Coins Do Not Care About EPS
As we have addressed over the past month, cryptoassets were nonreactive to the onslaught of gruesome tech earnings this week. At the time of writing, bitcoin, ether, and the rest of the crypto ecosystem have vastly outpaced the Nasdaq.
As we can see below, a major contributing factor to crypto doing so well is yields rolling over for the first time since early October.
Some questions that remain now are:
- How much relief will we see over the rest of this quarter?
- How much will crypto’s relative strength be able to avoid any periodic uplift in rates?
If we get a prolonged drawdown akin to the one that we saw from June through August, it is possible that we see a rather aggressive rally to the upside through year-end.
The chart below frames the recent magnitude of the pullback in rates relative to global interest rates via the pullback in the dollar. This chart displays the deviation of the $DXY from its 50-day moving average. Clearly, we have seen a relatively sharp drawdown recently.
Interestingly, throughout this year, we have witnessed this metric drop sharply on several occasions, but this appears to be the most extreme deviation from this moving average since the beginning of this year.
Strong Signs of Momentum
To coincide with these comparatively favorable macro conditions for risk assets, we are also seeing positive signs of investor confidence and strong momentum signals.
Below, we see that the 30-day moving average for SOPR is on the rise for both BTC and ETH. We have discussed the SOPR metric quite a bit in our research, so we won’t delve into the technical mechanics, but this chart essentially demonstrates that investors are starting to hold onto their ETH and BTC positions for more profitable exit points.
When this metric is sloping downwards, it means that a greater percentage of investors are exiting their positions at a loss, or in other words, capitulating on unprofitable positions more frequently. We will look for this metric to continue its upward swing over the next few weeks for confirmation of a more sustained rally.
Further, we can see that funds have started to deploy stablecoins into other cryptoassets in recent days. According to the wallet-labeling experts at Nansen, funds are at their lowest relative exposure to stablecoins since June. This is equivalent to lowering your exposure to cash in traditional financial markets.
This metric is particularly interesting when juxtaposed with the current macro positioning, which, as portrayed by the most recent Bank of America Fund Manager survey, is extremely long the US dollar and short risk assets.
Let’s Talk About Memes
Memes are Important
Broadly speaking, memes are an important aspect of society. They are the vessel through which cultures develop, iterate, and move ideas forward.
We thought Wikipedia put it rather eloquently:
A meme is an idea, behavior, or style that spreads by means of imitation from person to person within a culture and often carries symbolic meaning representing a particular phenomenon or theme. A meme acts as a unit for carrying cultural ideas, symbols, or practices that can be transmitted from one mind to another through writing, speech, gestures, rituals, or other imitable phenomena with a mimicked theme.
Although seemingly frivolous, Internet memes fall within this definition. They are the images, gifs, and videos that culture develops around. Given their power to bring internet communities together, should it surprise us that there is a monetary value to memes?
Enter Doge
One of the hallmarks of the overly frothy “everything bubble,” which started popping late last year, came in the form of adorable little dogs. After Gamestop and AMC, there were the dog coins, most notably, Dogecoin.
Dogecoin, unbeknownst to many, is one of the older cryptoassets originally created as a joke by Billy Markus and Jackson Palmer in 2013. Its recognizable branding was derived from the popular doge meme featuring a bewildered Shiba Inu resting on a couch with quotes floating around its head.
DOGE is a proof-of-work asset that is merge-mined with Litecoin, meaning miners can leverage their hash rate to mine both tokens simultaneously. Up until last year, it traded at a fraction of a cent, a function of both its then-diminutive market cap as well as its unlimited supply.
The Dogefather pt. II
One person that has always had an obsession with Dogecoin? Elon Musk.
Despite, for obvious reasons, favoring bitcoin for Tesla’s balance sheet, Elon has always held a special place in his heart for DOGE. He is on record tweeting about the memecoin over three years ago and has often discussed working with developers to improve the user experience with DOGE.
Importantly, he even spoke of integrating DOGE with a certain social media network.
Fast forward to this week, and we saw Elon Musk complete the unexpected feat of purchasing Twitter for $44 billion in hopes of turning the flailing social media company around. This has left many to speculate on whether DOGE will find a use case within Elon’s version of Twitter.
The exact mechanics through which DOGE would be integrated with Twitter remains to be seen. However, the wheels appear to already be in motion. Reports as of this morning have elucidated the interesting fact that Changpeng Zhao, CEO of Binance, was a significant backer of Elon’s bid for Twitter, offering $500 million in support.
According to Reuters, his strategic importance is to advise on how to properly leverage crypto to improve the Twitter platform.
From Reuters:
Binance, the world’s largest crypto exchange that has invested $500 million into Elon Musk’s buyout of Twitter Inc, is creating a team to work on how blockchain and crypto could be helpful to Twitter, the company’s spokesperson said on Friday.
As one of Elon Musk’s equity co-investors to fund his $44 billion deal, Binance said it will brainstorm plans and strategies that could help Elon Musk run the platform. The newly-formed team will explore how to build on-chain solutions to address Twitter’s issues including proliferation of bot accounts, a problem Musk has repeatedly complained about and almost reneged his offer on.
The Long Case for DOGE & SHIB
Given Elon’s historical love affair with DOGE, coupled with his recent acquisition of the beleaguered Twitter, it is not surprising that DOGE caught a bid this week, up over 30% at the time of writing.
In our view, there are a few things that DOGE has benefited from up to this point:
- The obvious tailwind that is the cultural weight of the doge meme within internet culture.
- Strong adoption in dogecoin’s early days. DOGE’s small unit price enabled it to be used effectively for tips across various online services.
- Small unit bias. Despite being fundamentally misguided, many retail investors feel more comfortable buying 10,000 units of something that costs $1 per unit vs. buying 1 unit of something that costs $10k per unit.
Now, we are faced with a very legitimate potential of Twitter adopting the meme coin in some capacity as either a means of payment or as a staking mechanism to reduce the number of bots on the platform.
Attacking this opportunity from a portfolio allocation perspective is admittedly tricky but could pay off for those willing to take a good deal of risk in a small position.
Outside of this acquisition news, memecoins have historically served as good options on risk. They are farthest out on the investment risk curve and often are the exclamation point that ends any prolonged risk-on rally.
However, this is a case in which there is a fundamental reason for the asset to break away from its normal pattern and trade as this quasi-Twitter equity.
We think the following frameworks are reasonable ways to approach this opportunity:
- A relatively small position in DOGE with the view that it could catch a sustained bid upon the release of new information pertaining to Twitter integration. Given its most recent surge, it may be prudent to wait for a more technically favorable entry point.
- As a second-order trade, we think it is likely that Shiba Inu ($SHIB), the Dogecoin derivative that lives on Ethereum, is likely to see some inflow from speculative capital following the massive rally in DOGE. SHIB was created amidst the memecoin craze in 2021 and lacks a lot of the history that Dogecoin benefits from. Thus, we would recommend de-risking upon any significant rallies.
To be clear, these are highly speculative assets that may require more active management than larger-cap cryptoassets. The public refusal of Elon to integrate DOGE could spell the end of any Elon-led rally to all-time highs. Further, the SHIB trade might never materialize as we anticipate. Thus, it is unlikely that we will integrate this recommendation within our core strategy. However, we still think it is an interesting opportunity for those wishing to venture out on the risk curve.