New Trade: We're Shorting a Bitcoin ETF on Rising Rates and Fading Speculative Sentiment
Today we are shorting the Volatility 2X Bitcoin ETF.
Here are the details with charts and commentary to follow.
Short Volatility Shares 2X Bitcoin ETF (BITX)
Shorting at 40.90 or better (higher is better when shorting)
Risk point: 55.59
Position size: 12.98%
Last week Bitcoin completed a 'halving' event. This event takes place approximately every four years as determined by the original software code. It is seen as bullish because, with each halving, the rate of creation for new BTC is cut in half. The halving process will continue until no new BTC are created, leaving the total capped at 21 million tokens.
Halving events have become a rallying cry for "number go up." The idea is that scarcity is used as a kind of promotional device. This halving event was broadly a disappointment, but that is likely because BTC had already run so far and so fast in 2024.
We want to establish a Bitcoin short here for multiple reasons:
The conclusion of the halving event increases the probability of profit-taking as the upside momentum of Bitcoin stalls out, particularly for anyone who bought near the recent highs.
A significant driver for Bitcoin, and crypto upside generally in 2024, is what we have referred to as "speculative quantitative easing," or "speculative QE" for short. The idea behind speculative QE is that extreme bullish sentiment adds velocity to trading activity in speculative assets through a significant increase in transaction turnover (higher volume) and greater willingness to both buy above the market (bid prices up) and hold bullish positions (wait to sell until prices rise).
Speculative QE is born of sentiment and perception and emotional factors rather than liquidity, but it acts like a liquidity multiplier through the impact of transaction velocity — a dollar that flows through the system ten times in 24 hours can have comparable impact to $10 that flows through just once.
As with normal liquidity, though, speculative QE can peak and diminish and even go into reverse. With the latest hard hits delivered to A.I. stocks, silver, Tesla, and other speculative assets, there are signs that speculative QE is fading. That increases the odds that bullish drivers in crypto will ebb.
Speculative QE is ebbing, in part, because interest rates are creeping higher at the long end of the curve, even as the hope of Federal Reserve interest rate cuts is fading away. As of this writing the U.S. Treasury 10-year yield is above 4.5% — its highest level in months — and a few days ago mortgage rates rose above 7% for the first time in 2024.
If the 10-year yield continues to creep higher even as the U.S. economy hangs tough and the dollar strengthens, those forces combine as a significant negative for inflation-sensitive assets. If the stock market goes into a full-blown correction, or the housing market shows sign of cracking, these events would also likely be disinflationary as the onset of economic pain would outpace the Federal Reserve's willingness to act.
In sum, the macro environment is turning hostile for speculative assets and inflation plays. At the same time, Bitcoin has been treading sideways for more than a month and has registered a lower high and a lower low, as the chart shows below.
At the same time BITX, the 2X Bitcoin ETF, is showing a breakdown and retracement pattern with the makings of a messy large-scale top.
Until next time,
Justice Clark Litle Chief Research Officer, TradeSmith
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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