Now I understand that this might be a controversial statement, but it’s true nonetheless. Crypto is on its way to ruin and investors unprepared for its downfall could loss everything.
Just like yesterday’s report, this special edition of Total Wealth is designed to prepare you for 2022 and secure 12 more months of profit.
Crypto Is a Sinking Ship
It’s all good until it isn’t with cryptos. And 2021 was good!
But just because 2021 was an up year doesn’t mean there’s momentum going into 2022.
There’s nowhere more freakishly crazy in terms of “YOLO mentality” than in crypto chasing. A Pew Research survey conducted last summer found 16% of U.S. adults have personally invested in, traded, or otherwise used at least one cryptocurrency. It’s estimated that 43% of U.S. men between 18-29 say they have invested in, traded, or used a form of cryptocurrency.
Institutions and hedge funds have been pouring money into cryptos too. Forbes reported in August that U.S. family offices, hedge funds, and traditional money managers placed some $17 billion into crypto assets in the first half of 2021. Globally, Coinbase reported in April 2021 that of the $335 billion in crypto trades the company did in the first quarter, $215 billion came from institutional investors. And it’s estimated that nearly one-third of hedge fund managers plan to add crypto to their portfolios in 2022. The reason they gave was the potential for appreciation.
But, Houston, we have a problem.
Whether it’s the young crowd attracted to crypto, older investors hoping to hit it big, or institutions jumping into the cryptocurrency craze, almost no one cites the benefits of any crypto, coin, token, or even the blockchain behind it. All the participants are speculators looking to ride cryptos to the moon. In other words, crypto trading and investing are being done on purely speculative grounds.
Why is that a problem? Because what goes up must come down.
There’s no intrinsic value in an asset – if you can even call them that – and no “utility.” When was the last time you bought something with a token – other than a subway ride?
Bitcoin (BTC) is the perfect example. It’s in something of a class by itself. For several reasons, it’s considered the real-deal, OG crypto.
Why? Because it was first? Because it’s been adopted by a country as its currency?
Or is it because people are blind or stupid enough to believe it is something new under the sun?
Bitcoin doesn’t in any way legitimize the space and has nothing to do with other cryptos other than to “legitimize” them in the eyes of traders or investors.
Everyone knows it’s really about blockchain – we all get that. But what most crypto investors don’t get is if the underlying blockchain isn’t attached to anything of tangible value – like smart contracts, royalty chains, or titles to real assets – it’s blockchain for the sake of distributing a crypto fiat.
It’s worth what it is because people believe it’s worth that much.
Cryptos are assets – they’re intangibility tokens that measure how speculative belief in them is.
After leaping from $11,000 in 2020 to $64,789 in April of last year – a whopping 477% rise – it tumbled 55% over two months. Then came another rally, leading to that November 2021 peak I mentioned earlier. And now, it’s tumbled again. That’s short-term cyclicality in one respect and volatility in another.
But either way, this pattern shows Bitcoin’s ruinous potential in 2022. Bitcoin may fall… far – either to its $41,000 support, to its more important support at $29,000, or further still. If its supports are broken, Bitcoin could undo all its gains from the past two years and drop below $11,000.
And when it comes to the other altcoins out there, they’re even more of a joke when it comes to their tied value – even the highly bought ones are a laughingstock.
Doge is a joke on Bitcoin. Shiba is a joke on Doge…
How can the whole edifice not be a joke if the cryptos most chased are known jokes and jokes about jokes?
The end of some cryptos is coming, and it’s going to be the ruination of many so-called investors and players in the space.
I don’t mean to say that some coins won’t “win.”
Those winners will be the cryptos actually tied to tangible goods and services, contracts, or anything real (and I don’t mean real as in “fiat” real). The winners in the speculation game will be those traders smart enough to take their profits on the way up and those who short coins on the slippery slope down.
And 2022’s first test of Bitcoin will be whether it falls further – down to $41,000, where there’s some support – or whether it tests the crucial support around $29,000. If it breaks that support, it could go down to $11,000 or $10,000.
Given the dicey nature of some of the biggest cryptos and the fact that they mostly follow BTC, 2022 is guaranteed to be volatile. Guaranteed!
What’s happening with interest rates, Omicron, the economy growing or slowing, international growth, and – maybe, most importantly – the U.S. stock market is what’s going to make or break cryptos in 2022. And of course, there’s the threat of regulation.
The danger cryptos pose isn’t just to speculators in the space or investors who say the volatility is just part of the profile of these burgeoning instruments that are like any other new, cutting-edge technology – hard to understand and price.
It could be the stock market selling off that triggers a crypto crash or the other way around. While a stock market rout would hit cryptos in a raging contagion fire – fully attendant with cross-margined positions getting called in at the same time – it’s more likely a massive crypto crash will bring down the stock market.
There is common ownership of cryptos alongside a lot of the same stocks in the form of meme stocks and narrative stocks, as well as momentum stocks in the market.
The concentration of positioning in a tight group of crypto names and a tight concentration in crowd-favorite stocks will prove catastrophic when either side of the boat loaded with the same ammunition lists to the same side and takes on water…
And traders get margin calls on wicked down days. This would cause forced selling on crypto exchanges and in brokerage accounts at Robinhood and other traditional discount brokerages that now cater to crypto traders. We’ll see retail speculators spit out stocks and cryptos as fast as they can.
And then, there’s the leverage.
Leverage is accomplished through speculative tools. Binance, the largest crypto exchange as of 2021, has $42 billion of derivatives volume.
Bitcoin futures have seen open interest near $30 billion. But proof positive that BTC is volatile – open interest fell to $12 billion in a matter of weeks.
In June 2021, more crypto derivatives were traded in a day than actual coins, and that remains true today. Binance, the largest exchange globally by far and unregulated for the most part, offers 100X leverage on actual coin trading and in some derivatives.
Crypto derivatives include options and futures traded on the CME, nondeliverable forwards, and futures with no physical settlement. Goldman Sachs started trading these in April. Leveraged tokens offer bull or bear bets with fixed leverage ratios and can be traded on exchanges like Huobi, Deribit, and FTX, along with Binance.
There’s the grayscale Bitcoin Trust and exchange-traded Bitcoin Tracker in Europe. Both track the price and can be traded like a futures contract. There are also bespoke derivatives contracts backed by banks and hedge funds and exchange-traded notes launched on Eurex, the European derivatives exchange.
The price of cryptos falls due to volatility, cyclicality, and when “new” traders – late in the short history of coins – holding at high prices start dumping. Because of this, support will be breached and profit taking will be followed by selling. Then, when next-level support areas are breached, shorting will put the nail in the coffin for some cryptos.
A severe plunge will create the usual cross-market contagion and could kill the stock market rally.
But knowing this is going to happen is going to be a moneymaking phenomenon – the likes of which we haven’t seen since the big short, when a handful of traders who understood the leverage in subprime made billions on the financial crisis. We know what to do and how to play the fallout in this case.
I’m a put option buyer for sure, but when things get scary, the price of puts goes through the roof – as they will for companies that mine coins, make the equipment favored by miners, power them, and store their servers.
So I prefer to short losers early in a given cycle – while their prices are high and just starting to fall… right about when puts are getting bid up. And to protect yourself from any bounces – since your short position is truly an exposed flank – you buy cheap call options, which will get cheaper as the underlying stock prices fall. That married position – a short stock and a long call – is a synthetic put.
As cryptos fall, synthetic puts on the weakest crypto miners and companies will be winning positions. Exchanges will suffer from volume shrinkage and should be played.
So should some of the institutional players in the crypto space like the following…
- MicroStrategy Inc. (NasdaqGS:MSTR)…
- Galaxy Digital Holdings Ltd. (OTCMKTS:BRPHF)…
- Voyager Digital Ltd. (OTCMKTS:VYGVF)…
- Coinbase Global Inc. (NasdaqGS:COIN)…
- And Riot Blockchain Inc. (NasdaqCM:RIOT).
Strangling Business – New Regulatory Moves
Last year was full of seemingly benign regulatory news. But don’t let your guard down.
A handful of regulatory rejiggering moves were anything but benign and will start impacting a host of companies, sectors, and lives in 2022. But it’s not regulation that’s already happened that’s going to rock 2022. It’s new regulatory waves that will really rock sectors and the markets.
