BitMEX founder’s latest long article: Chaos

The most psychologically shocking measure of your portfolio health is annual return. As always, our goal is to maintain or improve the purchasing power of the asset relative to the cost of energy. The essence of human civilization is to convert the potential energy of the sun and the earth into kinetic energy to support our bodily functions and modern way of life. Making money is not the purpose, because money is just an abstract concept of energy. The right way to measure your financial success is to determine how much energy is being spent on your lifestyle now (use oil as an example below), and how much will be spent in the future (hard to measure, of course). Then, you have to make sure your financial savings grow faster than your expected energy consumption.

The market does not stop at the bell at 12:01 am on January 1, 2022, returns are compound and path dependent in nature. Unfortunately, only a few trading days really matter. A simple example can illustrate this.

Back in January 1st, 2020, the world was simple and the global coronavirus madness had not yet taken shape. The price of Bitcoin at the time was $7,216. And on the last day of that good year, Bitcoin was at $28,996, an average annual return of 302%. Who Earns More, Bitcoin Investors or Pfizer?

BitMEX founder's latest long article: Chaos

While that was an impressive annual return, it belied the turbulent market volatility in mid-March. Let’s focus on March 2020.

Bitcoin experienced a correlational moment on March 16, battering it along with every other risk asset around the world as the world (except China) found the COVID-19 pandemic to be real and devastating. A correlative moment is when all risky assets fall at the same time and investors rush to sell all assets in margin trading to add to the global reserve currency (currently the US dollar) so they can repay their loans. All assets are spared. Only when the dust settles and the fear dissipates will asset prices start moving in more idiosyncratic ways again.

From January 1 to March 16, the price of bitcoin plummeted 38%. Many are stopped out, either psychologically or forcefully (a psychological stop is when the price of an asset reaches some inherent pain point that forces you to press the “sell” button. A forced stop is when your The leverage provider closes your position to retain some collateral value).

BitMEX founder's latest long article: Chaos

The above table illustrates the good and bad results of path dependence. The most important lesson is that trading on March 16 was by far the most important day of the year. Those very good traders who are tied to the trading ship have the opportunity to substantially increase their portfolio returns, from the low of the 16th to the end of the year, the return is 250% higher than the return of the investment from January 1st .

If you are unfortunate enough to get out of the market on the 16th, but have the energy and financial resources to re-buy the market, the date you get back into the position is extremely important. Bitcoin did not recover to January 1 levels until April 21. The longer you wait, the lower your 2020 compound rate of return.

Active traders have to show up on any day like March 16 and buy back shortly after selling a position to create a constant compounded rate of return.

For those who don’t want to watch Bitcoin 24/7, you have to build a portfolio that is convex in the event of a disastrous day like March 16. The right half of , that is, the profit from rising prices is greater than the losses from falling prices, which is simply understood as making more and losing less). The most important psychological hurdle to overcome is to move away from the concept of annual arithmetic rate of return and move to compound rate of return. Compounding returns, using the geometric mean to calculate the average return). The above example illustrates the negative effects of compounding, if you don’t protect your chips on the downside, you can’t participate in the upside rally.

To do all of the above, you have to factor out emotions when making investment decisions and use a certain amount of leverage wisely. The former requires more skill than the latter, as it is very difficult to completely change your investment philosophy (especially given that most of the investment literature focuses on arithmetic returns). To make matters worse, all trustees (i.e. fund managers) pay bonuses on an annual basis. If your fund manager loses all of your assets, the worst case scenario for them is temporary unemployment, and if the market goes their way, then you pay them a percentage of your earnings every year, over time Over time, this will destroy your compounding returns. I don’t have a solution to the hosting problem, but just remember it exists and adjust your behavior accordingly.

The point of this Bitcoin price history lesson is to start a discussion on how I have configured my portfolio this year before I think there will be a series of disastrous trading days like March 16, 2020. As usual, this has to do with the Fed cutting growth on its balance sheet to 0% and then raising rates one to three times in 2022.

I’ll start with why interest rates are so important, and then discuss how aggressive short-term policy rates set by central banks will cause the most pain for risk assets globally in the three- to six-month time frame. I believe the Fed and other lemming central banks around the world ultimately have no choice but to keep printing money. But at some point in the near future, domestic politics in many countries may require tightening the money supply to quell the dissent of the populace, whose food, housing, and transportation costs are rising, by a large margin!


When it comes to central banks, it is fashionable to be as transparent as possible about future actions. However, in the face of the obvious data, the executives refused to admit that money printing was the cause of the inflation that ripped apart society. Since the Great Recession of 2008, those who do their bidding have amassed massive amounts of fiat. Those who care about fundamentals and other similar bullshit are underperforming, don’t be silly and buy the damn big market!

