A New Era Of Indicators; The Bottom Is In

I dug into my pockets friday night and threw some money as the markets, picking up 3,000 shares of SLCA at 28.11. The fracking story is still very alive and well, and a little market correction is not going to stop them from raising prices. Plus, I figured I like the risk to reward down here.

Anyways, my purpose today is not to bore you with my cute little trades in and out of stocked markets. On to the subject at hand.

I have been knees deep in the crypto space as of late and have learned an immense amount about how this industry works in a relatively short period of time. My approach to this space is not the same as all those other miscreants out there, trading Bitcoins late into the night thinking it is their ticket to riches. Not gonna happen.

My involvement in this space is two-fold. On one hand, I have an investment in Ether which I do not intend on selling any time soon. I have a vested interest in the Ethereum blockchain itself, being that I also spend time developing D-Apps built on Ethereum smart contracts. Those require Ether to run, and it is only a matter of time before D-Apps start taking over our lives. The grounds are shifting beneath our feet, in the most egregious and unpredictable way possible.

My second interest in this space is strictly focused on extracting imperfections in market conditions, for the sole purpose of hedonistic leisure, aka arbitrage. I have accounts with many different crypto exchanges, tied to different bank accounts around the world. Better and improved exchanges are popping up on a monthly basis, and each one dances to a different rhythm. By merely applying simple algorithms to scrape prices of different exchanges and make calculations, I am able to extract price differences and find risk free opportunities without much effort. The method I use is quite complex, and I’d be remiss if I gave that away for free, but just understand that it works.

Now, these spreads between exchanges vary from time to time, dictated by its participants and their willingness to pay a premium. This, as most people do not know, is directly correlated to markets outside of the cryptoworld, such as the US stock markets. Let me explain.

In January last month, markets worldwide were lit aflame and ripped higher almost on a daily basis. There was a sense of invincibility in the air, money was easy, and glasses were overflowing with hubris. During these times, the spreads between certain crypto exchanges widened to spreads as large as 20%. This meant that if you put $1,000 through the system, you would have come out the other end with a risk free $200 more, minutes later.

Fast-forward to February and investors are getting ripped apart and shredded, and lo and behold, the spreads have narrowed to 3% or less. Clearly the fear in the markets have spilled over into the crypto-world, and the stock markets are still the invisible hands controlling the sheep that is the cryptoworld.

Here’s my thesis.

A lot of investors use all kinds of indicators from technical analysis to traditional indicators based on economical performance. An example of this would be TLT, the yield on the 20 year US treasury bond. By definition, markets have traded inversely to TLT – when SPY gained TLT retraced, and vice versa. The same can be said about the USD, and on occasion even gold.

Here’s the problem. Indicators only work until they don’t, which is usually when they become too reliable. Markets hate complacency and investors are always punished for their lack of creativity. What worked last week is almost certain to bankrupt you this week. Treasury yields and the US dollar were great tells on the market back in 2009-2012, but stopped working shortly after, yet you still get credible ‘economists’ making bold market decisions based on those factors. Let’s face it, nobody gives a shit about widening curves anymore other than your econ professor.

Right now, like it or not, the crypto-world controls much of the emotion in the market. Yes, those nerds locked up in a room with a dozen high-powered computers mining Bitcoins in off-reach parts of ghetto as fuck Asia and Russia – they control your markets.

Here’s a new indicator for you, which I will test and perfect over time; the crypto-greed indicator. This has nothing to do with the prices of crypto coins, mind you, but rather the appetite for them, aka the spread between different exchanges.

It works as follows; when spreads are north of 20%, treat it as an overbought indicator. On the other hand, a spread below 1% should be treated as ‘oversold’. Friday night, those spreads actually inverted for the first time, and crypto prices were cheaper in Asia than globally.  WTF, you ask? Markets ripped off the bottom for the last few hours on Friday, and spreads widened back to 3%.

If my thesis is correct, the market bottom should have been marked midday on Friday – and should remain the ‘bottom’ for at least some time. Let’s see what happens.