How to Navigate Bitcoin vs. Ethereum #48
Market Meditations | December 2, 2020
What’s the latest on bitcoin and what’s all this about ethereum 2.0? Don’t worry, we’ve got you covered. Let’s take another look at bitcoin’s price action this week, guide our readers through the Eth2 upgrade and potential implications for Ethereum’s price going forward.
Navigating Bitcoin Volatility and Ethereum Developments
The crypto market showed its true character this week. Bitcoin saw two attempts to break its all-time high followed by two scary red candles. A level that is watched by this many market participants is a recipe for increased volatility as high-leverage traders get flushed out of the market. Besides such exciting trading conditions, Ethereum 2.0 (Eth2) phase 0 successfully launched which is a major milestone for both crypto and Ethereum enthusiasts. Let’s go into some detail.
Bitcoin Volatility Picks up Near All-Time Highs
Despite two more attempts at breaking all-time highs, bitcoin has not been able to break above that almost mythical $20,000 price barrier. On several exchanges, including Coinbase and Binance, bitcoin actually broke its 2017 high but both moves were instantly rejected by the market. Does this mean that the trend isn’t strong enough and we’ll see further downside soon?
When the market is trending, the higher probability outcome is continuation instead of a change in trend. Consolidation in the middle of an uptrend is not considered bearish. It allows positions to accumulate (both long & short) which provides the necessary fuel for the next impulse move. Bigger players create volatility on both sides and use liquidations from overleveraged traders as liquidity to build their positions. The longer this consolidation lasts the stronger the follow-up move tends to be. As traders are not in the business of predicting where the market will go next, the best move is oftentimes to wait till the market breaks on either side before entering new positions again. Don’t get shaken out by the intraday volatility, that’s exactly what ‘whales’ are trying to accomplish.
Ethereum 2.0: Beacon Chain Goes Live
Other than bitcoin’s momentum pulling up the entire crypto market, there has been another major development in crypto recently. The first phase (phase 0) of Eth2 went live yesterday, a culmination of countless research efforts dating back to 2013.
Ethereum’s founder Vitalik Buterin and the entire Ethereum community congratulated researchers and celebrated on Twitter as the highly anticipated launch finally went live, after multiple delays and audits earlier this year. Technical details are beyond the scope of this article and I’ve already covered the different phases of Eth2 in a prior edition, but it’s worth taking a look at where we are now.
Yesterday, the Beacon Chain launched which is the 1st phase of ETH 2.0’s multi-stage rollout. The Beacon Chain is a new blockchain at the core of Eth2 and the moment where ETH holders can become stakers for the 1st time. It’s important to note that the current Ethereum blockchain will remain functional and migration will be optional until a much later date.
Implications on Ethereum’s price?
The reason why we started with a paragraph on bitcoin’s price action is that it’s still the dominant leader in the space. Correlations remain high across the entire crypto space and because of that, altcoins are oftentimes considered as leveraged bitcoin positions.
On a chart made by Coindesk, we see the strong correlation between bitcoin and ethereum’s price action since November 28. As Coindesk writes: “While bitcoin’s “store of value” narrative continues to be a strong signal coming from industry analysts, the “programmable money” thesis of Ethereum doesn’t seem to be making the market asset perform based on its fundamentals – yet.” As the market matures and becomes more efficient, correlations are likely to decrease slowly. For now, any serious crypto trader simply cannot ignore bitcoin as it dominates the majority of this market’s price action.
If we see a consolidation in bitcoin, given the correlation described above, we will likely see ethereum follow suit. This is a short term view. In the longer term, it is possible this relationship may change. Indeed, we can see from the graph below that the correlation is already weakening. Further, with initiatives like Eth 2.0, we may see ethereum start to perform more on its own fundamentals.