While policy changes frequently, the Fed is very clear about what they intend to do. “Transient” inflation has now been put on hold, and the Fed has signaled that they think it’s time to rein in food, energy and transportation inflation at the expense of financial asset prices. To that end, they decided to stop buying bonds until March of this year, and if their “dot plot” holds true, the first rate hike will take place between March and June.

Most market participants believe that Democrats will instruct the Fed to raise interest rates, and the Fed will follow suit. Democrats must prove their hardline stance on inflation to avoid a clean sweep in November’s congressional elections. But there is no consensus on how short-term rate hikes will affect financial assets — that is, whether they will weather the storm or succumb to pressure.   

Let’s forget about the perception of non-crypto asset investors, my reading of crypto asset investor sentiment is that they naively believe that the fundamentals of growth of the entire network and users will continue the unabated rise of crypto assets.

In my opinion, this heralds a serious crash, as the detrimental impact of rising interest rates on future cash flows could prompt speculators and margin investors to sell or significantly reduce their holdings of crypto assets. I don’t deny that loyal diamond traders have been increasing their positions after the price collapse, but in a short period of time, this “iron powder” cannot prevent the catastrophic price decline. Remember, as long as 1 bitcoin is trading at $20,000, then the final price is $20,000, even if there are 19 million bitcoins in the world that are not traded in the market. The final transaction price is the result of abandonment by marginal sellers, albeit a small transaction.

The most damaging effect of the last trade price is the psychological shock to weak traders, which affects the liquidation of underwater positions on leveraged trading platforms. So don’t tell me all the crypto market OGs are busy buying limit down; none of that matters when a fund manager destroys your position.

For more than a decade, crypto-asset investors have been salivating over the entry of “institutional” investors into the space. Now, they’re finally here, as the Bloomberg headline below suggests. Despite the small percentage of asset allocation, there are enough believers from the TradFi world to make a difference.

“Billionaires Are Embracing Crypto in Case Money ‘Goes to Hell'”

This article discusses how well-known CEOs and investors like Tom Peterffy (InteractiveBrokers) and Ray Dalio (Bridgewater) are holding Bitcoin and other crypto assets as a hedge against fiat declines.

While the wealthy who run large TradFi companies can withstand severe price drops, the lemmings that follow them can’t. The asset management industry is more than happy to invest in crypto assets, and as long as prices drop, these overpaid knockoff chefs don’t lose their well-paying jobs. They do not believe in and are not loyal to Satoshi Nakamoto. Therefore, if external conditions warrant a reduction in their crypto asset allocation, they will not hesitate to liquidate their positions – no matter how large the loss.

Institutional investors are at the mercy of the power of Eurodollars, which hold dollars outside the U.S. domestic banking system. Essentially, the world is shorting the dollar. When dollar prices fall, credit expands and financial assets rejoice. When the price of the dollar rises, credit contracts, and financial assets get gloomy. Read Alhambra Investments’ blog for a more in-depth discussion of how this market works.

The rate of change of money supply growth, its first derivative, is the most important factor in determining whether institutional investors are active or passive.

BitMEX founder's latest long article: Chaos

The white line is the U.S. M2 growth rate, which gradually increased in 2019. In March 2020, the Fed used its magic money-printing machine to nationalize the corporate bond market and rescue the U.S. Treasury market by bailing out a group of overleveraged macro hedge funds. This resulted in a jump in M2 growth. The Fed’s balance sheet grows, and as a result, the larger M2, the slower the growth rate (law of large numbers), and the U.S. government has not enacted enough fiscal spending to continue to accelerate money printing.

Currently, the Fed forecasts that growth in its balance sheet will slow to zero. If they don’t reinvest the maturing bonds in their portfolio, their balance sheets will actually shrink. The ugly white arrow in the image above shows the impact this could have on the money supply.

The yellow line is the price of Bitcoin/USD. Ease of monetary conditions in the US certainly contributed to the meteoric rise in prices (albeit with a delay of several months). Bitcoin has been trading sideways since M2 growth stalled. If the M2 growth rate reaches 0% or even negative in the short term, then the natural conclusion is that Bitcoin (without any incremental growth in the number of users or transactions processed through the network) may also be lower.

I could post more graphs depicting credit impulses in different countries, but they all paint the same picture. The villagers woke up because the prices of meat, vegetables, taxis, rent and other necessities were rising faster than their wages. Now their public enemy number one is inflation. If domestic politicians around the world want to continue sitting on their hands, they have to pretend to do something. So now is the time for central banks to put on some musical, at least for a short period of time, they will be willing to loosen their balance sheets and return to positive interest rates that reflect various domestic economic realities.

benchmark asset

Bitcoin is the cryptographic representation of money/energy.

Ethereum is the decentralized computer of the internet.

For the most part, each of the other major cryptoassets can be categorized as follows.

