Market Meditations | April 7, 2021
There is no certainty in the markets. Today’s price action confirms it.
The potential rewards are too high to entertain certainty.
Let’s unpack the price action and the art of building a prediction model.
Read, enjoy and share with your network. Let’s all build generational wealth together.
Crypto. Bitcoin price slides 5% as second day of losses costs Ethereum $2K landmark. More on this later.
Legacy. Stocks edged higher as investors awaited the minutes of the Federal Reserve’s latest policy meeting for clues on the central bank’s views about inflation and the bond-buying program.
Not sure where to start? We have a FTX tutorial for beginners which includes:
A step by step on how to open an account
Deposit and withdraw funds
Place a buy or sell order and stop loss.
We even let you in on why this is one of our preferred platforms.
The Art of Prediction
There is no certainty in the crypto markets. The potential rewards are too high to entertain certainty. We are in the business of making predictions. Calculated predictions cap our downside and create opportunities for exponential returns.
That’s why, today, we will take a close look at the art of making predictions. Specifically, we will summarise Nate Silver’s The Signal and the Noise.
First things first, what is a signal and what is noise. The presence of media and then social media has dramatically increased the amount of information in circulation. Now that would be a good thing, if the amount of useful information was increasing at the same rate. Which it isn’t. That means traders and investors are left with the challenge of trying to distinguish between useful information (signal) and misleading information (noise).
The goal of a prediction model should be to capture as much of the signal whilst drowning out the noise. As always, we come back to how biologically unsuited we are to trade the markets. Evolutionary instincts sometimes lead us to see patterns where there are none and as such, a prediction model is even more important.
1️⃣Correlation does not imply Causation
When creating a prediction model, it is important to recognise that correlation doesn’t imply causation. If we plot two coins next to each other on a 1 month time frame, it might look like they have a perfect negative correlation. That is, when one rallies, the other sells off. This correlation is not enough evidence to suggest that one event is causing another. And so often traders and investors jump to this conclusion. It is imperative to find more evidence before drawing causality. For instance, a technical pattern ought to be matched with a fundamental observation. Or, a strong narrative, should be underpinned by what you are seeing on the charts. Do not overestimate the predictive power of variables in isolation.
2️⃣Binary to Probabilistic Models
Next, we need to move from binary models to probabilistic models. If we asked you what will happen to Ethereum prices over the next few months, a good answer is not ‘up’ or ‘down’ and it’s not ‘up 40%’ or ‘down 20%’ either. A good answer is a spectrum of outcomes with probabilities attached to them. That is the way to view reality.
Once we have established a method to view reality in this way, we need to create a pragmatic model. One that is susceptible to adapting to new information. Or robust. You might be short term hyper bitcoin bullish and have a prediction model which depicts it as such, but, if, for example, we close below the 0.382 level, we should be able to adjust our predictions to factor for this new signal.
From one day to the next, we might be looking at very different predictions. When new information presents itself, we must always update our hypothesis. Only through this process of refinement will we move further away from the noise and closer to the signal.
ALTCOIN NEWS & ANALYSIS
Blood on the Streets
Blood on the streets today as Bitcoin slides 5% during a second day of losses and Ether reverses some of its previous successes, dropping below $2,000. For the reason, a cointelegraph article cites leveraged long positions in place at previous spot price, indicating that further upside is more likely than a correction. XRP and DOT were the biggest losers in the top 10 cryptocurrencies by market capitalization.
Markets don’t go up in a straight line. New market participants that recently bought after others convinced them that ‘number go up’ learned their first valuable lesson. When there is no resistance on the way up, support on the way down is likely to be thin as well. Those of us that were here in 2017 have become immune to this kind of volatility knowing that in a bull market, days like today are healthy and necessary in order for the overall uptrend to continue.
As I’ve written before, altcoins have ‘higher beta’ meaning that they are essentially leveraged bitcoin positions. The moves are bigger on both sides of the coin. An altcoin going up 50% in a day doesn’t surprise anybody who has been in crypto long enough, but that also means that during corrections they fall back deep, often retracing 30-50% from their highs while taking out all the stop-losses that have accumulated over the last few days/weeks.
EXCHANGE NEWS & ANALYSIS
Coinbase will register almost 115 million shares of Class A common stock under the ticker symbol ‘COIN’ on April 14 for trading on the Nasdaq. Ahead of this monumental event for the crypto industry coming up in a mere 7 days, Coinbase has announced spectacular 2021 Q1 earnings. Let’s take a look at the earnings report and why it matters for traders looking to profit.
Coinbase announced that they generated $1.8B in Q1 2021. To put this in perspective, Coinbase’s revenue in ALL of 2020 was $1.3B and Q1 2020 was $190-million. There’s no ignoring the fact that this growth of 500% indicates a massive increase in attention, further bolstered by the fact that monthly active users are up more than 6 million users as opposed to 1.3 million this time last year. The CFO herself Alesia Haas states, they’ve “seen all-time high crypto prices drive elevated levels of user activity and trading volume on our platform.” So how can traders use this information to profit?
?We’ve spoken about narrative investing, the idea that coins with fresh, exciting news and fundamentals are more likely to move than ones that do not have this catalyst. We know one of the biggest narratives of 2021 that has only picked up more steam since January is that of the exchange token. BNB (Binance’s token) has rallied 835%, FTT (FTX’s token) has rallied 640%, and (VGX) has rallied 1300%. These parabolic increases are more likely to occur when there is attention and volume behind the move due to a strong catalyst, and it’s likely that Coinbase news will serve as a strong motive for the exchange token narrative to continue. Thus, you may consider putting exchange tokens on your watchlist and favor buying pullbacks or breakouts because it is more likely there are other market participants doing the same. Do NOT buy blindly because of a narrative, but rather use it as confluence with price action and technical analysis.
FTT / DOLLAR
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We’re up ~20% since our analysis last week.
The 0.236 level holding on this move further reinforces continuation and an overall bullish market structure with an upside target of $50.
The news and hype around the Coinbase IPO remains a catalyst for exchange tokens.
?$40 acts as an invalidator to our bullish bias until then, I will be buying all dips.
NFTs, Gaming and The Metaverse with Coin Artist
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Coin Artist is the CEO of Blockade Games and has been involved in crypto since 2013.
Find partners to compliment your weaknesses
You do not have to be good at everything to succeed. Identify your weaknesses, find those who are able to complement them and then add value using your own strengths.
Focus on creating long term value
Those who make money quickly, often lose it just as fast. Build something that creates value and you will be able to achieve sustainable, long term success.
To identify opportunities, get involved
Getting involved in an industry allows you to understand the space and what it might be missing. For NFTs you can do this by simply making an NFT. Coin Artist recommends checking out Opensea as a way to get started.
Be deliberate in your actions
Everytime you make a decision, ask yourself if it moves you towards your goals. Doing so allows you to avoid actions that may seem beneficial, but are not actually helping you in the long run.
Do not purchase assets based on marketing hype
Lots of projects can be heavily marketed without having a good underlying product. Do your research, understand the asset you are investing in and you can avoid large losses if we enter a bear market.
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Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision.