Maelstrom

Listen Up

When it comes to central banking, being as transparent as possible about future actions is en vogue. However, the high clergy refuses to admit, in the face of obvious data that suggests otherwise, that money printing is the cause of inflation that tears society asunder. Those who have listened and done what they were told since the Great Recession of 2008 have stacked serious fiat ducats. Those who cared about funderrrrrmentals and other such nonsense have underperformed. Stop being a dumbass and buy the fucking dip!

Billionaires Are Embracing Crypto in Case Money ‘Goes to Hell’

The article discusses how luminary CEOs and investors such as Tom Peterffy (InteractiveBrokers) and Ray Dalio (Bridgewater) own Bitcoin and other cryptos as a hedge against the demise of fiat currencies.

The Benchmark

Bitcoin is the cryptographic representation of money / energy.

  1. Tokens tied to Layer 1 protocols that are looking to become “the next Bitcoin or Ethereum.” Said coins are more scalable, can handle more transactions per second, are actually anonymous, and/or have a mining reward system that encourages decentralisation. Monero is to Bitcoin what Solana is to Ethereum.
  2. Tokens that use existing Layer 1 protocols — most frequently Bitcoin or Ethereum — as a means to accomplish some desired function. One example would be Axie Infinity, a token-based play-to-earn game that uses NFT assets residing on the Ethereum blockchain.

Timeline

What if I’m wrong? What harm visits my portfolio if the crypto bull market continues without a major drawdown?

  1. Recorded Consumer Price Index (CPI) growth numbers decline below 2%. Given the way this index is “managed” by government statisticians, it is almost impossible for that to happen. But if the CPI trend is sharply lower and the political pressure from pissed off constituents dissipates, then maybe the Fed can publicly reverse course.
  2. Some parts of the extremely complex and opaque money and US Treasury markets break. You will know it when you see it — and it is the one thing the Fed is deathly afraid of. Given that all TradFi assets are valued using prices from the US money markets, the Fed must ensure this market functions in an orderly manner at all costs. Usually, restoring order necessitates printing a fuck ton of money.
  3. Inflation ceases to be the number one issue American voters care about in the run up to the November elections.
  1. The SPX trades down 20% to 30% from its all-time high (reached in 1H 2022). Whether you are an Asian or European net exporter or a wealthy American, you likely own a gigantic amount of American equities. The US stonk market is the best performing stonk market of any developed country. It also is the largest and most liquid. There are too many rich people who pay taxes and profligately consume for the Fed to let them down if the equity markets wobble hardcore. Another interesting reflexive fact is that the traditional wisdom of maintaining a 60 / 40 equities-to-bonds portfolio mix means that if the 60% in equities declines, fund managers of trillions of dollars automatically must sell bonds to maintain the ratio. It is literally written into the mandate. Thus, if the Fed allows equity prices to fall, it will increase the borrowing costs of the federal government — because as bond prices fall, yields rise — at a time when the government is running record deficits.
  2. Some parts of the extremely complex and opaque money and US Treasury markets break.
  3. The November 2022 elections are over.

Chaos

I do not actively trade around my positions. My goal is to construct a portfolio I believe will participate in the upside while limiting the damage of any downside. As I mentioned before, I done good if my portfolio’s return profile is convex. While I spent the majority of this essay talking about the crypto side of my portfolio, I expect my long interest rates and FX options portfolio — sourced via my investment in a volatility hedge fund — to make up for any losses on the crypto side of the book. However, if I’m being honest with myself, I probably need to add more so that I warehouse enough vega to make a difference on the downbeat.

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Arthur Hayes

Arthur Hayes

Co-Founder of 100x. Trading and crypto enthusiast. Focused on helping spread financial literacy and educate investors.