Bitcoin trading
It has been painful trend following Bitcoin this year compared to the previous ones. We started off with a decent run up and peaked into a correction in May. After three months of going nowhere, and with several unfortunate trades in the meantime, the correction ended in the mid-summer following a nice rebound to levels just above the May peak. Since then, we’ve had another correction.
I know I have been saying this multiple times already, but this is not a great environment for my trend following algorithms. It is also difficult to accept that the peak is behind us, as we’ve seen nowhere near the same levels of euphoric price action as during previous peaks (2013 and 2017). I fear shorting crypto currencies now may result in deep losses even though the algorithms (most of them), suggest SHORT.
To summarize my concerns:
- This sideways price action provides no clear trend
- The fluctuating trend signals provides negative alpha (better to “buy and hold” during such environments)
- I am undecided whether we have entered a bear market or not.
If we just entered a bear market, we must be very careful with our longs. It is aggravating taking losses from fluctuating trend signals, but it is important to remember that those signals do provide some risk reduction when the tide eventually changes. Many traders bought several dips during the previous bear market, and even though theoretically they are all millionaires by now, we all know they are truly not. I suspect many traders gave in somewhere during the 85 % drop.
The FED is tapering, but we still have very loose monetary policies. They are still printing, but the pace of printing is slowing. I do however not think that is what is stopping people from investing in crypto currencies just yet. I fear inflation may have reduced its influx. Consider this. If you live in Europe (like me) and have seen electricity cost go up ten-fold this month compared to December of 2020, then you truly have less money to invest in crypto currencies. Living cost is on the rise, and retail investors do have to eat and pay utility bills. I have not cared much about electricity cost previously, but this winter it truly makes a difference.
The energy markets
This leads us to my bullish energy thesis. ESG mania have driven us all mad, and reality is slapping this simple fact in our face. We can’t run our economy on solar panels and wind turbines when the wind is not blowing, and the sun is not shining. We need reliable and cheap energy, and all this ESG energy is best described as expensive and unreliable.
Nuclear energy should play a role, and fossil fuels as well. When people eventually freeze to death, I suppose solar panels isn’t so “social” after all, and our leaders may find oil and gas better then multiple cold bodies.
In Norway our government have recently decided to subsidize a part of the electricity bill, but as you all of course know, one can’t print electricity. It must be produced, and oil producers are still cheap. My only concern regarding the energy market is the still rising Omicron fear. Even though its severity isn’t even comparable to the Delta-variant, and much less the original Alpha, the narrative tends to structure around case counts, and that chart have barely begun to go up (in the US).
We may see an Omicron-scare in a week or two. Simultaneously I believe the pandemic to soon be over. “Everyone” will get Omicron (vaccinated or not), providing natural immunity and reduced fear of future strains as each iteration tend to be less severe than the previous one. This may prove foolishly optimistic, and I have no formal expertise in what I am typing at all. I do however find this turn of events probable. Pandemics always ends – eventually, and natural immunity combined with less severe strains have historically contributed massively.
If the politicians hyperventilate into a deeper lock-down, oil may drop, stocks may drop, and the FED may or may not continue its tapering. Jerome Powel is famous for his “pivots”, and I expect another one if the markets tanks.
The Gold markets
Gold have disappointed massively since the August 2020 peak. If we zoom out however, gold seem to trade in a bull market still. Gold simply does not move much upwards when sentiment embraces risk as it do today. Our gold is meant for protection, and we did not need it this year.
I believe another bull market began with the 2019 slow down and the 2020 shut-down, and that the recent struggle is simply a minor correction. If that hypothesis materialize in the technicals too, I will add back GDX (the gold miner ETF that I sold) while still keeping our gold streaming stocks. If gold truly goes up, we should not limit ourselves to 20 % in precious metals.
My plans for 2022
I fear the crypto market have changed since I created the algorithms. That means my algorithms may not produce the amount of alpha that I previously thought possible. I have started working on two enhanced trading algorithms for BTC and ETH, and I assume I will add more along the way. I will try to finish this work during the first quarter of 2022, hopefully much sooner. Until then, I will rely on the existing algorithms and trade more conservative then previously. I do not expect the bull market to last forever and I refuse to turn to dust!
I will hold some more cash until the Omicron scare materialize or is disregarded as unimportant by market participants and politicians. To reiterate. I do not fear Omicron, only its possible policy responses.
Final words
The portfolio is up roughly 43 % in 2021 with a risk mostly hovering around 4 and 5. Considering that precious metals have done nothing good for us (20 % of portfolio), and Bitcoin have traded most unfortunate for my trend following algorithms, I find the result acceptable. I am aware that Bitcoin is up 65 %, but please remember that Bitcoin holds a much higher risk then this portfolio.
If you want to learn more about the portfolio and its strategy, consider heading over to this section of my blog:
https://www.frihetsfondet.com/category/the-crypto-portfolio/
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Happy new year and the best of luck to you all.