Armageddon has been postponed: Cryptocurrencies and market realities
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UNLOCK OFFERCryptocurrencies have made an amazing splash in financial markets with volatility and appreciation many factors beyond traditional trading instruments. But can these created instruments survive contact with the economics of the tangible world? Join senior analysts Valeria Bednarik, Yohay Elam, and Joseph Trevisani for a discussion of this fascinating new market.
Yohay Elam: Sure. Bitcoin has recently received boosts from Visa, PayPal, Goldman Sachs, and others. It is holding onto high ground and trading relatively steadily. Are institutional backing and less volatility a sign of maturity?
Joseph Trevisani: I think it is a sign of reality. In order for cryptos to maintain their attraction, they must intersect with the real world. All those profits need to be used. The regulated exchanges backing these instruments know this, my guess is they are quietly pushing for acceptance.
Yohay Elam: Interacting with the world means paying taxes on profits so far, I cannot see cryptos as currencies as one cannot pay taxes with them.
Joseph Trevisani: Yes... among other things, also buying Teslas, Bitcoin enters the real world and the taxman is waiting. The extraordinary is about to become mundane. Elon Musk announced in a tweet on Tuesday that Tesla will soon accept Bitcoin payments. This is the taxes side of the old adage.
Yohay Elam: There are only two certainties in life, death, and taxes. So if cryptos are here to stay, that taxman will eventually get involved.
Joseph Trevisani: I am sure the taxman is already involved.
Valeria Bednarik: Ahh taxes! At least Biden has not named these ones yesterday. But agree with you Yohay, sooner than later we will get there
Joseph Trevisani: It reminds me of the early days of retail FX trading. There were many shops offering trading platforms but it was the involvement of regulators that gave most people the confidence to spend their money. People wanted some assurance that they could withdraw their funds. Regulators provided that.
Valeria Bednarik: They took some time to do so... early days of FX were more scam than anything else.
Joseph Trevisani: Yes, exactly my point.
Yohay Elam: I remember complaints about leverage limitations. But lower leverage and fewer scams helped make it more legit.
Valeria Bednarik: Yups.
Joseph Trevisani: Yes, the model that the early shops used was the inter-bank model, where leverage is virtually unlimited, controlled by the credit lines between banks. I remember calling one bank in Auckland and using the entire global line between that bank and mine, because of the size of the deals we had done. It was all done on the word of the dealers involved. Cryptos are no different in concept than any other derivatives, though the interesting point for them is, what exactly are they based on other than scarcity and trading?
Valeria Bednarik: There is something different. Cryptos are for holders. not for short-term buyers/sellers.
Yohay Elam: It's a one-way bet in cryptos, contrary to a two-way bet in forex.
Joseph Trevisani: I wonder. It is hard to look at a bitcoin chart and not have the bubble light flash.
Yohay Elam: There seems to be an element of faith in cryptos.
Valeria Bednarik: The other difference is that if you have the time and the knowledge you can mine your own digital currencies. Although not the same in 2021 as at the early stages of crypto mining for sure.
Yohay Elam: I met this guy over the weekend who told me that some people are mounting mining rigs in Texas, taking advantage of unused flare gas, to lower electricity costs.
Valeria Bednarik: Yeah, good idea.
Joseph Trevisani: Yes, that mining model is in some ways the most interesting aspect of cryptos. Compare to WTI, which can be traded by anyone with an eligible account, the volume is theoretically unlimited. Scarcity is one of the driving features of the crypto market.
Yohay Elam: Scarcity is an appeal, especially as fears of inflation are revived. But what gives Bitcoin its value? For me, buying BTC is appealing if you assume that someone else will buy it at a higher price.
Valeria Bednarik: Scarcity is one factor, speculation it will keep rising is the second, Elon Musk is the third?
Yohay Elam: VIP power.
Joseph Trevisani: The trading input is pure speculation, which, as a root word is the same as peculation. Cryptos are trendy now, but to last, and there is serious money behind some of the exchanges, I know some of the folks involved, there needs to be that translation to the real world.
Yohay Elam: ETFs, like the ones approved in Canada, could make them more accessible to the public.
Joseph Trevisani: For a trader, what guidelines can one use for the decision? Technical analysis?
Yohay Elam: In Bitcoin, technical analysis is making more sense than it used to, as volatility subsides. In Ripple's XRP, I think TA is not so useful...
Joseph Trevisani: As a trader what guidelines would you use?
Yohay Elam: It's a "make the trend your friend" approach. If everybody is buying bitcoin, there's an opportunity there no other fundamental value.
Joseph Trevisani: It seems to be how much profit do I have?
Yohay Elam: Hard to calculate...
Joseph Trevisani: Certainly there is an aspect of the "Matrix' about the crypto market. It is an interesting market question. Can a trading instrument wholly untethered from economics last?
Valeria Bednarik: Clearly no. As said, sooner than later cryptos will get into the circuit.
Yohay Elam: "Markets can remain irrational longer than you can remain solvent".
Joseph Trevisani: One of my favorite warning adages from trading. One I have experienced myself on numerous occasions. I think there might be a place for a few 'pure' trading instruments, but not the raft that is available now.
