Contrary to popular belief, the market doesn’t move based on fundamentals.
Asset prices move based on positioning, or a lack thereof.
In other words, we know for a fact that prices are not necessarily driven by the underlying “fair value” of the assets, or the “earnings” they produce, or the dividends they pay.
We established all this last week in You Get What You Pay For.
Prices move based on where the market is positioned – and where it is not positioned.
Take for example, the recent rally we’ve seen in equities. It’s not like anything is so different today than it was just three months ago.
It’s just that everyone was so bearish in April, to an extreme rarely seen throughout American history.
And so from extremes in positioning come massive unwinds.
That’s what you’re seeing in the stock market, as the S&P 500 and the Nasdaq keep making new all-time highs.
In fact, the Cboe Volatility Index (VIX) has never had this fast of a collapse in its history.
That’s not because of “fundamentals.”
It’s because of how the players were positioned.
Where Is the Next Unwind?
I’m always on the hunt for massive divergences between how investors are positioned and what’s actually happening.
Unwinds like what we just saw in stocks might be rare.
But when you open to opportunities around the world, you’ll notice they actually happen a lot more frequently than you’d think.
Take Bitcoin, for example.
Bitcoin is just a few points away from another new all-time high and is close to a $2.2 trillion market capitalization.
Bitcoin on its own represents almost two-thirds of the entire value of all the Cryptocurrency in the world.
This is a real asset – it’s worth more than 2% of the total global GDP.
Bitcoin has arrived.
But speculators are the shortest they’ve ever been.
These are asset managers, hedge funds, and other individual investors who are historically wrong near extremes.
The types of investors shorting Bitcoin – to an extent never seen before in history – are the same types of investors who were shorting U.S. Stocks a few months ago.
And they got their faces ripped off.
Commercial hedgers are the opposite of the speculators. This chart here shows their positioning in Bitcoin futures:
For every short, there is a long.
If speculators are the “dumb” money – who we want to fade – commercial hedgers are the “smart” money.
With commercials holding their highest-conviction longs in Bitcoin ever, it makes me more confident about our Crypto positions.
In fact, it indicates we should be adding to those positions.
Remember, just because a trader or an investor, of any time horizon, wants exposure to Crypto doesn’t mean they literally have to go onchain and buy Crypto.
ETFs with plenty of liquidity can give you exposure to Bitcoin, including the iShares Bitcoin Trust (IBIT) and many others.
And the Grayscale Ethereum Trust (ETHE) gives you the ability to benefit from rising Ethereum prices.
You can trade Bitcoin mining stocks such as Marathon Holdings (MARA) and Riot Platforms (RIOT), among others.
And there are ETFs filled with Crypto-related companies.
You have companies like Strategy (MSTR) that have completely disregarded their original business models.
Strategy now owns 597,325 Bitcoin. At a current price of around $110,000, the total value of MSTR’s Bitcoin is about $65 Billion.
But MSTR trades at a market cap of $116 billion, nearly double the fair value of its Bitcoin holdings.
This is driving some investors nuts.
Strategy’s original business is essentially a rounding error in this calculation.
So there’s a huge arbitrage opportunity happening where some investors are shorting MSTR and buying Bitcoin.
They feel there’s no way the stock should be trading at a 2x multiple to the value of its assets.
BUT IT IS!
Fighting the Arb
Here’s how this works.
Let’s say an investor shorts MSTR and buys an equivalent amount of Bitcoin.
They’re betting that eventually the price of MSTR, and its total market capitalization, will grind back toward parity with Bitcoin.
That’s because MSTR doesn’t have a meaningful business to make the stock worth 2x its Bitcoin holdings.
In other words, the arbitrage traders here are betting this orange line goes down:
But what if it goes up?
Look at performance ever since Michael Saylor started to incorporate what he calls the “Bitcoin Strategy.”
MSTR is up more than 3,000%, while Bitcoin is up 800%.
One of the arguments is that before all these ETFs, the only way for investors to access Bitcoin using traditional financial markets was through MSTR, and therefore deserved to trade at a premium for that.
But if you look at the performance of MSTR vs Bitcoin since the launch of the Bitcoin ETF, for example, MSTR has generated more than 5x the returns of Bitcoin.
So the answer is “no,” more options available for investors to participate is not a catalyst for lower MSTR prices or a closing of that gap.
It’s actually the opposite.
Everybody’s wrong.
I’m not shorting MSTR here. Are you crazy?
Maybe one day. But that day is not today.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs