Welcome to the free version of the Art of the Bubble!
Our paid 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.
The Secret to 10x Earnings Via Crypto Mining (Without Bitcoin)
There is nothing better than waking up after a good sleep and realizing that you had crypto operations–miners, nodes, bots, yield farms, and passive income devices–that made you money.
Of those, the most famous is mining … because Bitcoin is the most famous coin. Unfortunately, mining Bitcoin is largely best left to the professionals–unless you can get extremely cheap electricity (e.g., $.03 / kWh or less).
We’re going to talk about other crypto mining opportunities then. But to start, we need a framework for analysis–a secret game plan. The 10x part of our play is to identify coins that could rise 10x, since the real goal with mining is to reach break even.
Everything after break even is free money.
I outlined much of our framework in this article “Beyond the Hype: Timing The Crypto Maturity Cycle for Maximum Gain.” That article is worth a 5 minute read as it will save you thousands of dollars this bull run. I think its one of my best recent pieces.
The piece forwards the view that there are 3 phases to coin maturation.
- Phase 1 - These young coins have bad tokenomics and good narratives. To make money, you must get in early and get out early. Exiting by cycling into something that will grow long term, such as BTC or ETH, allows you to stay in the bull run with lower risk.
- Phase 2 - These are slightly older coins, but early investors such as venture capitalists, will dump their coins (they got theirs) and you (as a bag holder) are not going to make large gains even in a bull run. You’ll likely lose. Stay 100% away from these.
- Phase 3 - These are older coins that have made it through at least 1 cycle and early investors have sold their positions. If the tech is good and a narrative catches these, you are going to make money. Our bubble portfolio largely focuses on these as returns are large and relatively predictable.
We want to focus our mining operations on coins that are not going to fall into phase 2. If they happen to be phase 1, we’ll want a strategy to cycle out of them quickly.
Finally, as all coins go up in a crypto bull run, we want coins with the potential to do 10x, since we’d otherwise be better off buying and holding ETH + a few alts. With this framework in mind, let’s look at two coins.
Chia (XCH)
First, let’s look at Chia. It was an a16z darling in the last round and rode the “green mining” wave narrative for a bit. That narrative, to recall, points out that BTC mining is not great for the environment. Well XCH uses harddrive space to allocate plots of land that are “mined” to secure the network. It uses about 1% of BTC’s electricity.
It was also designed with the SEC in mind, so that it has regulatory advantages that most other coins do not.
These points boosted its launch price from $800 to about $1600 and then the cryptowinter took hold. Trigger warning, this chart is nasty.
Tokenomics. This is a “phase 3” coin in the sense that you are not going to be diluted in your holdings by early investors. They have dumped their bags.
There is still a fair headwind of token issuance planned for the lifetime of the coin, but like BTC, it has something on the order of a 100 year timeframe in mind.
Mine-o-nomics. You will need specialty hard drives for XCH mining as the ones you use for your current computer will be worn out quickly. Fortunately, electricity costs are almost nothing, so you can do this anywhere.
Chia has partnerships with a series of firms that offer cheap, refurbished hard drives do the work they need (link here).
The simplest way to get into this play is to buy an Evergreen starter kit (link). Depending on your options, you’re going to spend about $600 - $800 to get started.
Notably, farming rewards halve March 11, of 2024.
Growth Potential. If XCH rises to $270 from current levels, it will hit that 10x threshold. Most look at that nasty chart, though, and think the project’s dead.
What could bring it back?
Well, they have support for NFTs and private blockchains. Why do private blockchains matter? Because JP Morgan and BlackRock are tokenizing real world assets (RWAs) on private blockchains (such as Onyx). They don’t want sensitive financial matters made public.
XCH can tap into that RWA narrative.
How to Play This.
At 20 terabytes of space, you’ll make about $5 / month right now. If XCH does 10x, that’s $50 / month – which might happen if they can make that RWA narrative stick. Assuming that you spend $600 to get in, you’ll be even in one year = 6 months of bull cycle left (if the bull market lasts 18 months).
Kaspa (KAS)
Second, we have Kaspa (KAS), which has the following chart for the past year – nothing but a series of higher highs.