1. The token bound to the Layer 1 protocol is expected to become the “next Bitcoin or Ethereum”. These networks are more scalable, can process more transactions per second, or are anonymous. For example, Monero is for Bitcoin, or Solana is for Ethereum.

2. The other is to use the existing Layer 1 protocol as a token to accomplish certain intended functions, such as Axie Infinity, a token-based game that uses NFT assets residing on the Ethereum blockchain to make money.

A token is either trying to be a better version of bitcoin or ethereum, or exploiting the capabilities of both networks to create a new product or service.

Both Bitcoin and Ethereum have some fairly obvious shortcomings, and if another cryptoasset can replace either, its value will naturally explode. Anyone who discovers the aforementioned tokens in advance will become rich in crypto assets. There are many Layer 1s with high and rising expectation premiums, but these protocols transact based on expectations because the fundamentals of these protocols (such as the number of wallet addresses or payments in native tokens) compare to Bitcoin or Ethereum. amount of actual transaction fees) is pale. This does not mean that a particular coin cannot be a winner for a long enough time. However, we don’t care about the long term, we care about the next 3 to 6 months and protecting our portfolio downside. 

Regarding tokens that rely on the Bitcoin or Ethereum blockchain for their functionality, these tokens should (in theory) be worth no more than the protocol they are built on. That’s the difference between investing in a general application of a technology and a specific application – general applications are more likely to provide iterative power for multiple successful concrete applications, so general applications should be rated higher. While there is a large gap between the market caps of Ethereum and ERC-20 dAPPs, there is a certain time frame in which the price of dAPPs will rise faster than Ethereum. Of course during the fall, the aforementioned dAPPs will lose value faster than Ethereum. 

This is how I see the world. Therefore, I benchmark all returns in my crypto portfolio against Bitcoin or Ethereum. I got into this crypto world by swapping fiat for bitcoin and ethereum, these tokens always lead a rally before it’s time to buy low and sell high. In the process, my Bitcoin and Ethereum holdings may increase.

If I believed that in three to six months time, Bitcoin and Ethereum would be trading below $30,000 and $2,000, I would dump all my shitcoins. This is because Bitcoin and Ethereum, the highest quality tokens, have fallen less than all their yet-to-be-proven competitors. Any specific application using Bitcoin or Ethereum will also experience a free fall greater than 9.8m/s, and in a true crypto asset safe-haven environment, these shitcoins could drop by 75% to 90%.

The trend of the TradFi system mainly depends on the fluctuation of the cost of Eurodollars, while the encrypted market may be based on Bitcoin and Ethereum. I don’t have hard data on this, but my hunch is that currently billions of dollars worth of Bitcoin and Ethereum are being used as collateral, with holders depositing Bitcoin/Ethereum and getting USD in return. These dollars are used to buy assets such as cars or houses, as well as gold rush altcoins. If you think we are in a bull market and you already have the benchmark, it makes sense as a trader to add leverage and buy an altcoin to get a 10x gain if Bitcoin goes up another 10%.

Whether you buy junk coins or more SHIB, if Bitcoin or Ethereum drops 20% to 30%, you will be forced to sell your assets and raise Bitcoin or Ethereum to avoid being liquidated. A contraction in the price of the benchmark asset, fiat, will cause some margin traders to dump their altcoin positions desperately, regardless of whether they are making money. This is why the last price is influenced by marginal weak sellers.

It doesn’t take much marginal selling pressure to burst this bubble. CTMD Those terribly high Farming APY, once the shit coins start shitting, everyone will quit to make a profit. Even if only a small percentage of traders have leveraged access to large amounts of altcoins, it will be difficult to find large-scale buying during the decline due to the illiquidity of these coins. Remember, the gate goes in, the small gate goes out.


What if I’m wrong? What will hurt my portfolio if the crypto bull run continues without a big drop?

1. March to June

During this time, the Fed will either raise rates or not. Markets expect the Fed to raise rates, and they will only be disappointed if one of three things happens.

1. The growth rate of the consumer price index (CPI) fell below 2%. Given that the index is “managed” by government statisticians, this is unlikely to happen. But if the CPI trend falls sharply and the political pressure from voters dissipates, the Fed may be able to publicly reverse the trend.

2. Parts of the extremely complex and opaque currency market and US Treasury market will collapse. You’ll know it when you see it — it’s the one thing the Fed fears the most. Given that all of TradFi’s assets are valued based on prices in the U.S. money market, the Fed must do whatever it takes to ensure that this market functions in an orderly manner. Usually, restoring order requires a lot of money printing.

3. Inflation is no longer the number one concern for American voters ahead of the November election.

Of the three scenarios, I think the second is the most likely to happen. No one can predict what will happen to the currency/treasury bond market when the Fed stops funding. There are so many levers embedded in the system that it is impossible for us to know whether methadone will kill a drug addict.

