Novum Digital Asset Alpha – Daily Analysis 14 July 2020 (10-Minute Read)

Tuning into Tuesday I hope your week has been terrific so far, because if you’re a short seller, you’re likely having a whale of a time.
But if you’re not, get ready to strap in, because it’s going to be a bumpy ride. 

In brief (TL:DR)

  • U.S. stocks sank on Tuesday, paring back last Friday’s gains with the S&P 500 (-0.94%), and tech-heavy Nasdaq Composite (-2.13%) all sinking, while the blue-chip Dow Jones Industrial Average (+0.04%) closed marginally up. 
  • U.S. 10-year Treasuries slipped along with the broader market, bringing into question yet again the relationship between Treasuries and equities as yield rose to 0.638% from 0.633% on Friday (yields typically rise when prices fall). 
  • Oil slipped below US$40, as investors took stock of a the possibility of renewed lockdowns in several states, with WTI Crude Oil (Nymex) (-1.35%) down to US$39.56 from US$40.24. 
  • The dollar rose against a basket of major currencies, as investors cashed out of their more risky investments. 
  • Gold slipped with Gold (Comex) (-0.54%) edging lower to US$1,804.30 from US$1,808.20 as investors exited many asset classes to adopt a wait-and-see approach.   
  • Bitcoin (-0.35%) remained more or less unchanged at US$9,250 (GMT 0030) as Bitcoin outflows from exchanges continued to lead inflows, suggesting that investors continue to bet on the rise of Bitcoin. 

In today’s issue…

  1. WeWork is Working? 
  2. Coronavirus Case Numbers – Should Investors Care Anymore?
  3. Bitcoin Stock-To-Flow Analysis Suggests Bitcoin Rally Imminent

Market Overview

Can markets make up their minds already? Either this is the worst economic depression since the time when they were “Great” or we’re at the trough of the downturn and getting ready to make a strong recovery. 
The problem is that investors don’t know what to focus on and that’s causing more disagreements in investment narratives than a discussion over pizza toppings. 
Asian stocks spent the morning session lower, dragged down by Wall Street, with Tokyo’s Nikkei 225 (-0.84%), Seoul’s KOSPI (-0.32%), Sydney’s ASX 200 (-0.28%) and Hong Kong’s Hang Seng Index (-1.72%) all down in the pre-lunch trading session with Hong Kong most badly affected as a new wave of coronavirus infections hits the territory. 
Coronavirus infections are coming back in focus once again as states and whole countries, which seemed to have had the pandemic under control, are demonstrating yet again just how difficult it is to combat an invisible enemy. 
Adding to the volatility, tensions between the U.S. and China are ratcheting up as Washington officially declared that it was not recognizing China’s territorial claims in the South China Sea, reversing previous policy to not take a position on the territorial dispute in the region. 
With many companies set to report their second quarter results in the coming weeks, expect another round of shocks from markets to be tempered by stimulus packages and potential good news on coronavirus vaccines and treatments. 
If you don’t like roller coasters, then you may want to keep your eyes tightly shut as you head into the markets – this could be a bumpy ride.

1. WeWork is Working?

  • WeWork on track towards positive cash flow by 2021 
  • Unlikely beneficiary from the coronavirus pandemic stages remarkable turnaround 
Entrepreneurs are sometimes likened to traveling snake oil salesman and perhaps rightly so. 
To sell a vision, entrepreneurs sometimes need to see the world as they want it to be, rather than as it is, which has led to “reality distortion fields” or in some cases outright fraud. 
Because it’s hard for analysts using trailing indicators and historical benchmarks to accurately determine the future, especially in a Black Swan-era, such as the present, it’s just as hard to accurately call winners and write-off losers and nowhere has this been more apparent than in the fortunes of co-working office space provider WeWork. 
Of the myriad companies that would have been able to turn their fortunes around, WeWork would not have been a prime candidate. 
Yet here we are. 
In a recent interview with the Financial Times, WeWork Executive Chairman Marcelo Claure revealed that the embattled co-working space provider is now on track to positive cash flow in 2021.
Mind you, that’s positive cash flow and not profitability and it’ll be some time more before WeWork heads into profitability. 
But aggressive cost-cutting measures that saw some 8,000 employees given the boot, as well as the renegotiation of leases and sale of assets, has seen WeWork’s current executive chairman dramatically turn around what was once the world’s most over-priced startup’s balance sheets. 
WeWork has also been an unlikely beneficiary from the coronavirus pandemic. 
Since the onset of the coronavirus pandemic, there has been strong demand for flexible work spaces and WeWork expects to head into profitability by end-2021. 
While the pandemic has reduced demand for office space, some companies turned to WeWork to provide satellite offices closer to employees’ homes and to spread staff around beyond the main office. 
In the past month alone, Mastercard, ByteDance (owner of TikTok), Microsoft and Citigroup all signed new lease agreements with WeWork. 
At the beginning of this year, few would have guessed how much the nature of work would change in such a short period of time. 
And even if a vaccine is developed for the coronavirus, remote working and satellite offices may represent the future of the office. 
Just goes to show that we never know when We might Work. 