America’s biggest names in tech, cryptocurrency, decentralized finance, commission-free trading, the gig economy, and work-from-home lifestyles are all on the chopping block in one form or another.
The commander in chief of the new regulatory army is President Joe Biden, the country’s regulatory leader, big-company basher, union sympathizer, illegal immigrant and labor advocate, would-be spender of trillions of dollars of redistributed wealth in the name of vote-buying infrastructure projects, and woke social engineering crusading.
The chief’s in-house aide-de-camp is former Columbia University law professor Tim Wu, now special assistant to the president for technology and competition policy at the National Economic Council. Mr. Wu’s portfolio was mapped out in his 2018 book, The Curse of Bigness: Antitrust in the New Gilded Age, which calls for early 20th-century style antitrust break-up campaigns.
From the Department of Justice, the president expects Senate approval of nominee Jonathan Kanter for the role of Assistant Attorney General for the Antitrust Division. Kanter, who previously worked as an antitrust lawyer at the FTC, went out the revolving Washington door to Paul, Weiss, Rifkind, Wharton & Garrison LLP, where he lawyered on behalf of big corporations to sue even bigger corporations on antitrust grounds.
But when his firm notified him of conflicts he would have when they were engaged by some of the biggest companies in America, including Amazon and Apple, he founded Kanter Law Group to go after some companies his old firm began representing. Now he wants back inside D.C. to break up the companies he’ll later call clients in his private practice.
Mr. Biden’s other big gun, Lina Kahn, was voted onto the five-member commission that runs the FTC, then elevated by the president to chairwoman in a surprise move that upset Republicans and big businesses. Ms. Kahn, the 32-year-old former Columbia Law School professor, best known for her 2017 Yale Law School paper entitled “Amazon’s Antitrust Paradox,” rails regularly against the likes of Amazon, Google, and Meta – calling for new regulations to curb big company “abuses of power.”
These regulatory heavyweights are already weighing in on Big Tech and other targets.
Congress and the SEC grabbed headlines highlighting how Facebook’s engagement-based algorithms affect teenage girls’ negative views of their bodies and facilitate the viral spread of “harmful content” on the company’s platforms when Frances Haugen, the former product manager for Meta Platforms Inc., turned internal documents over to media outlets.
One of the documents leaked was a 2019 report wherein an employee reported on “hate speech, divisive political speech, and misinformation on Facebook and the family of apps [that] are affecting societies around the world” – likely in reference to the organizing of a genocide in Myanmar using Meta’s platforms. There is compelling evidence that the company’s product mechanics, such as virality, recommendations, and optimizing for engagement, are a significant part of why these types of speech flourish on the platform.
Other social media platforms, like YouTube, Snap Inc. (NYSE:SNAP), and TikTok have also been asked to address these issues in congressional committees, testifying how they keep their users safe.
Meanwhile, Amazon.com Inc. (Nasdaq:AMZN), Alphabet Inc. (Nasdaq:GOOG) (aka Google), and Apple Inc. (Nasdaq:AAPL) are all under investigation or “examination” by various U.S. regulatory bodies as well as European and Australian watchdogs.
But it’s not just Big Tech that these regulatory soldiers are attacking.
After the SEC announced that the legality of payment for order flow (PFOF), the pillar that makes popular trading apps like Robinhood free, was up for debate, Congress started its own investigation. Some find the meme stock phenomenon and the “gamification” investing to be concerning, especially since these apps can use PFOF for their own personal gain.
And big business is under a microscope too.
The U.S. Department of Labor has been told to look into unionizing activity and see if impediments have been thrown up by Amazon managers or executives.
President Biden has been pushing the Occupational Safety and Health Administration (OSHA) to create and enforce an “Emergency Temporary Standard” regarding COVID-19 – in the process, creating a set of national laws implementing workplace controls, targeting personal health records, and training employees on current national emergency standards.
Regulators and enforcers from the Internal Revenue Service and OSHA are being told to examine work-from-home (WFH) rules and regulations to ensure WFH wage earners comply with multistate tax law and wage/hour issues for nonexempt employees, including how they track hours and workers’ compensation payments.
In short, the long arm of regulation is being extended like never before. This, among other things, will freak out investors who see frontal assaults on many of their successful company holdings as a reason to sell before worst-case scenarios come to pass.
