Happy New Year! We wish you and your family a happy and prosperous 2022. 2021 turned out to be rather different from what we imagined on many fronts. Some things did not change – as of today (10th January,) BTC/USD is the same price of $41,500 as of a year ago and Covid still dominates the news and our daily lives. Some things did change greatly; the geopolitical map of crypto shifted profoundly from China to the West, NFT’s became ‘the new thing’ and after 20 years, $3 Trillion and 4 Presidents, the USA replaced the Taliban with the Taliban.   

In the Hedge Fund business, it is important to have some world views and attempt to step outside of comfortable assumptions. In order to make money, it is necessary to hold some outlier views. Here are a few: 

  1. Bitcoin will finally break the long awaited $100,000 barrier.
  2. The covid pandemic shall come to an end in Sweden, England, Mexico, Brazil and South Africa.
  3. A large cyber pandemic will attack the financial system and be blamed on the Russians. 
  4. A large debt crisis will have started in Italy. 

December’s Price Action
As discussed in last month’s newsletter, we expected the rest of December to be a poor month for the crypto markets. We have been rather cautious since BTCUSD failed to take $70,000 and have sat largely in cash since. This caution has taken some of the edge off Bitcoin’s 42% pullback. We briefly attempted to buy a breakout around Christmas time – which was stopped out at a loss. The graph we provided in last month’s newsletter predicted that BTC would touch $40,000 and this was reached on the 10th January. We believe that the bull market will likely resume back up to $70k in the next couple of months.

Reasons to be Bull(ish)
We believe that BTCUSD reaching $40,000 was a significant buying opportunity. In terms of Technical Analysis, there was strong horizontal and diagonal support at around the $40,000 mark. This was acknowledged by a substantial bid stack at that level. In terms of the derivative markets, Bitmex’s funding rate has been below par or even negative for almost two months and this normally unwinds quite abruptly. Lastly, the supply of Bitcoin keeps leaving the exchanges and this may suggest a supply shock.  

Tapering and Interest Rates
Nevertheless, Fed tapering and interest rates do provide some reason for caution. Inflation is becoming a significant problem in the West and this puts Biden in an intolerable situation with regards to the midterm elections in November. The Federal Reserve has stated that there will be three rate rises throughout 2022. These can be safely ignored, as they dare not make the US debt burden unbearable. The greater concern is the tapering of Federal Reserve asset purchases. The markets were saved in 2020 by a staggering level of money printing – even greater than in the 2008 GFC. The world’s economy and financial system are entirely dependent on not just more freshly printed money, but an ever accelerating rate of it. There remains the likelihood of a substantial ‘Risk Off” event in 2022 which results in a pullback in equities and crypto. Nevertheless, this will be solved by the resumption of massive stimulus and the upward trend of financial assets and an acceleration of cryptocurrencies. 

The debt based monetary system is heading to its inevitable conclusion and this current crypto cycle is not over. Therefore, SCF will most likely make significant gains in 2022.