Market Meditations | May 28, 2021
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The markets are volatile.
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Now’s our chance to study and improve.
Ethereum: Flying Solo?
Ethereum is down vs. last 24 hours. Likely following in the footsteps of Bitcoin (the market leader). BTC buyers have failed to recapture the $40k level. This despite a series of positive news headlines and fundamental developments:
It’s believed that a Bitcoin ETF will provide easier institutional access points to the digital asset market, which could be a bonus for price and adoption. The appeal to investors is that it allows access to the bitcoin market without having to own bitcoin itself. Not to mention, ETFs are a staple of many retirement portfolios. Meaning exposure to crypto assets could increasingly become an allocation in retirement plans. For more on what ETFs are and how to get exposure to them, check out our ? Getting Exposure to Crypto ETFs letter.
Empirically speaking (based on historical evidence), these types of headlines and news events have had the potential to trigger bitcoin rallies. These packages increase the money supply and therefore leads to inflation. Inflation erodes your purchasing power and the value of your investments. Fears of inflation have usually led investors to flock to inflation hedge assets. Examples include gold and bitcoin. And yet, this news does not seem to have aided us in reclaiming the $40k level. The question then becomes, what will it take?
?Out of the ashes, a strong Ethereum narrative has arisen. The narrative is twofold.
On the one hand, Ethereum is being viewed separately to Bitcoin because whilst BTC operates on Proof of Work, ETH is transitioning to Proof of Stake. Thereby (apparently) avoiding some of the environmental concerns. Recall, Elon Musk’s environmental concerns with regards to BTC are what triggered this downtrend. If you are unfamiliar with PoW and PoS, check out our ? Intro to Staking Guide.
Further, we are seeing another strong narrative whereby ETH is distinct to BTC in that it has use cases, whereas BTC is ‘just’ a store of value. This has managed to manifest into a broader narrative to try validate a distinction between the last bull run; this time around, assets (DeFi tokens especially) have clear use cases.
But will Ethereum price action really ever be truly independent of Bitcoin? Or are their paths always interlinked? We can turn to the price action to guide us with regards to next steps ?
Overall sentiment: Broken out of a parabolic bull market and gone into something which is neutral at best.
Key Levels: Clear downtrend since we lost the key structural level at $3.5k. Support at $2.5k which is a very pivotal level. If we can hold this level, we might see a retest at the $3k level or just below. As a potential play, this idea would be invalidated below the 0.618 level.
Preferred Play: below $2k there is further downside and above $3.5k there is further upside. Therefore, in the meantime, our prefered play is short term scalps in between these levels.
In a similar vein to Ethereum, there has been mention of a ‘Cardano Summer’: predictions that the proof-of-stake blockchain platform will shock traders with a series of potential bullish developments:
The development team announced in April that smart contract functionality would arrive on ADA’s blockchain in August.
The team is also preparing to launch a converter that will enable users to swap supported Ethereum tokens (ERC-20) to special Cardano-based tokens.
There was also a report from CoinShares indicating that Cardano outpaced BTC and ETH in institutional flows for the first time last week. CoinShares notes that this may “represent investors actively choosing proof-of-stake coins based on environmental considerations”.
Let’s find out if the technicals match the fundamentals ?
Overall sentiment: Neutral trend.
Couple layers of short term support:
Losing 1.5 is not a complete market shift.
1.4 however may be a point of no return and potential short term scalp bounces.
Swing trade / momentum play: once we lose 1.4, downside target as low as 1. Upside plays above 1.8
Short term scalps: 1.4 – 1.5 could be levels to bounce off (8.2% scalp) Very brave: 1.3 – 1.26 level as well.
Proceed with Caution
When the market dips, everyone is looking for a hero. Namely, that one altcoin that will earn them back their recent losses. To get a sense for the degree of recent losses, consider these numbers from glassnode:
The chart below presents the USD value of losses realised by spent coins and shows that a new ATH of $4.53B in losses was hit on 19-May. This is higher than the previous spikes in Mar 2020 and Feb/Apr 2021 by over 300% and is the peak from a total weekly realised loss of $14.2B.
Today, for example, THETA was the one coin in the Top 20 by market capitalization that was in the green. Let’s take a look at the technicals to understand why actually, it is best not just to jump straight into a revenge trade but rather, to proceed with caution and patience?
Overall sentiment: Much more volatile structure. Be very cautious with this asset.
Key level on upside: $9 for market shift.
Lots of red flags: lower lows and lower highs. Below the $6.75 level is looking very weak.
Why Mental Accounting Doesn’t Always Add Up
Trading crypto can often yield large, unexpected returns. Let’s take Dogecoin as an example. If you invested $1,000 on April 13th on a whim, and sold in less than a month on 7th May you would have had over $9,000, a 900% increase. However, what would you have done with all this extra unexpected cash?
Rather than step back and allocate the cash as part of a wider strategy, many of us would have purchased something unnecessary or even rolled the profits into another risky investment without any thought. This is because of mental accounting.
Mental accounting is where we subjectively assign value to an amount of money based on how it was earned or how we intend to spend it. In our example $9,000 is objectively worth $9,000 but mentally we may assign a lower value to it because of the ease from which it was obtained.
This effect can have a devastating impact not just on our trading performance but throughout our financial lives. So how can you avoid falling into the trap of mental accounting?
The key here is to formulate a consistent method of allocating additional income. Whether regular income or one off lump sums, ensure you have a strategy to allocate that capital. To provide examples, for regular income, dollar cost averaging (DCA) can be effective (for more info check out our DCA guide). For lump sums we may want to allocate that capital over time also using DCA or set percentage allocations for different assets, ensuring that any large inflow gets allocated accordingly.
You can even set a percentage that you are happy to spend on luxury items or vacations. Everyone is different and will want to allocate capital according to their preferences. What is essential, is to have predefined rules that are right for you and to stick to these rules.
Psychology of Surviving Volatile Markets with Jimie
Jimie, also known as Your NLP Coach, is a certified Neuro-Linguistic Programming coach that specializes in developing trading psychology.
Humans perceive events through our 5 senses and apply certain filters such as our mood.
Because of this, information is often distorted or even deleted to ensure it aligns with our beliefs. If you have internalised that the market is in a specific state, your brain will process information in a way to suit your bias. Make an active effort to find information that conflicts with your beliefs.
The emotions you’re feeling have a large impact on your body and vice versa.
For example, when in a state of fear your eyes will dilate and your amygdala (part of your brian) will become activated. These bodily changes cause you to feel even more fear. To break this loop of fear, use your body rather than your mind. For example meditate or use breathing techniques.
Reframing our emotions can help regulate them
Switching your thinking from “I am fearful” to “I am feeling fearful” distances yourself from that emotion, helps us to generate insights into that emotion and ultimately allows it to fade away.
Your retina is part of your brain and is connected to your amygdala which plays a part in processing your fight or flight response.
A simple exercise of moving your eyes from left to right can help deactivate this part of the brain, soothing any anxiety or fear you may feel.
Learning from your mistakes is essential to development
However, first you must accept reality by allowing yourself to focus on your emotions for enough time to process them.
Always have a written trading plan
This is a tip that we often repeat simply because of how essential it really is. In times of volatility, everyone is susceptible to their emotions. Having a written plan allows you to rely on your own thoughts at a time when you were not susceptible to the emotions that arise from volatile market conditions.
Visualising large loses can help you to take profits
Taking profit in a bull market can often go against the emotions we feel at the time. Focus on a time when you have given your gains back to the market or what that might feel like and taking profits become significantly easier.
Some of the links we’ve included are affiliate, they give you rewards and discounts and earn us a commission. 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.