The Waffle: Gored by the Bull

It has been a busy first quarter of the year. A lot of institutional client interaction has prevented me from regular writing. As much as we all love a good alliteration, I am forced to rebrand my colloquial regurgitations to "The Waffle" and remove the weekly. There simply aren't enough hours in the day. NowI feel it's time again to spout a few unsolicited words from a battle-tested, moderately deranged mind, colloquially known as "wisdom".

We are at a strange point in the #crypto universe. (When are we not?) On the regulation front, there is the US SEC allowing Bitcoin futures and brining all the big money into the arena, three months later they apparently want to reconsider their position on Ethereum. Is it an orange grove or isn't it? Honestly, who cares anymore. Americans are looking to the election - another grasp by the world's biggest gerontocracy for legitimacy.

Ethereum, be it a security or not, has far bigger problems. After the Dencun upgrade what went live last week -- an absolute farce of an "upgrade" by the way -- it has become ridiculously cheap and easy to launch an L2 on the biggest decentralized computing network. Dencun makes L2 transactions cheap. We are in a bull market. Everyone wants in. The hackers are waiting. We counted a record number of hacks last week, all related to Ethereum's Permit function - arguable the biggest blunder in the history of blockchain coding. Bull markets attract vile elements, they phish for your Permit and all your funds are gone. Mark my words, you will see another mega hack in the next 4-6 weeks.

Then there is the worry about immediate price action. In last week's Uphold Institutional note (contact [email protected] ) we issued a warning week, just in time. 24 hours later, Bitcoin losing 10,000 points and returning back up to 67k was all over the news.?And then things went south again into the end of the week.? Charts tell us we are now in a temporary downward channel with a target of 58k.?Through the weekend there was upside on extremely shallow volume, meaning that the real direction is again decided by US East Coast morning trading action.

But we are not chartists, and I specifically am a terrible trader, and to be honest I just don't care about the price of apples.

There are other signs that have us worried. On the equities side, there is unadulterated bullishness and bears have all but gone extinct. Investors small and large are all in, while valuations have surpassed the 2021 peak. While equities aren’t the topic of this newsletter, markets have spillover effects and the same folks that run the equities show now deal in Bitcoin. It would be foolish to ignore either side. Here is one charts that says it all, taken from our favorite equities newsletter, TopDowncharts.

I have been in the business for a long time, mostly on the fundamental and psychological side. Human emotions, narratives, greed, and dreams paint a better picture than any technical analysis. If there is one thing I've learned over the course of my career its this: There is no wisdom of the masses. The masses are dumb and opportunistic. They don't think for themselves but follow trends. While in investing the trend is your friend, in life, you are often better of being a contrarian. Following the masses saves your job, because you did what everyone did. Contrarian is he better option: if you are wrong, people won't notice or briefly dismiss you as a crank. If you are right, you end up on the cover of a magazine. And that's why I never made money investing, while also being mostly right.

The story now is this: we have seen a massive bull run, fired mostly by overhyped AI (artificial intelligence) hype. Investors have no clue what AI is. The transporter model data crunching done by the rapidly worsening ChatGPT cohort is all we have. In over a year, this AI hasn't produced a single original thought. There is just data, and no "intelligence". That realization is slowly setting in. ChatGPT results are increasingly incorrect due to what we data scientists call progressive pollution. Decentralized networks like BitTensor are still a fringe enterprise.

So, we are now at a point where absolutely everyone and their cat is convinced that a new phase of the bull market is upon us, both in equities and in crypto. Investors big and small are all in. If they are all in, who's left to buy, I ask.

The major story in crypto are the ETFs and the Bitcoin halving. Both are non-events. The ETFs have opened the door to institutional engagement, which has made Bitcoin more, not less, volatile. Every weekday New York morning as redemption orders are being processed, Bitcoin dumps and flushes out leverage. Then, around noon, we go up again with incremental spot buys. The amplitude of intraday moves has changed dramatically. Bitcoin volatility has never been higher.