As always, we provide the key takeaways in the concluding section. First and foremost, we continue to see volatility around that key $20,000 level. Does this mean you should panic everytime you see a red candle? No. As we have described, consolidation in the middle of an uptrend is not considered bearish. We have also suggested not to lose sight of other developments in other coins, particularly given altcoins are oftentimes considered as leveraged bitcoin positions. In particular, Eth 2.0 has caught our attention. In the short term, a consolidation in bitcoin might be matched by a consolidation in ethereum. Longer term, we may begin to see ethereum perform off the back of its own fundamentals.
CEO of World’s Largest Asset Manager Says Bitcoin Can Possibly ‘Evolve’ Into Global Asset. Larry Fink, CEO of the world’s largest asset management firm Blackrock, said that bitcoin ‘has caught the attention’ of many people and that the cryptocurrency market was still relatively small compared to others. Fink also said that having a digital currency has a real impact on the U.S. dollar, making it less relevant on a global scale for international holders of dollar-based assets. BlackRock is the world’s largest asset manager with over $7.4 trillion dollars in assets under management. Read more.
XRP Led November’s Crypto Bull Run With 169% Gain. Whilst bitcoin dominated headlines, XRP quietly jumped 169% during the month to top the performance rankings among digital assets in the CoinDesk 20. The move left XRP, the payments token used in Ripple’s global payments network, up 225% in 2020, versus the older and larger bitcoin’s 165% gain. The frenzy in XRP may be driven by a looming airdrop of free “spark” tokens to anyone who holds XRP, some digital-markets analysts told CoinDesk last month. Read more.
Libra Rebrands to ‘Diem’ in Anticipation of 2021 Launch. Libra, the stablecoin that was announced by Facebook last year, is rebranding to ‘Diem’ in an effort to further distance itself from the original Facebook-led vision rolled out last year. The Libra association, composed of 27 member firms, announced the news on Tuesday as it prepares the potential 2021 launch of their single, dollar-pegged stablecoin. Last year, the project received a lot of criticism from lawmakers who demanded that all development cease until they could better understand it. The ‘Diem dollar’ will launch as soon as the new entity is licensed through the Swiss Financial Market Supervisory Authority (FINMA). Read more.
Crypto Exchange Binance Unveils New Staking Service for Eth2. In a blog post on Tuesday, cryptocurrency exchange Binance said that the staking offering would go live today at 0:00 AM (UTC). The new Eth2-focused staking service ‘is committed to providing users with one-click Locked Staking for worry-free ultra-high returns.’ The lock-up period is determined according to the development of Eth2, which may exceed two years. Users receive BETH as rewards that can be redeemed for ETH at a 1:1 ratio when Eth12 phase 1 goes live. The announcement comes a day after Coinbase also announced their support for Eth2, also including a staking service. Read more.
Positive Oil Outlook Draws in Fund Managers. Hedge funds are becoming increasingly bullish on the outlook for oil prices, anticipating that early deployment of coronavirus vaccines will allow a rapid resumption of more normal travel patterns. Ultra-loose fiscal and monetary policies are also expected to promote a progressive recovery from the massive cyclical downturn in business activity experienced in 2020, giving a big boost to petroleum consumption. Hedge funds and other money managers purchased the equivalent of 78 million barrels in the six most important petroleum futures and options contracts in the week ending Nov. 24. Read more.
#28 Qiao Wang: Building in DeFi, Algorithmic Trading and Successful Entrepreneurship.
Qiao Wang (@QwQiao) is a former quant trader, successful entrepreneur and startup advisor. Qiao was a quant trader at Tower Research before co-founding Messari, a service that provides reliable data and market intelligence for crypto investors. He currently helps decentralized finance (DeFi) startups through the startup accelerator DeFi alliance.
In this episode, we discuss Qiao’s background in quant trading and how he used his expertise to build successful businesses in crypto. We dive deep into the decentralized finance theme, ranging from his thoughts on why DeFi could be the next big thing in crypto to how he helps startups find product-market fit through the DeFi Alliance, a startup accelerator. We also expand on Qiao’s personal trading and investing strategies, what it takes to be a successful founder and why Bitcoin remains in the Schelling point for crypto as a store of value.
