• nourielroubini2

Who's coming with me? Incentives in Crypto

By Dr.Sauce 2/7/2021

"Show me the incentives and I will show you the outcome" - Charlie Munger.

Despite Warren Buffet's right hand man calling Bitcoin "rat poison", he did have other useful observations about life and general investing.

Tom Cruise, in the 1996 film "Jerry Maguire", walked into the office and pleaded with staff and clients: "Who's coming with me!".

Incentives drive the whole crypto market and I will argue in this article that we are likely to see a further bull market only when the incentives of all (or most of) the key stakeholders are aligned. The question is... who's coming with us! Show me the money!

I have been in the crypto market for some time now and the Booyah Traders group have been kind enough to give me a mouthpiece. I can be found in the Booyah Traders Telegram channel as a regular.

There is also a separate analysis channel which is more for spectators to get a daily market update from us.

The moonshots channel is for shitcoin discussion. No shills or pump and dumpers please.

So let's get down to business! The "stakeholders" in Bitcoin can be broadly listed as:

  • Long term retail HODLers.

  • Miners.

  • Institutional Investors.

  • Whales (who may also be Institutional Investors, or Miners).

  • Retail Investors.

  • Exchanges.

  • The Government, the Banks or "the establishment".

There is obviously significant overlap between many of these categories.

Long term retail HODLers want the price to moon. They are the easiest category of stakeholders to analyze as their incentive is consistent. Long term HODLers are human and despite their HODL memes are likely to sell during prolonged bear markets. I believe they have the smallest effect on price.

Miners have a long term interest in the appreciation of the price of Bitcoin but they are forced to sell to pay for their electricity costs. In a sense miners are HODLers, however they are also the main gateway of supply. They are forced, through their need to pay for electricity priced in fiat currency, to bring their coins to market. Miners can be "whales" too. Miners generally sell in waves via TWAP algorithms. These selling periods can result in large dumps in the Bitcoin price.

Institutional investors in the space have a long term interest in the price appreciation of Bitcoin. They are subject to other forces such as corporate social governance. They are also likely to be "whales".

Whales are simply large holders of Bitcoin and can be institutional investors, private individuals, miners, exchanges or other unknown entities. These investors arguably have the biggest long term interest in the price appreciation of Bitcoin. However short term, they have the ability to move the market. For this reason their incentives often do not align with the interests of retail investors.

Exchanges are getting a "clip of the ticket" and many of them receive profits in crypto, often in their own native exchange tokens. Many of the top 10 wallets are exchange cold wallets. They have a long term interest in the health of the industry and by extension, the long term appreciation of the price of Bitcoin. However many (such as Bitmex) have been accused of counter-trading their customers. Such theories are difficult to completely exclude. They permeate the whole internet, see here!

There is no one type of a retail investor. At one end of the spectrum, there are highly sophisticated retail participants with many years of investment and trading experience. On the other hand, many retail investors merely trade or gamble the mainstream media news cycle, the twitter feed of Elon Musk, or other forms of low effort short term speculation. Most of these investors buy the tops and sell the bottoms.

I believe the 2020 bull run caught many institutional investors off guard. Many of them thought Bitcoin was dead and buried after the 2017-18 crash. I think since the 2020 bull run there has been a lot of institutional interest in Bitcoin. However, institutions don't want to buy in after retail! This correction has been a campaign by large interests to buy cheaply from retail investors. The current trend of retail investors buying meme coins such as DOGE while institutions eye cheap Bitcoin appears to be working in the favour of large interests, for now.

The Chinese government's actions have also had a negative effect on Bitcoin's price. As an authoritarian country, they have nothing to gain from nurturing anti-establishment technology. It remains to be seen whether this will have a long term effect on demand. Asia forms 30% of global trade volumes. We do know that the current tightening of restrictions will severely curtail crypto related investment in China. What we do not know is whether the average retail investor in China will be deterred from purchasing and owning cryptocurrency.

I believe the 2020 bull-run also caught Western governments off guard. Stricter regulations are coming.

We can see that the current short term market dynamic is an example of misaligned incentives. Institutional investors want lower prices and more time to get their positions in. Remember they cannot buy their positions all at once, as this would move prices against them.

For the moment, the miners appear to be staying put, see miner outflows:

Retail is almost nowhere to be seen. The indicator I use to gauge retail interest is "total active addresses", which has cratered to 2018 bear market levels. However I do see an encouraging "bounce" on this indicator, see chart below:

I infer from the low active addresses and low trade volumes that the price action right now is almost completely spoofed by TWAP bots run by whales. These bots are printing patterns that traders using traditional TA might find enticing. It is likely that the bot will then counter trade the "correct" TA play. Some patterns that I've noticed:

  • TWAPS trade on 4 hr candles and above.

  • There can be a large variance in the price in the 4 hr cycle.

  • Sometimes, we see big moves in certain directions that are designed to "print" enticing patterns on the chart for 1 hour or more. The purpose is to entice retail to "pick up the ball and run with it".

  • These moves are invariably traps. Candles can reverse with 20 minutes left until candle close.

  • The bots are looking for retail liquidity to scalp.

  • The TWAP is recording the results of its liquidity tests in either direction and adjusts it's movements to maximise returns.

My view is that once the pattern appears, it is too late!

I agree with Sir Baller and Akin that we are still in re-accumulation. However this re-accumulation is not happening in the way most people think. The "bullhorn" pattern has given way to a sloping down pattern, see lines drawn on the chart below.

In my opinion this sloping down pattern does not mean that the whole market is selling and that everyone should start liquidating all their positions, although that is the way it appears. It is quite the opposite. The whales are drip feeding Bitcoin into the low volume market to paint a sloping down pattern. The intent is to trick retail investors into giving up their coins cheaply. When prices breach support levels, I expect the whales will purchase large volumes of cheap coins from panic sellers. From this strategy, they will end up net positive in BTC and in profit.

I don't think we're in for a crypto winter. There is too much at stake here for powerful interests.

For this reason I would say:

  • Trade with the whales, not against them. Attempt to buy lower.

  • Don't use stop losses around round numbers. The TWAPs are designed to run obvious stops.

  • If you must sell, wait for confirmation.

  • Otherwise, hold tight.

In my humble opinion, we will need to see some decent retail volume before we can consider that prices will increase sustainably. To do that, I believe BTC/USD needs to form a "base" over the next few months. I believe this "base" will actually be artificially "printed" on the chart by whales, when they are ready for prices to increase. It will entice retail investors back in, and hopefully we will see the interests of all stakeholders align, resulting in further price gains.

I believe the patient HODLers will see a bull market soon. Show me the money!



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