Yohay Elam: As we speak, the S&P 500 is flirting with 4,000. It is considered the broadest gauge of US stocks. Is it close to bubble territory?
Valeria Bednarik: It is. However, that does not mean it will blow anytime soon. If Biden goes ahead with his investment plans, we may be having this discussion with the index at 5,000.
Yohay Elam: Indeed, those Dow 20K hats were hot just a few years ago, and now the DJIA is much higher look at the ISM Manufacturing PMI.
Valeria Bednarik: That's the monthly chart of the Dow, with a channel draw long, long ago, coming from Jan 2009.
Joseph Trevisani: Yes, the ISM was impressive...new orders have had the best nine-month run since the Reagan boom of the 1980s.
Valeria Bednarik: So it seems it will take a couple of years before we can discuss bubbles.
Joseph Trevisani: Equites only partially obey any idea of value. What I mean is that as now, or after the financial crisis, the market is supported by low-interest rates, but when the economy recovers the market price level begins to rise from the point where it finds itself. For instance, the Dow is about 33,000 today. For argument's sake let's say the bid from 31,000 is Fed liquidity supported, when the Fed withdraws the support, the market will not lose 2,000 points.
Valeria Bednarik: Yups, exactly.
Yohay Elam: Indeed, perhaps the best guide for traders, is to follow the Fed.
Joseph Trevisani: And interest rates. We have seen that this year with the dollar.
Yohay Elam: All hail yields.
Joseph Trevisani: Historically, and one is tempted to say, histrionically, they have the strongest correlation to currency values. Here we have the real-world impact. Return matters for investment purposes.
Yohay Elam: So, where next for cryptos and stocks? The only way is up? That's an 80s song.
Joseph Trevisani: Stocks higher, cryptos I'm not so sure. If the world returns, financially and economically speaking, to normal, does that drain some of the attraction of cryptos?
Valeria Bednarik: For stocks is up. LOL yeah, For cryptos, is not that clear. Remember that at some point, those tend to act as safe-haven. Cryptos will likely be choppier than equities in their way up.
Joseph Trevisani: Exactly, Armageddon seems to have been postponed.
Valeria Bednarik: For now.
Yohay Elam: Indeed, and enthusiasts may lose some of their interest in cryptos, as some lost interest in gold after 2011.
Joseph Trevisani: I think so. My basic question for cryptos as a trader is what is the connection to economics. Without one how do you trade?
Yohay Elam: Economics is somewhere between social and mathematical studies. Cryptos looks mathematical but is only social -- a belief system.
Joseph Trevisani: Which is where it gets interesting.
Cryptocurrencies have made an amazing splash in financial markets with volatility and appreciation many factors beyond traditional trading instruments. But can these created instruments survive contact with the economics of the tangible world? Join senior analysts Valeria Bednarik, Yohay Elam, and Joseph Trevisani for a discussion of this fascinating new market.
Yohay Elam: Sure. Bitcoin has recently received boosts from Visa, PayPal, Goldman Sachs, and others. It is holding onto high ground and trading relatively steadily. Are institutional backing and less volatility a sign of maturity?
Joseph Trevisani: I think it is a sign of reality. In order for cryptos to maintain their attraction, they must intersect with the real world. All those profits need to be used. The regulated exchanges backing these instruments know this, my guess is they are quietly pushing for acceptance.
Yohay Elam: Interacting with the world means paying taxes on profits so far, I cannot see cryptos as currencies as one cannot pay taxes with them.
Joseph Trevisani: Yes... among other things, also buying Teslas, Bitcoin enters the real world and the taxman is waiting. The extraordinary is about to become mundane. Elon Musk announced in a tweet on Tuesday that Tesla will soon accept Bitcoin payments. This is the taxes side of the old adage.
Yohay Elam: There are only two certainties in life, death, and taxes. So if cryptos are here to stay, that taxman will eventually get involved.
Joseph Trevisani: I am sure the taxman is already involved.
Valeria Bednarik: Ahh taxes! At least Biden has not named these ones yesterday. But agree with you Yohay, sooner than later we will get there
Joseph Trevisani: It reminds me of the early days of retail FX trading. There were many shops offering trading platforms but it was the involvement of regulators that gave most people the confidence to spend their money. People wanted some assurance that they could withdraw their funds. Regulators provided that.
Valeria Bednarik: They took some time to do so... early days of FX were more scam than anything else.
Joseph Trevisani: Yes, exactly my point.
Yohay Elam: I remember complaints about leverage limitations. But lower leverage and fewer scams helped make it more legit.
Valeria Bednarik: Yups.
Joseph Trevisani: Yes, the model that the early shops used was the inter-bank model, where leverage is virtually unlimited, controlled by the credit lines between banks. I remember calling one bank in Auckland and using the entire global line between that bank and mine, because of the size of the deals we had done. It was all done on the word of the dealers involved. Cryptos are no different in concept than any other derivatives, though the interesting point for them is, what exactly are they based on other than scarcity and trading?
Valeria Bednarik: There is something different. Cryptos are for holders. not for short-term buyers/sellers.
