Don’s analysis: We haven’t seen this kind of risk and volatility in quite some time. Embrace it, because it’s here. It’s actually a beneficial time for shorter-term traders who employ volatility arbitrage strategies.
Transcript below:
And joining us now to discuss the crypto markets is Don Kaufman, co-founder of trading education firm, Theo Trade. All right, Don. So if you're educating your traders out there on what is happening in the crypto market, why are we falling back and what should be their next move?
| Don Kaufman: | Yeah. First and foremost, you can't necessarily look at some of this volatility per se, as being a bad thing. When you're looking at crypto markets in general, most people that are out there are long crypto. In effect, they simply buy it and hold it. Now we're a bit of a different animal here at Theo Trade, and we're much more into volatility, more specifically, even volatility arbitrage, which for the most part is trading a number of products against, for instance, Bitcoin. It's really one of the ways not only to survive volatility, but to embrace volatility in this particular marketplace. So obviously, we're looking at the $40,000 level specific to Bitcoin, possibly loving it, if even we do break lower. Again, probably not too many bearish traders per se, regarding the markets, but we would definitely be one of them. |
| Speaker 4: | So Don, I mean, we're seeing prices fall like this; we're well off our highs from November. Do you think that it's really worries about tightening from the Fed and US monetary policy, or are there other concerns really happening that have nothing to do with the macroeconomic picture? |
| Don Kaufman: | The macroeconomic picture, unquestionably, you want to take a look at the Fed of course. I mean, for the first time ever, we've got a Fed that's talking about right now, contracting their entire balance sheet and they haven't even stopped the tapering yet, which is absolutely awe-inspiring when you start to think about it. We're still juicing the entire economy, and yet they're talking about now anywhere from three to four rate hikes. They're talking about, runoff of the balance sheet, and we're not even home yet in terms of pulling the taper. So this is a fast rug pull. There's no question that the asset markets, they're terrified of it. |
| Speaker 4: | So nonetheless, I mean, as you said that they're still adding liquidity into the markets, if you will. And yet, there is this concern that there will be a tightening, that there will be an unloading of the balance sheet. So do you think that perhaps the market is maybe acting on something else other than what they're hearing, what's being said versus what's being done? What's actually the thinking behind why prices have been falling off their highs? |
| Don Kaufman: | So we can talk about, first of all, a lot of the coins right now have actually been trading like most of the other asset classes. I mean, there's actually been some great correlations even between Bitcoin and some major stocks out there, and some of the first time we've actually seen this. But there's just absolutely no doubt though, that that fear is definitely generating some of the sales side activities specifically in here. What has been termed over the last umpteen years is what we term a Fed Put. A lot of people might not necessarily be familiar with that terminology, but the Fed has had an unbelievable backstop. The backstop has now been removed. We can look at all the other economics ultimately behind this, and the bigger picture, the Fed doesn't have your back anymore. And that's something that has been true relatively since the financial crisis. |
| Speaker 5: | Yeah. That brings me to my question. I mean, all these Fed trends that you're talking about are large, longer term narratives. None of this is going to stop anytime soon. So when do you think the prices are going to stop falling? If that's really what's motivating the recent crash in prices, when will it end, right? Because all these Fed concerns aren't going away anytime soon. |
| Don Kaufman: | No. I completely agree with that; can't concur more with that. Ultimately, we're going to have to go through some fairly heavy volatility and we're going to have to shake out a lot of what you would call, the bullish traders that are what we call weak longs. Weak longs are ultimately individuals that are in there; they're looking to make a couple of bucks. Right now, if you're going to be in the marketplace, you have to be able to withstand high degrees of volatility. But on the flip side of that, shorter duration traders, which would be somebody like me, again, we're into volatility arbitrage strategies, specifically in the coin marketplace. But shorter term traders, this is going to be the beneficial time. This is the time where things are going to sell off violently, wicked bounces. I mean, in the end, you got to look at this as that volatility is coming back and we haven't seen this kind of risk and volatility in quite some time. And again, embrace it because it's here. |
| Speaker 2: | So Don, you're saying embrace the volatility. How low do you think it could go for Bitcoin? |
| Don Kaufman: | Well, all right. So Bitcoin breaking under $40,000, obviously everybody's looking at that number, very likely to happen at some point this week. I think it's a fairly rough ride into the lower $30,000 range from that point. At that point in time, we'll have to reassess, because again, specifically Bitcoin has been trading like a lot of other risk assets. Again, you look around the marketplace and Bitcoin obviously has been called the new gold. Nevertheless though, it's moving like if it were the S&P 500, which is highly unusual, and we're going to see if some of those correlations continue or if they're going to start to break apart. If they do continue, this could be a long and fairly precipitous slide. Nevertheless, in the lower $30,000 handle is where I would actually look for higher degrees of support. |
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