Derivatives, ETF's & China – Where Crypto's Next Catalyst Lies

I haven’t posted in some time here, but I figure now is as a good a time as ever. Undoubtedly, you’ve all been inundated with all the coverage of Bitcoin and crypto. We are living in exciting times, there’s no question about it!

This post will explore what my intuition is currently telling me about what the near-medium future holds for the cryptocurrency markets; I hope you read along and enjoy!

“The big money is not in the buying and selling…but in the waiting”

– Charlie Munger


Institutions are on the cusp of gaining access to derivatives. For the longest time, I considered this a bullish indicator, yet I am beginning to re-think this. My rationale offered that by institutions and banks entering the market, they would provide INSANE amounts of liquidity. This liquidity would be used to buy any weakness in the market, which would condition the market to “buy the dip”. This dip buying would set the stage for a brilliant blow off top in the crypto markets and would make small pools of people extremely wealthy, whilst most latecomers would end up getting fleeced.

So what has me thinking differently now?

For one, I did not foresee mainstream media and the everyday person latching onto the Bitcoin/alt currency narrative so rapidly; I thought it would really pick up after the New Year. I was confident that the holiday season would be the greatest catalyst for the network effect, and as a small aside, I still see Christmas being a major bullish catalyst as those who looked like fools at the Thanksgiving dinner table will be bidding Bitcoin even higher.

What has me thinking differently is the fact that derivatives will pave the way for a crypto-specific ETF.

While derivatives are necessary for institutional investors to enter the space (allows for hedging), I am beginning to use the opening of derivatives trading as more of a secular timing indicator, rather than a near-term volume and price indicator.

Once derivatives are deployed into a market, it generally shows the market is mature, the public awareness is there, and hence, it is ripe for market makers to get in as the middle man and make transaction fees on what is the hot commodity in demand.

This game of cat and mouse continues so long as the market makers can create more highly levered instruments and the markets keep buying them up. More importantly than all of this, though, is the fact that derivatives are merely a precursor to ETF’s; more on ETF’s and their importance later.

Let me be clear. I remain bullish on the space, however, I am sensing that we are in the blow off top phase, and I don’t intend to get too cute and pick up pennies in front of a steaming freight train. Meaning, I don’t plan to get too greedy and make the mistake of thinking that I can sell at the peak before everyone else.

That does not mean that you ought to not invest in the space. I still believe that as non-accredited investors, crypto offers the largest upside potential of any asset class. It is the equivalent of making early-stage, venture capital style investments, which is usually reserved for the elite, “accredited” investors. The upside is astronomical, and everyone should be putting small amounts of liquid capital into various cryptocurrencies they see as viable long term survivors.

I intend to maintain a core of holdings that I will not sell for several years, while speculating more offensively with the house's money.

Essentially, my plan is to identify which of my current holdings deserve to be considered my core assets. Each of you will have to go about this process on your own, but suffice it to say that I recommend you remove these assets from your net worth calculations. Wipe them from your memory, they do not exist. Forget that you own them -- just remember where you’ve stored them offline, and the password/keys -- and move on with your life. Check back on these core holdings in several years, you’ll be thankful you did.

As for the remainder of your non-core holdings, it is time to start organizing your exit strategy. These non-core holdings are your more speculative holdings, and as such, I recommend you let them ride the rocket ship into the melt up phase and take out incremental profits as the ship rises. Let me repeat, harvest profits from these speculative positions as they rise.

For example, sell in increments of 10-20% of your holdings at various price levels. Ideally, you’ll reach a price point so high that your last 10-20% allocation is the only thing on the chopping block should the market shift into a secular bear market. This is what I mean by not getting greedy.

The primary market indicator I am looking out for is the roll-out of exchange traded funds (ETF’s). ETF’s tend to signal classic market tops.

Why?

Because retail investors demand an easy way to invest in the latest hot trend, and what better way than an ETF? It is convenient, the underlying assets in the fund have all just skyrocketed in value, many famous investors have already made fortunes in the same sector, what could go wrong?

In other words, all of the big money has already been made by the time an ETF or index becomes available. An ETF is the purest indicator of an investment idea gone mainstream.

Here are some examples, including uranium, solar, and rare earth metals:

And who will be buying these cryptocurrency ETF’s once they come out? This guy…

When you see ETF’s start rolling out, I’d say look for the exit. At this point, the marginal pool of buyers will reach a threshold where they become the minority; meaning there will be more sellers than buyers in the market, which is not an ideal setup as an investor looking to accumulate capital.

GREAT WALL OF CHINA -- Source

For those of you who have yet to enter the space, I have some good news.
The single largest catalyst remaining in this melt up phase of the crypto market is China. You know, the world’s fastest growing economy.

I still believe that this bull market has strong legs so long as Chinese capital remains in play and ETF’s are on the horizon. The pool of marginal buyers still outnumbers the current pool of potential sellers, so therefore, the price still has room to rise.

To close, I think it’s time for everyone to consolidate their crypto portfolios and identify which assets they want to hold throughout the storm, and which of the others they are willing to let ride through the melt up storm in hopes of harvesting profits in a timely fashion.

Keep an eye on China and the development of any crypto-specific ETF’s.

Speaking about keeping an eye out, where was everyone at in my last post? My intention was to get a discussion going, but all I heard was crickets. Buehler?

DISCLAIMER : This content is for informational, educational and research purposes only. This post is not to be taken as personalized investment advice.

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