But Big Tech companies aren’t going to let regulators roll over them without a fight. In fact, they’ve been funding their defense for decades. This year, anticipating the regulatory army’s marching orders, they’ve been ramping up lobbying efforts.
According to the Center for Responsive Politics, Meta is on track to beat its previous record of $19.7 million spent on lobbying in 2020, but we won’t have a final tally for 2021 for some time.
Amazon has spent $15.3 million in the last 12 months, but they’re expected to have ramped up and may enter 2022 having spent more than the $18.7 million. Google and Apple are spending more too.
Cryptocurrency companies, including Coinbase, are spending millions of dollars on hiring 24 top Washington lobbyists, including Teana Baker-Taylor from Chamber of Digital Commerce, Marc Lampkin, managing partner of Brownstein Hyatt Farber Schreck LLP, and Patrick McCarty, law professor and lobbyist founder and president of McCarty Financial LLC.
No company and no industry is going to take a regulatory frontal assault lying down. They’re all gearing up for a fight.
But that doesn’t mean all investors can read the room.
Don’t Follow the Crowd
Investors who aren’t on board with what these companies are up against and how they can defend themselves or even bend and shape eventual regulation to their benefit are already selling stock in companies like Meta, Amazon, and Robinhood.
That’s a mistake.
We’re not waiting to watch wars waged. We have a good idea who’s going to win what. That’s why in 2022, I’m calling who the winners and losers are going to be and how to play them.
Meta, for one, is bearing the brunt of the backlash from multiple attacks and is already on sale. In light of the recent scandal, the rebrand from Facebook to Meta is still the biggest social media company in the world. It isn’t going to succumb to the slings and arrows of regulation – it’s a bargain here and now.
FB has a gigantic subscriber base – the biggest audience in the world – because it commands about one-fifth of the world’s population on its platforms. That’s not going to change. FB’s assets, including Instagram, WhatsApp, Onavo, Beluga, and the future Metaverse are separately worth more than the sum of their parts. Even if the company’s broken up by antitrust crusaders, it will be worth even more. That’s just one reason to buy FB – I mean Meta – while it’s on sale.
Robinhood Markets Inc. (Nasdaq:HOOD) is way, way down below its IPO price. Since congressmen and women don’t read, especially not the gargantuan bills they pass into law or reports they cite when they craft those monster laws, it’s highly unlikely any of them read the SEC’s report on the “meme stock phenomenon” and the short squeezes that drove the likes of GameStop and AMC to the moon. I did, and there’s absolutely nothing in there that would ever lead Congress or any other regulator to undermine Robinhood. On the contrary, Robinhood is currently on sale.
PayPal Holdings Inc. (Nasdaq:PYPL), which has also taken a hit over fears new regulations in the payment space will impact its revenues, is a screaming buy. PYPL is in the line of fire of several regulatory bodies. Still, they’ve got work-arounds already in motion to circumvent issues they may face over DeFi businesses they’re spearheading and its money-moving businesses.
But let’s not forget to talk about one positive turn from this administration: pot regulation. Or rather, deregulation. A couple of Republican senators are floating legislation to decriminalize marijuana at the federal level. And that’s where the trouble is for pot companies and pot stocks. Decriminalizing pot and letting the states regulate it like they regulate and tax liquor is a long-overdue change. And it’s the only good regulation that’s coming because its deregulation.
So let’s party with Green Thumb Industries Inc. (OTC:GTBIF). This company distributes and sells various cannabis products for medical use and adult use in the U.S.
It sells cannabis flowers as well as processed and packaged products, including concentrates, edibles, topical applications, and other cannabis products under names like Rhythm, Dogwalkers, The Feel Collection, and other popular brand names.
What makes GTBIF a deregulation play isn’t just its future potential. This company is already profitable. Over the trailing 12 months, it earned $827 million in revenue and a sweet $75 million in net income. Meaning GTBIF has a profit margin of 9.08% and an operating margin north of 25.12%.
Now, I’m curious about your top picks of the year. What stocks do you think will take off in 2022? Drop me a line at firstname.lastname@example.org and I may feature them in next Friday’s video.
But until then…