Bitcoin and Bonds

by JDH on December 2, 2023

Two charts for you today.  First, Bitcoin:

For those who haven’t paid attention, Bitcoin is up almost 140% year-to-date and is the best-performing asset class of the year.  So, in hindsight, on New Year’s Day 2023, we all should have purchased Bitcoin.

More than half of that increase has happened since the middle of September, so the second best strategy would have been to buy on Labour Day.  But that’s all in the past; what does the future hold?

Historically, December has not been a great month for Bitcoin.  It was down 4% last December and down 19% in December 2022, but that’s not surprising because most months are down months in a bear market.  In 2020, it was up 48%, but the Decembers in 2019 and 2018 were slightly down.  So, seasonality does not favour December, but that does not have significant predictive value.

Of more interest is the up-channel, which you can see in the chart above.  As long as that channel remain intact, Bitcoin will trend upward.  That’s obvious; whether it will remain intact is an open question.

My base case is that Bitcoin will trend upward, and we will have a “blow off top” when the spot ETFs are approved in January, at which point Bitcoin will retreat.  How high will it go?  How low will it crash?

I have no idea.

If I had to guess, I think the top is around USD 50,000 (which is lower than the $69,000 all-time high).  The subsequent correction perhaps brings it back into the $30,000 range.  So, you have three choices:

  1. Avoid Bitcoin because it’s a highly speculative asset that is easily manipulated, so stay away.
  2. Wait until a crash happens so you can buy lower (unless a crash doesn’t happen or the crash does not bring it down to as low as it is today).
  3. Dollar Cost Average.  Don’t try to pick the top or bottom; buy on a regular interval at whatever the price is, and “stack sats.”

As I said, I have no idea what will happen, and I am not a heavy Bitcoin investor, so you can flip a coin for yourself and make your own decision.

Bond Yields

Which brings us to the other interesting chart: The Canadian

Quite the correction, eh?

From a high of 4.6% on October 3, the yield has collapsed to 3.5%.  That’s a stunning reversal, and it implies the following:

First, mortgage rates in Canada are dropping because they are very closely correlated with the 5-year yield.

Second, we are heading into a recession because, in a recession, the demand for money declines, and that’s reflected in the yield.

I expect yields to decline for a few more months until the Bank of Canada officially recognizes the recession and begins to lower rates, likely in March or April 2024.  For now, I have a position in bond ETFs, and I will collect the interest and hope to generate a capital gain on the continued decline in yields.

That’s the game plan.  Do your due diligence because I’m just guessing.

Thanks for reading; see you next week.

A Deep Dive on Bitcoin

by JDH on November 25, 2023

I believe Bitcoin moves in cycles (that coincidentally or not are roughly aligned with the US presidential election cycle).  The all-time high was in November 2021 at around $69,000 uSD.

By November 2022, Bitcoin was below USD 16,000,  for a peak-to-trough drop of over 75%.

Since then, Bitcoin has been up 145% and will be the best-performing asset class in 2023.

That’s history, but who cares about history?  We know Bitcoin, as a young asset class, is very volatile.  The more important question is: what’s the future?

For the last month, Bitcoin has moved up in a parallel channel.  Sometimes it breaks through the channel to the upside, sometimes to the downside, but it roughly follows that channel:

So, if you are a trader, over the last month, the correct strategy has been to place buy orders near the bottom of the channel and sell orders near the top, and you pocket a few bucks on the swings.

As long as that trend continues, it’s a simple strategy.

But uptrend channels don’t continue forever, so what is likely to happen next?

The big “macro” event we are all waiting for is the SEC approval of spot Bitcoin ETFs, which will likely happen in January (or February, or March).  That news will likely cause a spike upward in Bitcoin, followed by the inevitable correction.

Bitcoin is up 145% this year.  Everybody is front-running the news.  When the news is released, nobody will be remaining to front-run it, and that’s when the correction happens.

Buy on rumour, sell on news.

We then have the halving, which is a pre-determined date when the supply of bitcoin that can be mined is cut in half.  It happens every four years (just like the US presidential election cycle) and it will occur in May 2024.  Based on the law of supply and demand, reduced supply should increase the price.