Given the law of large numbers, simply resuming the previous trend of asset purchases will not result in a sudden sharp acceleration in the growth of the money supply. So while risk assets, including crypto, will rejoice, the best-case scenario is for asset purchases to slowly climb toward previous all-time highs. Even if this happens, the only way for the crypto market to rise is for the Fed to open the faucet openly and then fiat to cryptocurrencies.

If this starts to happen, there will be enough time to sell fiat, increase your total crypto holdings, or move up the crypto risk curve by increasing your altcoin holdings. You always go up the stairs and go down the elevator.

If I’m wrong, I’m not going to suffer a major short-swing loss as the crypto market resumes higher. Patience doesn’t come at a great cost.

2. From June

Assuming I’m right and the Fed raises rates at least once before the June meeting, if any of the following happens, the Fed will suddenly cut rates to zero and start at a faster pace than Usain Bolt Money printing machine.

1. The S&P is down 20% to 30% from its all-time high (reached in the first half of 2022). Whether you’re a net exporter to Asia or Europe, or a wealthy American, you probably own a huge amount of U.S. stocks. The U.S. stock market is the best performing stock market in the developed world, and it is also the largest and most liquid. There are too many rich people paying taxes and spending recklessly, and the Fed won’t let them down if there’s a serious turmoil in the stock market.

Another interesting reflex fact is that the conventional wisdom of maintaining a six-for-four equity-bond portfolio means that if 60% of equities fall, a fund manager with trillions of dollars has to sell bonds to maintain that ratio, which is totally written in the command. So if the Fed allows stock prices to fall, it will increase the cost of borrowing for the federal government — because yields rise as bond prices fall — at a time when the government is facing record deficits.

2. Parts of the extremely complex and opaque currency market and US Treasury market will collapse. .

3. The November 2022 elections are over.

Worst-case scenario, after November, the parties are back in action. Neither party in the US actually wants to stop the rise in asset prices. Both parties have proven their worth by shouting to the world: “I’m in power and the S&P 500 is up!” That makes everyone rich and your rich donors happy. After civilians go through the dramatic process of voting and expressing their dissatisfaction with the soaring cost of living, they can be forgotten until the next election. The government will then continue to print money to inflate financial asset prices. This is the American business model, and because of the structure of the global economy, this model must be preserved.


I am not actively trading around my positions. My goal is to build a portfolio that I think will be able to participate in the upside while limiting losses on the downside. As I mentioned before, if my portfolio’s return curve is convex, I’m doing fine. While I’ve spent most of this post talking about the crypto asset side of my portfolio, I expect my long-term interest rate and FX options portfolio – through my exposure to volatility hedge funds – to make up for crypto any loss of assets. However, if I’m being honest with myself, I may need to add more so I have enough Vega to make a difference on the downside .

I don’t want to sit in front of a screen for hours on end staring at my bitcoin day in and day out, I don’t like that. Some traders do this and are successful day traders, but these traders have to be very focused. If you can’t or don’t want to be on call 24/7 to look after your crypto portfolio, don’t try to short-term trade.

As these thoughts brewed in my head over the past few weeks, I was determined to act. I checked my entire crypto portfolio. After a 75% drop from current levels, I dumped any shitcoin that I wasn’t willing to add to my position. This leaves me with Bitcoin, Ethereum, and a few other stablecoins in the metaverse and algorithmic. Position size is not determined by the notional amount you hold, but as a percentage of your total assets. A position of 100 bitcoins is too big for some people and too small for others. Everything is relative.

Now, I am waiting. I am still fully invested in my benchmark crypto asset. Your encryption benchmark may or may not be similar to mine. I’ve given you my reasons, and you should figure out why you think your benchmarks are valid in the context of your energy goals.

If Bitcoin hits $20,000, or Ethereum hits $1,400, then I’ll start to wonder if these cryptoassets have energy value. Those two prices were all-time highs during the previous bull run in 2017, but those were fiat prices, and if oil goes negative again, who cares if the benchmark crypto asset’s fiat price decreases.

I hold fiat, ready for the vertical candle. I have traded this market long enough to find the final blow to the soul of a speculative bull. Although I was confident in my ability to spot the bottom, I also learned not to try to grab a knife that fell. What if you didn’t buy the bottom of the market? Let the market heal and then buy at a higher price because the seller’s marginal trade is over.

Whoever sells first, sells best. Now is the time to assess whether positive interest rates will seriously hurt your portfolio to buy more energy. No matter how governments try to suppress the fluctuations of the universe, the normal state is chaos. We are entropy!

Original address:

Author | Arthur Hayes, Founder of BitMEX

Translation | Wu Shuo Blockchain Wu Zhuocheng

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.