The Wolf Den #550 - The Contrarian Trap

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If you are reading this letter, then you have distanced yourself from the crowd - you swallowed the orange pill. The crowd that I am talking about likely includes over 95% of the world’s population, which are those with no exposure to crypto.

So how big are we as a group?

The most aggressive studies state that 16% of Americans have invested in, traded, or used cryptocurrency and that retail investors have distributed 4% of their wealth into the asset class. This feels high to me.

Slash those numbers by roughly half and you will have the numbers for institutional exposure - 8% with 2% exposure.

This is a small community.

We escaped one matrix, fiat, to enter another one - crypto.

So here is the question - have we left one herd to join another?

I often say that being contrarian is not enough. Leaving the fiat matrix for an altcoin casino is not necessarily an upgrade. This is a trap that lures in “contrarian thinkers.” There is nothing wrong with investing in altcoins or trading speculative assets, but most people who enter the crypto space through this door leave broke and disappointed. If you found your way here through DOGE, cartoon NFTs or other memes, then you have not exited the matrix. You have merely replaced it with an inferior one.

Being a successful contrarian means questioning each and every herd you enter. Questioning a fiat mindset is a successful first step, but the first town a new crypto enthusiast arrives at is likely a mirage aiming to separate them from their money. This is the reason that so many crypto investors fail in the long run - they are merely here to get rich quick.

Bitcoin and Ethereum are the largest coins by market cap, but they certainly aren’t the #1 tourist attractions. To be a successful long-term crypto investor, one has to exit the fiat herd, fading the biases of the majority of the world, then exit the crypto herd, fading the many misleading biases that prey on people trying to fade the biases of the real world.

What a mess, right?

A successful crypto investor has to side-step two herds, each opposed, and each likely wrong in their own ways. It’s a balancing act of constant reality checks to ensure contrarian thinking hasn’t led us to a “contrarian trap.”

Arguably the safest approach is a core stack of Bitcoin, some Ethereum, 15% in collateralized stablecoins… and a healthy dose of patience and low time preference. This balance will keep you contrarian to the fiat herd, but also to the get rich quick herd that dominates this space.

Keep the other investments small, with the money you are willing to lose.

There’s really nothing to see today on the charts, but I did want to note the predictable bounce from oversold that I discussed yesterday on low time frames. Now, if price drops again, we will likely get bullish divergence. We will see.

Here are some key events to watch this week:

Musk, Tesla and Twitter are this week’s theme of the MLIV Pulse survey. Also share your views on the S&P 500’s biggest stocks. Click here to get involved anonymously.

Some of the main moves in markets:

When you are frustrated with the market, I suggest resetting your conviction with some older literature. If you haven’t taken a look at the Cryptography Mailing List, you are missing out. This primary source dates back to the period between October, 2008 and 2010 when Satoshi disappeared. In the email thread, the participants discuss the white paper and future implications of Bitcoin at a time when only a handful of people were involved. 

The discussion is long but incredibly insightful, and circles around some of the most hotly debated subjects that Bitcoin faces today: scalability, double spends, 51% attacks, intrinsic value, inflation, and more. It is an incredible defense of Bitcoin’s most essential properties to a small audience of curious and skeptical minds. As a bonus, you can find Hal Finney discussing, “an amusing thought experiment” in which he makes a radical Bitcoin prediction. “Current estimates of total worldwide household wealth that I have found range from $100 trillion to $300 trillion. With 20 million coins, that gives each coin a value of about $10 million.”

Senators Toomey and Sinema are pushing for a simple, yet impactful, proposal to exempt crypto transactions of $50 or less from being taxed. This would allow people to use Bitcoin and other coins for small transactions without worrying about triggering a taxable sale.

Earlier this year, Senators Lummis and Gillibrand included a similar plan in their crypto bill, but for $600 rather than $50. Ideally, we would like to see the higher number approved, but $50 is a good start.

A brief update on the Lummis-Gillibrand bill… Congress.gov states: “Senate - 06/07/2022 Read twice and referred to the Committee on Finance,” which means we are still in the “introduction” phase. It is unlikely we will see significant movement on this bill before the end of the year. It is election season, after all. Still, it is good to see Senators on both sides of the aisle pushing for a bill that offers tax relief on small transactions.

According to a NY Times report, Kraken is under investigation for ignoring federal sanctions and serving Iranian users on the platform. This isn’t the first time a major exchange has seen pushback from federal regulators on who can and cannot use platforms. Binance, BitGo, and BitPay have been in similar situations in the past.

Kraken’s CEO Jesse Powell said this on Twitter back in February regarding Ukraine sanctions, “our mission at [Kraken] is to bridge individual humans out of the legacy financial system and to bring them into the world of crypto, where arbitrary lines on maps no longer matter, where they don’t have to worry about being caught in broad, indiscriminate wealth confiscation.”

If you scroll to the bottom of Chipotle’s home page, you’ll notice an advertisement for a game that customers can play to win free, guac, queso, or crypto. The game is called “Buy The Dip,” and is free to play. Hopefully Chipotle takes their own advice and actually buys the dip, rather than just marketing to badly beaten crypto market participants.

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