2. Coronavirus Case Numbers – Should Investors Care Anymore?

  • With a fire hose of data, investors are struggling to link coronavirus infections with stock market performance 
  • Soaring infections are tempered with prospective vaccines which keeps markets in a constant state of flux, explaining the recent inter day volatility 
There are many people who don’t enjoy roller coasters and that’s understandable. 
Those which are particularly frightening seem to be those in the dark, like Disney’s famed Space Mountain. 
The darkness means that there’s no way to anticipate where the next turn or sudden drop is going to come from, but the anticipation of being on the roller coaster will ensure that the ride will be thrilling. 
For investors wading through a trove of data regarding the coronavirus pandemic, it can sometimes feel like taking a ride on Space Mountain – it’s dark, we’re all scared and we don’t know what’s coming next. 
On Monday, hospitalizations in California and Florida spiked, but U.S. stocks still somehow managed to spend much of the opening session in the green. 
Some stock market bulls pointed to slivers of positive data lurking within the coronavirus numbers.
For instance, Arizona on Monday showed the lowest number of new cases reported in two weeks.
And while numbers released at the start of the week can sometimes lag due to a slowdown in reporting over the weekend, many investors took comfort that the state at the center of the latest outbreak was showing progress. 
There’s a term for that sort of analysis – “confirmation bias” – looking for evidence or data to support an already developed hypothesis. 
But there is some data to suggest that if things are not getting better, they’re definitely not getting any worse. 
The problem of course is the quality of the data being received – 100% of those infected with the coronavirus won’t show up in any statistics if they’re not tested. 
These “asymptomatic” cases have proved an exceeding headache for healthcare officials because they are able to go around infecting large scores of people without knowing it.
And while social distancing will go some way towards reducing coronavirus infections, it’ll also translate to slower economic growth. 
Fiscal and monetary policies will continue to attempt to offset the related economic weakness, but the tension between the two is why stocks are so volatile. 
And even if a vaccine doesn’t result in a silver bullet, because it will take time to roll out the vaccine and produce it, investors are likely to look past short-term distribution bottlenecks and other factors and bet on stocks once again. 
Some analysts are suggesting that developments on the vaccine front are what most investors care about and what has allowed markets to look past negative data. 
To that end, Monday saw some positive news as pharmaceutical giant Pfizer received permission from the U.S. Food and Drug Administration to fast track two vaccine candidates. 
And with over 140 vaccines under development and even more treatments from researchers in China, Europe and the U.S., the odds of some progress being reported on a regular basis is high – which also means that volatility is going to continue to be high. 
For investors who are not keen on roller coasters, the unfortunate news is that we’ve all just been given season passes to Space Mountain, and for now at least, we can’t get off.  