But again, everyone knows this, so speculators are front-running the halving.

So what is one to do?

I am of the view that, long-term, Bitcoin is a deflationary asset.  Unlike fiat currency, the supply is limited, so long term, the price will increase.  It makes intuitive sense to have a portion of your portfolio in Bitcoin.  One percent, five percent, whatever your risk tolerance allows.  We have ETFs in Canada; the spot ETFs in the USA will make this easier.  That will drive investment.

But Bitcoin is very volatile.  75% drawdowns happen frequently.

So, the prudent course of action is to Dollar Cost Average.  Buy a set amount every week, or month, or whatever, and over time your average cost basis should be lower than the market price.

Also, since crashes happen frequently, having cash available is a prudent strategy (not just for Bitcoin, but for everything).  Bitcoin was under $4,000 during the pandemic crash.  If you had cash, that was, in hindsight, a great buying opportunity.

I do not have a significant investment in Bitcoin.  I’m old, and it’s too volatile.  But, having a few dollars seems like a prudent asymmetric bet.  If you have 1% of your portfolio in it, and it goes to zero, you lose 1%.  But if it doubles, which it has already done this year, the rest of your portfolio can be flat and you are up 2% on the year.  So, it’s worth monitoring.

Thanks for reading; see you next week.

TLT: Did I Get Too Cute?

November 18, 2023

I believe interest rates are heading down, so I bought TLT – iShares 20+ Year Treasury Bond ETF to profit from that. This week, TLT was up over 3%. Beautiful. But I got greedy and wanted more, so on November 14, I sold the TLT November 17 $90 calls for 66 cents.  I owned the […]

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I Have Nothing to Report

November 11, 2023

My post last week describing how to play the crash in interest rates has worked out well, but one week is not a trend, and interest rates did tick up at the end of the week, so let’s not draw any conclusions yet. We are clearly in a recession or close to it.  I won’t […]

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How to Play the Collapse in Interest Rates

November 4, 2023

Interest rates, particularly at the short end, are collapsing.  That’s not surprising.  We are in a recession.  Consumers have less money, so they buy fewer cars, houses, and everything else, so the demand for money decreases.  Less demand = lower prices, and the price of money is the interest rate.  It’s that simple. Here’s the […]

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Interest Rates Appear to Have Peaked (Maybe)

October 28, 2023

On the one-year chart, the Canada 5 Year Government Bond Yield has rolled over: From the peak on October 3, the 5-year is down 9%, falling from 4.45% to 4.066%. So does that prove that interest rates have peaked? Perhaps.  I hypothesize that we are in a recession, and in a recession, we borrow less […]

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Where are we now?

October 21, 2023

On October 7, I predicted that interest rates have peaked, as expressed by the Canadian 5-Year Bond Yield. Here’s the updated chart, that shows that yes, interest rates appear to have peaked: But, I can show you the same chart, and draw an up channel showing that the drop on Friday is merely a minor […]

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Lower for Longer?

October 14, 2023

Last week, I said that interest rates have peaked, and I showed this chart: So far, so good.  The 5-year Canada Government Bond Yield closed at 4.212%, a further drop since last week, so the prediction still holds. But what about the future?  Let’s review some history: Interest rates were low, personal savings were non-existent, […]

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Interest Rates Have Peaked

October 7, 2023

I’m calling it: interest rates have peaked.  It’s all downhill from here.  I’ll be more specific: The Canada 5 Year Government Bond Yield peaked at 4.461% on Tuesday, October 3, 2023, a 11:45 am.  Here’s the chart: That’s crazy, you say.  The trend is clearly upward.  Yes, it is, but here’s my thought process: The […]

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Have Yields Topped?

September 30, 2023

I have no idea. The Canada 5-year yield dropped from 1996 through 2020.  It got down to around zero, and has climbed since, closing Friday at 4.25%  Here’s the long term view: And here’s the short-term view: Over the last week, the yield has been flat.  It “double topped” at 4.78% on Thursday, and then […]

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