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Happy Monday from Cumberland SG! Last Thursday, I attended a drinks events hosted by our friends at Coinbase, something we haven’t been able to do much in Singapore for the past few years. Over the span of just a few hours, three separate people came up to me and made the same comment: “Your commentary today felt pretty bearish!” I read it back the next day, and it was true. I had started the write-up trying to pose a balanced argument, and it came out Doom-and-Gloom. The observation bothered me. I have always sought to find contrarian stances, and I had let the mood of the market affect my forward outlook. Well, as my colleague Jonah wrote last week: “We’re getting to the point where it’s embarrassing to be a bull in polite company.” Well: let’s be impolite, let’s be contrarian.

I studied at The University of Chicago, the home of the Efficient Market Hypothesis, which posits that forming a view is a waste of time, because the market knows best, and at any point in time the market price is simply the present value of the expected value of future prices. It’s a helpful, if naïve, reminder. There is some % chance that BTC is going to zero, there is some % chance that BTC is going to $1m, and there is a much more robust distribution between those two extremes. The efficient market hypothesis says that the current price just tells us what the collective market thinks about the distribution. Forget being Bullish or Bearish, the hypothesis says, and instead seek alpha elsewhere. (It’s fine advice, though somewhat condescending when one of your jobs is writing market commentary.) I will come back to this alternative alpha shortly.

Bitcoin has traded lower seven weeks in a row, for the first time in history. Traders who were bearish two months ago feel vindicated, and traders who were bullish are embarrassed to have been so. There are myriad reasons the price has moved lower: pressure from the Fed, melting tech stocks, the LUNA blowup… I could continue. However, the market is a machine to take inputs and push out a price which reflects them. All of those catalysts are the reasons why Bitcoin has traded lower for the last seven weeks, but they are not necessarily the reasons it will continue lower in the next seven. Crypto is a momentum asset class… except when it isn’t. The market feels terrible right now, and strapping on a long feels worse; but thinking selectively, the generational opportunities have always reared their heads at the exact moment that the market has felt worse. Be greedy when others are fearful, as the saying goes, and right now, boy, are they fearful.

Back to thinking about Alpha. One consistent source of alpha for traders who understand the rules of their markets has always been to understand handcuffed incentives, spaces where price action isn’t necessarily a result of the market changing its mind about expected values. Crypto traders watch the liquidation logs, because leverage causes people to do trades that they didn’t want to do. Equity traders watch for index rebalances, because it causes ETFs to blindly ape into names on the margin. Private deals in crypto have traded richer than liquid tokens, because many funds haven’t yet figured out how to get liquid tokens onto their balance sheets.

I have always viewed the significant headline of 2020 to be Paul Tudor Jones’ public entrance into Bitcoin, not because of the balance sheet deployed there but because of the permission structure that was established, allowing traders at every fund, even at the capital-I Institutions, to begin the conversation about investing in crypto. Well, after seven weeks of downticks, there is not much of a permission structure to be Long. “It is embarrassing in polite company to be Bullish.” That extends not just to polite company, but to pitches to the CIO or at trading team stand-ups. As it gets harder to be bullish, less funds are long. And with most funds under water this year, there’s not much incentive for an individual trader to stick his or her neck out. Being flat or short right now is not a forced position, by any means, but it is the path of least resistance.

Does this mean that it’s time to back up the truck and load up? Well, maybe– that was certainly the case in March 2020– but the knife-catch has always been one of the most difficult trades. However, hiding one’s head in the sand has always been the wrong play, and there are trades here that seem worth pursuing. Last week, we highlighted an ETH call-spread, and calls are trading at a 13 vol discount to puts right now, for all the reasons discussed above. In a difficult market, it’s always best to own assets that one is OK with owning even if the timing doesn’t work, so you want the fundamentals on your side; ETH has strong, deflationary fundamentals with healthy yield coming, perhaps as soon as August, so even if you catch the knife too early, it’s one that feels worth hanging onto.

Cumberland is a buyer of BTC and ETH.