Things I learned:
Bitcoin is a way to store and transfer value.
Collateralizing this value allows borrowing and lending. DeFi is becoming the next big thing in crypto because it allows you to do this.
Twitter is what Linkedin was always meant to be. It provides incredible networking opportunities with professionals from all over the world.
Specialize, focus on dominating a small market before you expand.
In entrepreneurship, you want to focus on one single bet and vision.
Traders see many different probability streams in the future. As a trader, you want to make as many independent bets as possible to reduce risk while increasing your return.
DeFi can become a lot better if both institutional liquidity providers and retail come together. That was the original motivation behind the DeFi alliance, a startup accelerator for startups within the DeFi space.
Chicago is probably accountable for 30-50% of all the liquidity in the world.
Finding product market fit is oftentimes pure luck and hard to decide upon in advance. A good idea is always a necessary condition, but not sufficient. Most of the time, it takes startups a lot of iterations and feedback from users before finding PMF.
The lower the time frame, the more transaction costs you’ll pay. Algorithmic strategies have to be tested with real money by slowly scaling up to really find out if the algo is profitable or not.
Founders in DeFi often come from traditional finance backgrounds and tend to apply their experience while sometimes forget to think from first principles and be open-minded about everything in DeFi.
Crypto is a great place to be a generalist and be able to understand different areas and applications, both short-term and long-term.
Posting interesting stuff is a proven way to get an audience. Don’t be afraid to share your views on crypto and the market.
The lower the time frame, the more competition there is. To successfully trade this market, you probably have to do this full-time. Long-term investing can be done on the side and requires less time overall.
Bitcoin remains the main crypto as a store of value. It’s very hard to have two equally massive stores of value assets in the same asset class.
Critically Evaluating Your Trading Strategy
Trading is a learning process. A good trader will learn from their mistakes to avoid repeating them in the future. On the contrary, bad traders will keep making the same mistakes over and over again. What does this lead to? Such a degree of frustration that they call it quits or are forced to call it quits due to financial reasons. In this next section, we will explain how to assess your trading strategy to ensure you are constantly growing and developing as a trader.
As well as learning from your mistakes, you should try to learn from successful trades. There are two elements to successful trades: your trading strategy and your emotional response to your trading strategy. A good trader will understand what went right and seek to repeat it in the future. A bad trader will just celebrate the win, without taking a moment to understand and analyze it.
Post trade analysis should be a regular part of your trading routine. In particular, you may want to ask yourself the following questions:
How did you create your trading strategy? Was it based on fundamental analysis, technical analysis or a combination of both? You may start to notice a pattern after a while. You might find you are particularly savvy when it comes to fundamentals or you might find a technical indicator that you have a seemingly strong grasp of. Needless to say, you should play to your strengths and seek to specialise in it.
How well did your trade plan work for you? Was the entry position sufficient to maximise risk and reward? Or did you find it was too small or too large? Perhaps you could have entered at a better R:R. Did you enter your position at the right price level or did you rush in? Were your take profit and stop loss levels appropriate? These are the kind of questions that will allow you to get a sense for your position size, entry, stop loss and take profit levels going forward.
How well did you manage your trade after it was open? Were you able to monitor your trade while it was open? This will indicate how much time and dedication you can devote to your trading and whether it is appropriate. For instance, if you are scalping, it is likely you will need to be at the screen much longer than if you perhaps take a more long term view. For those with a full time job, some trading strategies will be less suitable. Also ask yourself whether you adjusted your stop loss levels. Did you modify your trading strategy half way? These are among some of the most important questions as they will help you understand your emotions and how disciplined you are as a trader.
This is a personal exercise. There is no requirement to go posting this on twitter and telling your friends – unless you want to of course. However, by assessing your trading strategy like this you will develop mastery of your strengths, weaknesses and emotions. Keep at it, these will be small wins everyday that result in huge long term gains.
Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.