The Lehman Moment?
The Lehman Brothers collapse has long been associated with the beginning of the financial crisis. There are some saying Terra is crypto's Lehman moment. What we can learn from this week's action.
“Leverage will never make a bad investment a good one. Leverage will however make a good investment a bad one.”
That quote is from Mark Yusko. If you don’t know Mark, he’s a very successful hedge fund manager and a Bitcoin advocate as well. He’s one of the original traditional finance heads who likes cryptocurrency as an investment long term. That quote came from a video that I’ll share at the end of this post.
Mark is not alone. What’s often forgotten is the fact that there are a lot of traditional finance people who get exposure to cryptocurrencies and digital assets. Yesterday, Frank Chaparro, who is works for crypto content site The Block tweeted this:
It isn’t just that LUNA specifically has gone to essentially zero (which it has):
It’s also that people use leverage to buy speculative assets on margin. I can’t stress enough how much I don’t encourage using leverage/margin for crypto. For those who don’t really know what it is, margin is debt. If a market participant has a 4 to 1 margin ratio, it means they can gamble $40,000 on a $10,000 deposit with their broker. Now let’s say somebody levers up to buy Bitcoin with the exact figures I just laid out. We’ll call this somebody “Jake.”
Jake levers up $10,000 at 4 to 1. His broker clears him to spend 40 grand. He spends the entire $40,000 on Bitcoin when Bitcoin is $40,000. So he owns one Bitcoin on paper. If Bitcoin moves up to $80,000 and Jake sells, his $40,000 wager has turned into $80,000. But remember, $30,000 of that $80,000 belongs to his broker. Jake pockets the rest (after margin fees). It’s an amazing bet and he gets paid very well for it.
But let’s say he’s wrong. Let’s say Bitcoin doesn’t move to $80,000 from $40,000, instead it pulls back to $30,000 - as it just did in real life… In that scenario, Jake has seen the $40,000 he invested in Bitcoin decrease by $10,000. That’s his entire deposit. And Jake’s losses come from his side of the ledger first. The broker closes the position and Jake is wiped out. Thanks for playing. Leverage is how you can destroy an account incredibly quickly if you guess wrong.
I can not stress enough how important it is to not use leverage in crypto. It’s one of my core principles pertaining to any investment. Not just crypto. Another core principle is diversification. Yes, I talk crypto a lot because of what I believe is serious wager asymmetry. Yes, I’m feeling it this week. But I’m still sleeping just fine because crypto is just one part of a larger portfolio. I have more in stocks. I have far more in metal. I have a similar amount in other alternative assets like investment grade wine, art, and sports memorabilia; all of which have held up much better than stonks and bonds FYI. But I digress.
One final point. None of this investment capital should be money that you can’t afford to lose. It’s not the rent money. It’s not the grocery money. It’s not the electricity bill. That’s the key. When I talk about buying Bitcoin or Zcash, I’m not doing it with money I need tomorrow. My family isn’t going to be unable to eat because I bought a sh!tcoin. Be smart. Risk what you can afford to lose. But take advantage of opportunities when you can.
ZEC Setup
Some of you have followed me into Zcash. For those of you who have, hang tough. Here’s what I’m seeing in the charts right now. First the daily chart:
ZEC is oversold. Let’s get that out of the way from the get go. Obviously oversold doesn’t mean the bottom is in. But usually when RSI gets this low on ZEC a turnaround isn’t too far away. The price is also plunging through its bottom Bollinger band every single day. Currently, it is above that line ($76) but if there’s a broad market selloff that continues into the close, ZEC isn’t going to be immune. The weekly looks a little more optimistic to be honest.
The Bollinger band on the weekly has served as a nice bottom indicator for ZEC so far this year. It hit it and quickly reversed back in January. It doesn’t mean the candle next week can’t make a lower low, but I think if it does, it’ll be a good opportunity to add. I’ve bought this selloff. If ZEC somehow manages to go under $70 I’ll add another round.
At times like this in the market, everything is indiscriminately sold. That means even assets that have no fundamental reason to be sold off get sold off anyway. If you still buy the idea that cryptocurrency has a place in the future, than privacy in value exchange is going to be essential. It’s that simple.
LUNA blew up because it was a ponzi scheme running an algorithmic stablecoin that failed. The protocol had to sell several billion in Bitcoin to try to defend its assets. Nothing has fundamentally changed for Zcash. The only difference is the price.
Final thoughts
If you, as I do, view these massive crypto collapses as opportunities to selectively buy some things, it’s not a bad time to take some chances with money that you can afford to lose. Short of that, just remind yourself what matters in life and do the things that will make you feel better.
That last one is absolutely a joke from one of the finest fintwit jokesters. As promised, here’s the video that features the Yusko quote at the beginning of this post. It was released today and it’s a great watch:
Disclosure: I’m not an investment advisor. I merely share what I do and why I do it. You shouldn’t take anything I say as investment advice and always do your own research when making investment decisions. Cryptocurrencies, tokens, STONKs, and digital trinkets could all go to zero. I have no job and I live in my wife’s basement. I’m the last person on the face of the earth who you should listen to for financial advice or life advice. I’m long BTC and ZEC.
Great group of guys.