Welcome to the free version of the Art of the Bubble!
Our subscriber plans make use of the same base algorithm that our crypto hedge fund, 1.2 Capital Management, does.
We have two primary data offerings for stocks: (1) a risk parity “Bubble Portfolio” and (2) a “Leveraged Index Portfolio”. They are pictured below relative to their benchmark: the QQQ, which is an ETF of the Nasdaq100.
Hello Bubble Riders!
The idea behind Bitcoin halvings is simple: supply of new BTC into the market drops dramatically (by 50%) and if demand stays even close to constant, it will out strip the remaining supply.
As a result, the price goes up. Econ 101.
This is probably the best explanation for why BTC has seen consistent bull runs after halving events in 2012, 2016, and 2020.
Our own analyst team did a back-of-the-envelope calculation for what BTC could hit in 2025 (halving bull runs tend to go more than 12 months). Recently, Pantera Capital also performed such an analysis using historical price trend action.
- They ended up with $147.8k as a target, we ended up with a round number, $160k, because you are not going to achieve better precision with these sorts of estimates.
It’s worth reading Samantha Russell’s 2 minute analysis here. The heart of it goes like this.
- BTC reaches new all-time highs (ATHs) with each new bull run.
- But those ATHs are sequentially smaller each time.
- Last time, BTC made it about 3.23x above its previous high.
- If we assume 2.5x for the next bull run, you’ll get about $160k.
Here’s Pantera’s illustrated depiction (it is admittedly fancy-looking).
But the end result is effectively the same. The difference between a $147k and $160k call is well within the margin of error (which is likely +/- 15%).
What’s interesting about Pantera’s approach is that they divide the halving events into a pre-and post-analysis.
It’s at this point that I think their analysis is inaccurate. The reason turns on Level 1 and Level 2 strategies (which is where we get the name 1.2 Labs and 1.2 Capital after all). Here’s the longer read as Lesson 7 of The Art of The Bubble.
In any game, some players are naive. They do not try to anticipate what other players are doing, and only expect the best results given the rules. They are Level 0 players. Level 1 players expect the Level 0 players to do specific things, and so they learn to “play to the person,” anticipating their moves. Those are Level 1 players.
Level 2 players anticipate Level 1 players and so on.
What’s the optimal level of sophistication? According to studies, it’s a mix of Level 1 and Level 2 strategies–that when combined is a Level 1.2 strategy.
Ok, I think that everyone in the crypto space now knows about the halving. It may not transpire as expected, but I tend to think that sophisticated actors will want to accumulate more before the halving.
- Rather than a 2.3x target, as Pantera has it, we might see a 3x target.
- It might also be a higher accumulation by volume though, so it’s a little hard to predict.
The net result is probably the same: buying earlier in this cycle, say 6 months before the April 2024 halving, is probably smarter than buying later. In this way, you’ll at least have a Level 1 strategy for trading this halving event.
Happy trading!
-Sebastian Purcell, PhD
The Macro Situation
Something knocked me out the trees
And now I'm on my knees
Darling
Don't you monkey with the monkey
— Peter Gabriel, “Shock the Monkey”
Nvidia (NVDA) reported a 101% jump from last year, propping markets up at midweek. But alas, the inevitable monkey on the back has not gone away. The labor market remains strong. Jobless numbers were expected to increase from 239,000 in June to 240,000 in July. Instead, they dropped to 230,000.
Mitigating the monkey is data that wage-rise is slowing. This provides some long-term optimism given that high wages are more of a direct factor affecting inflation (i.e. the cost of production increases since employers have to pay more for labor).
It will be interesting to see how the Fed reacts given its indications that the fight to reach 2% inflation is far from over. The worry at the moment is that prices remain high while the US economy experiences significant growth. The third quarter is currently forecast for 5.9% annualized GDP increase.
September, however, will likely remain without a rate increase.
The Fed’s signals about future action will push precious metals down as the US dollar strengthens (index: 104.19). Rate increases might also put mid- to long-term treasuries in a tough liquidity spot. If investors are selling in expectation of a rise, the months-old question (c. the Silicon Valley Bank collapse) about bond market liquidity may get ugly.
On a brighter note, crude oil clawed back some territory with news of OPEC+ production cuts. Crude is 2.23% down on the week.
- Todd Mei, PhD and Sebastian Purcell, PhD
AI Sentiment Report
The following sentiment scores use ChatGPT as part of the AI tech stack to sectors through leading indicators. (Lesson 4 of The Art of The Bubble covers the selection of lead indicators for bubble trades). The scores are most indicative for the next day of trading (a Monday), but they appear to set the general tone for the next week.
The methodology employed is based on this peer reviewed academic article, which produced 550%+ results in back tests over a 2 year time frame. We consider 4 and 5 scores to be positive, but please bear in mind that the AI model is still in its validation phase.
-The Research Team:
Dom Viera, Samantha Russell, Nicole Zinuhova, Aiza Malik
That’s it for this week!
Happy Trading!!
-The Team
Think About Subscribing
Our subscriber plans make use of the same base algorithm that our hedge fund, 1.2 Capital Management does, but modified in timeframe so you don’t have to stare at your screen all day.
We have two primary data offerings in cryptocurrencies: (1) AOTB Dynamic and (2) the Crypto Maxi. Here are our returns with comparisons to others (data from Messari.io).
This newsletter is provided for educational and entertainment purposes only and should not be relied upon for business, investment, taxation, or legal advice. You should consult your own advisors for those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by 1.2 Capital Management. (An offering to invest in a 1.2 Capital Management fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation--all of which should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by 1.2 Capital Management, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
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