Because of that, retail adoption has NOT taken off. After the last two weeks, in extremely short-sighted moves, some banks have postponed plans to offer Bitcoin. We also heard chatter at DAS London conference that it would take 3-6 months before the ETFs would really be available to investors as distribution channels are not ready and financial advisors, banks and other outlets are notoriously slow to move. They are also greatly affected by the broader market, therefore, if equities slump, so will the push to peddle paper Bitcoin. We could, realistically see 1/2 year of sideways or downwards movement before the real broader bull market stakes and all your cousins and aunts start asking where to buy Bitcoin.

So far, all the efforts to make Bitcoin a payment system, however, have failed. The Lightning Network was an "A for effort" at best. Bitcoin itself is increasingly problematic (if you haven't swallowed the orange pill that is, and can still evaluate technology on its own merits rather than the Bitcoin Gospel. Technologically it is a dinosaur. Its user experience is shit. Nobody apart from a few washed-up crypto punks pays in Bitcoin. It's allegedly digital gold. But without use case and transactions, it has no budget once all is mined. Bitcoin mining is a short term profit scenario at best. Miners know this. They need use cases for Bitcoin. So they came up with Ordinals, inscriptions, BRC-20 tokens, all pushed and partly financed by the mining industry. Having stoned snakes and livid lizard JPGs on Bitcoin is good for miners.

Then there is the meme coin circus back in town. We issued a note to our clients this week explaining what meme coins actually do for the underlying chain, and why they are both important and a sign of trouble. When most gains are made on the garbage end, then the end is in sight. Not the end of the so-called bull market, don't misunderstand me. We are at the brink of a huge move in adoption and awareness. But that doesn't mean we can't have another lull.

Finally, there is the Bitcoin halving, sold to the masses as an actual event that matters. It isn't. and it t matters primarily to miners, which now earn half the money they used to. Which means they need Bitcoin to stay well above $60000 to be even remotely profitable. Even a short bear phase would ruin the smaller ones. Which will make Bitcoin mining even more centralized. Combine the ETFs and the miners, and you realize the Bitcoin dream is dead. If there only were an alternative. #smirks

ETFs haven't made Bitcoin more stable, but instead brought institutional leverage trades. The halving story is bull. In the past, we had many smaller miners, and a bull run after every halving. That does not mean this will happen again. By many measures, Bitcoin is expensive at these level. Everybody is in, everybody believes we are going up. The Bitcoin ETF noobs have just had two weeks of agony as their buys are all under water after the dump. They might decide to get out again very quickly. And there is an explosion of hacks and frauds.

As I mentioned, have observed a RECORD number of small hacks in the last week. Many of them are phishing thefts enabled by Ethereum’s single biggest bungle, the Permit signature. $10 million were stolen in just Pendle Yield tokens, all signature phishing events. After Ethereum’s Dencun upgrade, it has become ridiculously cheap and easy to launch L2s and we have identified at least 8 completely fraudulent projects in just 2 days. In particular, there is an explosion of projects from previously discredited individuals miraculously back on the scene. We identified several projects there that are all narrative and no tech. Any project that raises tokens now to raise money to do “work later” is a red flag the size of Florida. Hashtag #HoweyTest #OrangeGrove. There have been several highly publicized projects with low float where founders have dumped tokens from the get go. We have written up one such illustrious example for you, a project that went from darling of the crypto geek world to most hated bunch of morons in just 15 minutes. just drop us a line on [email protected] for some light entertainment (unless you invested, then its a hard lesson).

My friend Dr Sirer of Avalanche made a very good post this week, warning about crypto frauds, and SBF 2.0. The next unscrupulous fraudster on a beanbag is just around the corner!

He points out a number of projects of the sort we have identified too: narrative doesn't match work, or "pay now, we'll do the work later" or founders dumping their tokens as soon as a project launches. In the last 2 weeks we saw more of those than in the whole second half of 2023.

So lets put this jumble of thoughts (it's called waffle for a reason) in order:

Herd mentality means equities are in for a BIG correction. AI narrative fizzling means get out while you are ahead. Bitcoin halving fading and the memes and fraud at record highs means nothing but trouble.

We don't make predictions, of course, especially not about the future. But I'd say there are plenty of reasons to put some hard earneds under the pillow and be cautious.

Remember: in Pamplona, at the bull run, there's always a few runners who get gored. Don't let it be you.

Remember also that the market is always right and wants to go where it wants to go.