Yohay Elam: It's a one-way bet in cryptos, contrary to a two-way bet in forex.
Joseph Trevisani: I wonder. It is hard to look at a bitcoin chart and not have the bubble light flash.
Yohay Elam: There seems to be an element of faith in cryptos.
Valeria Bednarik: The other difference is that if you have the time and the knowledge you can mine your own digital currencies. Although not the same in 2021 as at the early stages of crypto mining for sure.
Yohay Elam: I met this guy over the weekend who told me that some people are mounting mining rigs in Texas, taking advantage of unused flare gas, to lower electricity costs.
Valeria Bednarik: Yeah, good idea.
Joseph Trevisani: Yes, that mining model is in some ways the most interesting aspect of cryptos. Compare to WTI, which can be traded by anyone with an eligible account, the volume is theoretically unlimited. Scarcity is one of the driving features of the crypto market.
Yohay Elam: Scarcity is an appeal, especially as fears of inflation are revived. But what gives Bitcoin its value? For me, buying BTC is appealing if you assume that someone else will buy it at a higher price.
Valeria Bednarik: Scarcity is one factor, speculation it will keep rising is the second, Elon Musk is the third?
Yohay Elam: VIP power.
Joseph Trevisani: The trading input is pure speculation, which, as a root word is the same as peculation. Cryptos are trendy now, but to last, and there is serious money behind some of the exchanges, I know some of the folks involved, there needs to be that translation to the real world.
Yohay Elam: ETFs, like the ones approved in Canada, could make them more accessible to the public.
Joseph Trevisani: For a trader, what guidelines can one use for the decision? Technical analysis?
Yohay Elam: In Bitcoin, technical analysis is making more sense than it used to, as volatility subsides. In Ripple's XRP, I think TA is not so useful...
Joseph Trevisani: As a trader what guidelines would you use?
Yohay Elam: It's a "make the trend your friend" approach. If everybody is buying bitcoin, there's an opportunity there no other fundamental value.
Joseph Trevisani: It seems to be how much profit do I have?
Yohay Elam: Hard to calculate...
Joseph Trevisani: Certainly there is an aspect of the "Matrix' about the crypto market. It is an interesting market question. Can a trading instrument wholly untethered from economics last?
Valeria Bednarik: Clearly no. As said, sooner than later cryptos will get into the circuit.
Yohay Elam: "Markets can remain irrational longer than you can remain solvent".
Joseph Trevisani: One of my favorite warning adages from trading. One I have experienced myself on numerous occasions. I think there might be a place for a few 'pure' trading instruments, but not the raft that is available now.
Yohay Elam: As we speak, the S&P 500 is flirting with 4,000. It is considered the broadest gauge of US stocks. Is it close to bubble territory?
Valeria Bednarik: It is. However, that does not mean it will blow anytime soon. If Biden goes ahead with his investment plans, we may be having this discussion with the index at 5,000.
Yohay Elam: Indeed, those Dow 20K hats were hot just a few years ago, and now the DJIA is much higher look at the ISM Manufacturing PMI.
Valeria Bednarik: That's the monthly chart of the Dow, with a channel draw long, long ago, coming from Jan 2009.
Joseph Trevisani: Yes, the ISM was impressive...new orders have had the best nine-month run since the Reagan boom of the 1980s.
Valeria Bednarik: So it seems it will take a couple of years before we can discuss bubbles.
Joseph Trevisani: Equites only partially obey any idea of value. What I mean is that as now, or after the financial crisis, the market is supported by low-interest rates, but when the economy recovers the market price level begins to rise from the point where it finds itself. For instance, the Dow is about 33,000 today. For argument's sake let's say the bid from 31,000 is Fed liquidity supported, when the Fed withdraws the support, the market will not lose 2,000 points.
Valeria Bednarik: Yups, exactly.
Yohay Elam: Indeed, perhaps the best guide for traders, is to follow the Fed.
Joseph Trevisani: And interest rates. We have seen that this year with the dollar.
Yohay Elam: All hail yields.
Joseph Trevisani: Historically, and one is tempted to say, histrionically, they have the strongest correlation to currency values. Here we have the real-world impact. Return matters for investment purposes.
Yohay Elam: So, where next for cryptos and stocks? The only way is up? That's an 80s song.
Joseph Trevisani: Stocks higher, cryptos I'm not so sure. If the world returns, financially and economically speaking, to normal, does that drain some of the attraction of cryptos?
Valeria Bednarik: For stocks is up. LOL yeah, For cryptos, is not that clear. Remember that at some point, those tend to act as safe-haven. Cryptos will likely be choppier than equities in their way up.
Joseph Trevisani: Exactly, Armageddon seems to have been postponed.
Valeria Bednarik: For now.
Yohay Elam: Indeed, and enthusiasts may lose some of their interest in cryptos, as some lost interest in gold after 2011.
Joseph Trevisani: I think so. My basic question for cryptos as a trader is what is the connection to economics. Without one how do you trade?
Yohay Elam: Economics is somewhere between social and mathematical studies. Cryptos looks mathematical but is only social -- a belief system.
Joseph Trevisani: Which is where it gets interesting.
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