When Will the Crypto Winter End?

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Estimated read time: 6 minutes 18 seconds

1. When Will the Crypto Winter End?

2. Why is The US Dollar Outperforming Bitcoin?

3. The Differences Between a Hedge Fund, Private Equity Fund, and Venture Capital Fund

Good morning and happy Monday - let's get smarter

When Will the Crypto Winter End?

The vaccine rollout / end of lockdowns + zero interest rate craziness brought massive returns to high risk investors

Risk assets such as cryptocurrencies and SPAC’s

Not only did this bring on high returns it also brought out a lot of phonies and frauds

The question becomes, will we ever see investors pour money into assets like crypto with no regard and see another massive boom in high risk assets?

Realistically, just like all asset classes, returns change based on the economic cycle and now that GDP is slowing and interest rates are rising (recession) higher risk assets UNDERPERFORM

What outperforms?

Typically assets that outperform you have disinflation (slowing inflation) and slowing GDP growth assets like: The USD Dollar, Gold, Investment Grade Bonds ($LQD) -> these are assets that have decreasing volatility and have heavy inflows during recessions

Sectors that perform well: Healthcare and consumer staples

Consumer staples would be companies like Dollar General, Procter & Gamble, and Walmart

These are STAPLES that consumers need for daily activities no matter what

A lot of these companies by no coincidence also compete on volume (selling more) vs price (they are the low price)

Current savings rates are the lowest they have been in decades

Makes sense then that buyers would be looking to transact for the lowest price?

What can you do now? Be a buyer on down days of $UUP, the US Dollar, buy the ticker $GLD, Gold, buy the ticker PINK (Healthcare ETF), buy the ticker $XLP (Consumer Staples ETF)

Rather than the risk of owning an individual stock, you can buy the healthcare and staples ETF which own various different companies 

What will underperform?

High volatility and higher risk assets such as crypto, or tech names such as TSLA

TLSA as an example has a Beta of 1.91

Beta is a measure of the volatility compared to a benchmark like the S&P500

A beta of 1 means that the ticker is equally as volatile as the S&P500, < 1 means less volatile than the S&P500, and > 1 means more volatile

If you own a lot of tickers in low performing sectors during a recession with high beta, this is a sure fire way to get pummeled

For how long could these assets underperform?

If I could tell you when the exact date there would be economic regime changes, I would definitely be living in Mykonos and not writing this

But

What does the data say and what data matters?

Ray Dalio, legendary investor and founder of the hedge fund Bridgewater, who's firm runs $140 billion, came up with the 4 regimes of the macro environment that are the main drivers of whether a stock, asset class, etc, outperforms or not

Growth (GDP growth) -> are we accelerating or decelerating

Inflation -> are we accelerating or decelerating

The other important macro factor not on this chart is the federal reserve's policy

Policy -> is the fed raising interest rates (hawkish) or lowering rates (dovish)

^ These are THE most important factors

If you look at the chart, the most important factor for stocks is whether GDP is increasing or decreasing. So the key is to understand when GDP will be accelerating again.

And THESE factors indicate for a potential regime change out of slowing growth and slowing inflation, a recession, to accelerating growth in Q3 of 2023

That is when we would expect the crypto winter to end

Why is the US Dollar Outperforming Bitcoin? Important Market Dynamics

There are several factors that can influence the relationship between cryptocurrencies and the US dollar.

Here are a few potential reasons why cryptocurrencies trade inversely to the US dollar:

Market dynamics: Like any asset, the price of cryptocurrencies is influenced by supply and demand. When demand for a particular cryptocurrency increases, its price may rise, while a decrease in demand may cause the price to fall. Changes in demand for cryptocurrencies can be influenced by a variety of factors, including investor sentiment, market trends, and regulatory developments.

Inflation: One of the primary purposes of cryptocurrencies is to serve as a store of value, and many investors view them as a hedge against inflation. If investors believe that the US dollar is at risk of losing value due to rising inflation, they may be more likely to invest in cryptocurrencies as a way to protect their wealth. In this case, the value of cryptocurrencies may rise as the value of the US dollar falls.

Market instability: Cryptocurrencies are often viewed as a relatively risky investment due to their high volatility and the lack of regulation in the cryptocurrency market. If there is uncertainty or instability in financial markets, investors may turn to the US Dollar as a safe haven, which could cause the value of cryptocurrencies to fall relative to the US dollar.

Volatility: During recessionary environments, investors should move their assets out of asset classes that have rising volatility, and into less volatile assets. Why? Returns are inversely correlated to volatility, so as volatility rises, you want to move your money towards asset classes that have less volatility such as a currency or a fixed income asset (bonds) that are lower volatility asset classes

It's important to note that the relationship between cryptocurrencies and the US dollar can be complex and can vary over time. It's not always possible to predict how these two asset classes will move in relation to one another, but we can use the past to help us guide the future

Historically, a bullish USD Dollar has means a bearish Bitcoin

What is The Difference Between a Hedge Fund, Private Equity Fund, Venture Capital Fund

Hedge funds, private equity funds, and venture capital funds are all types of investment vehicles that are designed to generate returns for their investors.

However, there are some key differences between these three types of funds:

Investment strategy: Hedge funds typically use a variety of investment strategies, such as long/short (making money both ways as stocks go up and down or hedging) investing, leverage, and arbitrage, to generate returns. Private equity funds typically focus on making long-term investments in companies, with the goal of growing the value of those investments over time. Venture capital funds typically invest in early-stage companies that have high growth potential, with the goal of helping those companies scale and become successful.

Structure: Hedge funds are typically structured as partnerships, with the fund manager acting as the general partner and the investors as the limited partners. Private equity funds are also structured as partnerships, but they typically have a more complex structure that includes multiple layers of investment vehicles. Venture capital funds are also typically structured as partnerships, but they may have a different fee structure than hedge funds and private equity funds. 

Fees: All three types of funds charge fees to their investors, but the fees can be structured differently. Hedge funds typically charge a management fee, which is a percentage of the assets under management, as well as a performance fee, which is a percentage of the fund's profits. Private equity funds typically charge a management fee, as well as a carried interest fee, which is a percentage of the fund's profits above a certain threshold. Venture capital funds may also charge management fees and carried interest fees, but they may have a different fee structure than hedge funds and private equity funds. A common fee structure for VC and PE funds is “2/20”. This means if their fund has $100m of investors capital, they make 2% of that as a management fee, and 20% of the profits

Regulation: Hedge funds are subject to less regulatory oversight than private equity funds and venture capital funds, and they are typically only available to accredited investors (individuals with a high net worth or certain professional qualifications). Private equity funds and venture capital funds are subject to more regulatory oversight and are generally available to a wider range of investors.

Overall, while hedge funds, private equity funds, and venture capital funds are all types of investment vehicles, they have different investment strategies, structures, fees, and levels of regulatory oversight.

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.