3. Bitcoin Stock-To-Flow Analysis Suggests Bitcoin Rally Imminent

  • Comparing Bitcoin to gold, a stock-to-flow analysis suggests that the scarcity of Bitcoin should see positive indicators for Bitcoin’s price 
  • Depending on one’s perspective of Bitcoin, if as a store of value, Bitcoin could see a tremendous rally in the next 12 months 
Time for a brain teaser. See if you can spot the error in this reasoning: 
Harold is a grandfather.
Harold is bald.
Therefore, all grandfathers are bald.
The first two statements may be true, but that doesn’t make the third one true. 
This error is known as an inductive fallacy – it’s where the data points may be factually correct, but the conclusion drawn from those facts is wrong.
Which is why a stock-to-flow analysis applied to Bitcoin could easily lead to misleading conclusions. 
Bitcoin is scarce. 
The scarcer an asset is, the more valuable it is. 
Therefore Bitcoin is valuable.
Many analysts have compared Bitcoin to gold and compared the fact that since Bitcoin has a similar stock-to-flow as gold, that is why Bitcoin’s price is set to rise. 
Although the limited track record of Bitcoin has revealed that Bitcoin prices have tended to rise as its stock-to-flow rises, in and of itself, stock-to-flow is insufficient to paint a whole picture for Bitcoin, because it makes the assumption that Bitcoin is intrinsically valuable, something we just don’t know yet. 
Some suggest that the U.S. Federal Reserve’s unprecedented printing of US$2.9 trillion in 13 weeks has caused a corruption of money on an industrial scale, and argued that as a case for the value of Bitcoin. 
Others suggest that as investors lose confidence in fiat currency, they will pour money into haven assets like gold and Bitcoin. 
And some Bitcoin bulls, also suggest that institutional interest in Bitcoin is likely to see a major increase in demand. 
In that vein, these Bitcoin bulls point to the fact that billionaire macro hedge fund manager Paul Tudor Jones has put some 3% of his own wealth into Bitcoin.
Grayscale Investments, which manages the institutional-grade Grayscale Bitcoin Trust, has also been buying Bitcoin faster than it’s being mined, fueling speculation that Bitcoin is set to surge. 
Against this backdrop, these same Bitcoin bulls are suggesting a strong upswing in Bitcoin within the next 12 months. 
But can we be so sure? 
This all boils down to our initial premise – is Bitcoin valuable? 
Even if investors lose confidence in fiat currency, that doesn’t necessarily mean that they will pour into Bitcoin, they may pour into gold. 
And institutional investor interest in Bitcoin and other cryptocurrencies may be skewed towards making more dollars and not more Bitcoin.
Think about it logically – why do investors want to buy Bitcoin?
Because they expect that it will go up in dollar terms.
And when Bitcoin does go up in dollar terms, what do they do? They sell the Bitcoin.
And what do they get in return? More dollars. 
If the entire round trip for Bitcoin is to make more dollars – ultimately what are investors prizing? Bitcoin or the dollar? 
Which is why predictions of Bitcoin rising to US$100,000 or falling to US$50 are unhelpful. 
Unlike gold, Bitcoin is ultimately speculative and narrative-driven. Gold still has industrial and decorative value, Bitcoin’s primary value is its narrative. 
Yes, Bitcoin’s scarcity and systemic qualities aid in its use as a store of value – but for anything to possess value, there has to be consensus on what value means – and in that sense, the jury is still out on Bitcoin. 
Quite instead of buying Bitcoin and holding on to it – is US$10,000 cheap or expensive – a market agnostic approach towards Bitcoin is probably the only responsible way forward at this point in time.
While it may be impossible to predict whether Bitcoin will go up or down in the long run – it is possible to predict that Bitcoin will be volatile in the immediate term. 
For investors who want to make dollars from Bitcoin, the price of Bitcoin shouldn’t matter, it’s how many dollars you get from trading it. 
If it’s the dollars you want, don’t get distracted by the Bitcoin, because if you don’t know where you’re going, any road will take you there. 

Trading Bitcoin Today

Bitcoin edged lower in the past 24 hours as a heavy selldown threatened to take the benchmark cryptocurrency below US$9,200 at one stage before a small retracement. 
In overnight trading, Bitcoin cleared the resistance at US$9,300 but was unable to convincingly push higher, leading to a sharp selldown and now trades around US$9,230 (GMT 0300). 
Exchange outflows continue to lead inflows, suggesting that some investors are still preparing for a higher price for Bitcoin in the near term. 
Looking ahead over the next 24 hours, expect that Bitcoin will continue to trade within a range between US$9,200 and US$9,350 – as suggested yesterday. 
Bitcoin continues to see strong resistance at US$9,350 and strong support at US$9,160 – this hasn’t changed. 
The long we suggested yesterday for Bitcoin was to enter on a pullback closer to US$9,270 and exit at US$9,300, with a stop loss at US$9,260 – this trade was profitable. 
Yesterday’s short for Bitcoin was to wait till it tested US$9,320 again and short to US$9,200 with a short cover at US$9,350 – this trade is still open and profit can be taken at any point now – Bitcoin didn’t touch US$9,200 although it came close. 
Looking ahead, longs for Bitcoin can consider entering at around US$9,230 for now and exit at US$9,320, with a stop loss at US$9,210. 
Shorts for Bitcoin can wait till it tests US$9,320 again and short to US$9,210, with a short cover at US$9,350. 

Trading Ethereum Today

Ethereum more or less traced the movements of Bitcoin over the past 24 hours and is down from yesterday’s close. 
The long for Ethereum yesterday was to get in at US$241.50 and take profit at US$243 with a stop loss at US$241 – this trade was profitable. 
Ethereum did see a bump up and tested US$245 overnight before the rally proved unsustained and saw a sharp drop to US$237 before rebounding to now trade at US$239 (GMT 0300) 
The short for Ethereum yesterday was to wait till another push towards US$243 and short to US$239, with a short cover at US$244 – this trade was also in the money. 
Looking ahead, those wanting to go long on Ethereum can consider entering at the lower end of US$239 and exiting at US$243, with a stop loss at US$238. 
Shorts for Ethereum can consider waiting till another rally to US$243 and short to US$238 with a short cover at US$244. 

Novum Digital Asset Alpha is a digital asset quantitative trading firm.

Exclusive access to Novum Digital Asset Alpha’s Daily Analysis is made in conjunction with Bitcoin Malaysia.

The information and thoughts laid out in this analysis are strictly for information purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws.

It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals.

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