’t concluded (yet) at A=C. If A=C that puts ETHUSD at around 800, again below the 0.786 retracement. So for Ether we think – there can most certainly be some short term upside but speaking for staff personal accounts we will probably not be treating that as a real move up until such time as support is really proven, i.e., with multiple retests, the rest of the market also moving up, etc.
Our own view is that Bitcoin and Ether are here to stay and that they are investable. If you were minded to open new positions in both – directly or via proxies such as GBTC and ETHE – we can see the sense in starting now but we would suggest not betting the farm, instead waiting to see if this is just temporary respite from selling until a lower low forms support.
If we got a 0.786 retracement in these two cryptocurrencies, we would be much more inclined to start layering in bigger allocations in the hope of enjoying the next major ride upwards.
Cestrian Capital Research, Inc. – 23 May 2022
Join Growth Investor Pro today. Currently the second-fastest growing service on Seeking Alpha, membership brings you:
All brought to you in emailed investment notes, 24/7 members-only chat, buy and sell alerts, and twice-weekly live webinars including open-mic Q&A with senior Cestrian staff. Click HERE to learn more!
This article was written by
Regulated by the Securities & Exchange Commission.
Cestrian Capital Research, Inc
5000 Birch St, West Tower, Suite 3000, Newport Beach, CA92660
Disclosure: I/we have a beneficial long position in the shares of ETHE, BITO either through stock ownership, options, or other derivatives. Business relationship disclosure: See disclaimer text at the top of this article.
Additional disclosure: Cestrian Capital Research, Inc staff personal accounts hold long positions in, inter alia, ETHE and BITO.