It’s a proof of work coin that uses directed acyclic graph (DAG) technology, but still uses ASIC miners (like Bitcoin does). Technologically, it’s BTC, but faster and more secure.
Mine-o-nomics. As an ASIC coin, your primary variable is electricity price. If it’s cheap for you, then you can mine this coin. You could even repurpose some of your BTC miners for this task.
Tokenomics. This coin, though young, was a fair launch coin, meaning that there are no early investors who will make you their exit liquidity. This gives it the tokenomics of a Phase 3 coin.
With a present (fully diluted) market cap of $1.3 billion, KAS couldgrow to $13 billion, so it fits our criteria for possible growth in the next bull run.
Growth Potential. The tech development of KAS seems to focus on the blockchain itself, which makes this coin a BTC competitor in the ASIC space. Its trop rival is thus Bitcoin Cash (BCH), which did reach $53 billion in market cap during its first bull market cycle.
How to Play This. The growth potential for this coin, I think, makes it a 1 cycle coin = sell you coins. It’s just not going to out-compete BCH or BTC long term. They need to pivot to Real World Asset support or something for that kind of survival.
To avoid spending significant sums in mining equipment, I think that Fraction Mining offers a better entry pathway. You’ll have to spend $25 to buy a membership NFT. Then $500 to buy a KAS NFT, which gives you mining rights.
Each NFT gives you 0.11 terrahash power at a rate of $0.065 / kWh. Using standard calculators, and evaluating with KAS’ current price, it will take you 10 months to break even.
At 2x the current price, you’ll be in the money in 5 months. At 4x the price, you’ll be in the money in 2.5 months.
Everything after that is pure profit.
I find these opportunities interesting. But if you don’t like any of those options, you could always just buy the coins for these and trade out when market trends change...which might make you want a good trading algo (like the kind that we offer at 1.2 Labs ;)
-Sebastian Purcell, PhD
The Macro Situation
bonds (noun):
- the economic license to chill thanks to the full faith and credit of the US government;
- except when the bond villain is rapid interest rate increase, or Count Havoc.
― New Entry in the Updated Devil’s Dictionary
The main narrative has focused on the Fed’s appetite for future interest rate increases. With the jobs numbers for October down — 150,000 compared to 270,000 in September — things are looking up for markets. The likelihood of a pause on rate hikes for the year are now anticipated by some economists.
The more interesting (you’re welcome for that pun) sub-narrative during the post-pandemic saga has always been about the bond market. The rise in interest rates has now resurected a question about the long-term soundness of US government debt.
Silicon Valley Bank and other mid-sized bank collapses earlier this year remind us that interest rate hikes can force banks to sell their bond holdings at a loss. Bank runs, usually survivable, become untenable when banks cannot redeem their holdings at expected levels.
Something similar happens for the US government:
- Bond sell-off = fall in bond prices
- A fall in bond prices = an increase in bond yields
- An increase in bond yields = greater borrowing costs
With such increased borrowing costs, concerns shift to the US governments’ ability to service its debt burdens, given that those debts now represent a materially higher percent of annual GDP.
To be sure, the 10-year treasury yield rates have cooled a bit since the October jobs report; but we shouldn’t forget that 10-year yields broke 5% not so long ago (a first in 16 years!).
Some institutions have been selling during this period too. A few weeks ago, we mentioned China’s $21B sell-off of US stocks and bonds. The Fed has also been shrinking its balance sheet.
Political infighting hasn’t helped. House of Representatives may push for a default on debt burdens. Hence, as eToro US investment analyst Callie Cox puts it:
“The pressure that we're seeing from the ten-year yield has caused investors to worry about the future because they're wondering if something could break. And that may be the narrative for the following days and weeks, what could break?”
This set of concerns, in the “boring” area of bonds, is now our primary area of concern for the macroeconomy.
To put it all in perspective, debt burdens form a long-term concern. Important but not imminent.
A government shutdown, an imminent concern, will almost certainly do the work that the FED hoped to achieve in the labor market. Interest rate cuts over the next 12 months now seem almost certain (hence the increased flows into the TLT).
- Todd Mei, PhD and Sebastian Purcell, PhD
AI Sentiment Report
The following sentiment scores use ChatGPT as part of the AI tech stack to track sectors as 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
Happy Trading!!
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.
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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