Don Kaufman On CoinDesk TV: Considerable downside risk in Bitcoin

TheoTrade co-founder Don Kaufman shared his insights into the crypto market with CoinDesk TV. The US dollar has become the new volatility index that traders should pay attention to, Don said. There’s considerable downside pressure in Bitcoin. “Can you withstand a $13,000 move higher of lower?” Don asks. See the video or read the transcript below to get Don’s analysis of Bitcoin.

**transcript below***

Christine Lee:

All right, joining us now to discuss BT price and more is Don Kaufman, co-founder of trading education firm, TheoTrade. Hello there, Don. So taking a look at Bitcoin price, what do you see in the horizon, short term versus long term?

Don Kaufman:

Yeah, so one of the first things I'll bring up is the correlation coefficient that you just showed a moment ago. It's something I'm looking at continuously. Whether you want to look at the NASDAQ, whether you want to look at the S&Ps, the correlation is extraordinarily high, and that does not exactly bode very well for Bitcoin specifically in the very near term. There's a tremendous, right now, amount of risk on the table. We're going to see some really wild volatility as well, in just the very next few days.

Christine Lee:

Well, speaking of the chart of the day, so you're seeing that it's very correlated with tech stocks, with the NASDAQ. So I wonder, where would you put this floor and the ceiling on Bitcoin then?

Don Kaufman:

All right, so one of the things that I've actually used in Bitcoin quite considerably is kind of an old school tactic that we used many years ago, all the way back to the Chicago Board Options Exchange. And that happens to be that I'm applying, really, price mechanism for movement using some Bitcoin options, specifically the Bitcoin futures. So I look at the Bitcoin options in the futures, and what they're showing is for about the next 30 days, there's about a $6,600 movement ultimately being priced in, either higher or lower. Now that's what we term kind of a one standard deviation move.

Don Kaufman:

I don't want to completely geek out on everybody, don't get excited about the fact that the expectation of movement is on only $6,000 higher or lower, for instance, over the next 30 days. The overall movement that would be priced in there is what we term a probability of touching. And really, it references almost a $13,000 move, either higher or lower. So again, to kind of put this in context, if you looked at Bitcoin right now being a $36,000 product, the expected range based on option marketplace right now is that ultimately Bitcoin's going to trade upwards of $49,000 or all the way down, for instance, to $23,000. And unfortunately at this point, again, the market actually projects there's considerable downside pressure and still considerable downside risk.

Christine Lee:

So what are some of the catalysts, do you think, that could either push the markets a leg lower or market higher? What kind of headwinds and tailwinds do you see for Bitcoin?

Don Kaufman:

Number one headwind right now that we're looking at in the overall marketplace, whether any asset class, of course you're going to point out interest rates. So I think everybody's aware of exactly what the Fed said. I mean, listen, the Fed came out probably more hawkish than I would have anticipated, but they said it in the most dovish terms possible. Nevertheless, if you look at like the 10-year interest rate, it's sitting at about 1.8%. If that starts to crack any further to the upside, it is really going to turn into kind of fear and loathing inside of the crypto markets as a whole.

Don Kaufman:

The other aspect that's going on specifically today that I, again, don't think necessarily bodes very well for Bitcoin specifically, there is a huge breakout right now in the US dollar to the upside. And the dollar to me has become kind of like the new volatility index. People talked about years ago what the VIX is, it's for the S&P 500 it's the volatility index. When it comes to the crypto markets, not enough people are paying attention, though, ultimately to the US dollar, which is, in effect, it's like duck and cover, right? So a lot of people from crypto are going to move to some of the stable coins, but the dollar breaking out to the upside, I don't think, again, bodes well for many major asset classes right now.

Christine Lee:

Mm-hmm. And taking a look at, again, the correlations with tech stocks, do you think sellers are mainly macro legacy traders and that the crypto natives are keeping their coins close to the vest? To who are the sellers out there?

Don Kaufman:

You know, that's actually, it's a great question. So I am the quantitative-like elk. I'm a little bit more of an old school trader, and I'm going to tell you right now, when you see asset prices getting hit across the board, it doesn't matter what the product happens to be, they're going to hit them all. And if you look at Bitcoin specifically, the more tied in it becomes to other asset classes, and when I mention other asset classes, I'm talking about the NASDAQ and NASDAQ-related stocks, I'm talking about the S&P 500, I'm talking about volatility in the S&P 500. Unequivocally, it is tied in now, with the, of course the listing of Bitcoin futures. Now we have a Bitcoin futures ETF. The more tied in we are to those platforms, the more ultimately the crypto is going to move like any other asset class.

Christine Lee:

Interesting. So, my sense from what you've been saying is that we're in for a lot of choppy waters, perhaps a leg lower. So I wonder, are you taking this as an opportunity to buy? What's your strategy?

Don Kaufman:

I'm much more of a volatility player, and that is, I'll happen to be long, I can actually be short. I do actually trade some of the alternative products out there, like a futures contract, for instance, against Bitcoin directly. So the more volatility there is, typically the better it is specifically for me. If you were just on the long side of crypto or Bitcoin specifically, listen, right now, you got to worry about getting washed out of this marketplace. So we're going to see some really intense, short term volatility. I mean, the bottom line is, if you compare some of the crypto markets and specifically Bitcoin to the S&Ps, the S&Ps have not been washed out. And what I mean by washed out is no one's throwing the towel in. We've had a couple of days, like earlier this week, where we really kind of felt the fear, but that's one thing that we just, we have not gotten there yet. Not the crypto markets, not in the S&P.

Don Kaufman:

When I say feel the fear, you got to stare at that screen right now and you got to look at it and think to yourself, oh, the world is coming to an end. We got to flush out some of the weak hands. If you are in this, you just, you have to look at what I was talking about a moment ago. It's kind of that standard deviation of risk. You got to ask yourself at this point, can you withstand a $13,000 move higher or lower? Let's not even assign what we think price action is necessarily going to do. But can you withstand a $13,000 move inside of the next 30 days? And if the answer is no, you have ultimately what your position should be at that point in time. I mean, listen, these option markets are very definitive. There's, what, hundreds of millions of dollars at risk, ultimately, in that marketplace. It's one of the greatest ways, though, to be able to discern that risk.