Gold and Bitcoin (Continued…)

Gold and Bitcoin (Continued…)

Bitcoin trades this morning under $63,000 — down more than $8,000 from last Friday. Contrary to what you might think, this activity at this time is totally normal.

As you likely know — because we keep telling you, heh — Bitcoin is on the verge of its fourth “halving” since 2012.

Sometime between midday Friday and midday Saturday, the rewards from mining Bitcoin will be cut in half.

Thus it will take twice as much computing power to generate the same quantity of new Bitcoin. This is what’s built into the Bitcoin algorithm to keep its supply strictly limited — unlike U.S. dollars and other fiat currencies that governments can print willy-nilly.

Again, halvings have happened three previous times in Bitcoin’s short history — just enough of a data set from which we can start discerning a correlation with the Bitcoin price.

In the March 2024 issue of Altucher’s Investment Network, Paradigm’s senior crypto analyst Chris Campbell posited a “Bitcoin halving cycle” consisting of five distinct phases.

For the sake of brevity today, we won’t get into the weeds of what all five phases are. Suffice to say we’re in Phase 3 — the run-up to the halving moment.

Chris says this phase is typically accompanied by a sell-off: “In the 2020 cycle, for example, a 20% retracement occurred two weeks before the halving, while in 2016, a 29–40% pullback took place 28 days prior.

“This retrace normally presents one of the last bargain-buying opportunities before the halving.”

On March 22, Chris made it clear: “As the Bitcoin halving approaches, the possibility of a bigger pre-halving dump cannot be ruled out entirely.“

OK, OK, you’re saying: I get all that. What happens in a few more days when Phase 4 kicks in?

“Historical data shows that the price often falls or moves sideways for months following the halving event,” says Chris. “In the 2012, 2016 and 2020 cycles, it took 100–200 days after the halving for Bitcoin to reach a new all-time high.”

In other words, it might not be till late summer or early fall when Bitcoin reclaims the over-$73,000 record set at mid-March.

Now, bear in mind: Our resident crypto evangelist James Altucher says this halving will be like no other. That’s because the new Bitcoin ETFs launched in January will bring a whole new level of demand for Bitcoin from institutional investors like hedge funds and insurance companies.

But there’s another reason this halving is different — and it gets back to our discussion yesterday about Bitcoin and gold.

As Chris explains, “Bitcoin's supply growth rate, which has been around 1.8% annually for the past four years, is set to drop to approximately 0.9% following the halving event.

“This reduction in supply growth will mark the first time Bitcoin falls below the supply growth rate of gold,” Chris says.

Yep. The world’s gold supply grows about 2% a year, give or take. (It’s getting harder and harder for gold miners to keep up that pace, but that’s a story for another day.) Starting no later than Saturday, the growth rate of Bitcoin’s supply will be half that.

And at a time all those institutional investors are piling into Bitcoin?

“With 15 million out of the total 19.5 million Bitcoin in circulation being held by long-term investors, or ‘hodlers,’ institutions will have to compete for a shrinking number of Bitcoins,” says Chris.

As for Phase 5, you might call that the mania stage — the blowoff top.

“This is the most exciting phase of the cycle, where Bitcoin can go ballistic,” Chris concludes. “Extreme FOMO and price targets of $1 million or more are common during this phase.”

But that’s a good 15–18 months away yet. For our purposes today, the thing to know is that now’s the time to position yourself for Phase 4. After all, it’s coming Friday or Saturday.

And while you’ll no doubt bag a handsome gain from Bitcoin — James Altucher’s target for year-end 2024 is $140,000 — you’ll want to cast your eye toward smaller alt-coins if it’s life-changing wealth you’re looking for.

But please, don’t go freelancing this. James says 90% of alt-coins are losers — and only a few are capable of delivering the kind of wealth you can hand off to the next generation.

If you still haven’t seen James’ pre-halving briefing — in which he details six of his favorites and names one of them absolutely free — time is running out.

No more windup. Here’s the link.

Earnings Season Strategy

With earnings season underway in earnest, it’s time to revisit a perennial question: Should I wait until after an earnings report to buy shares?

There’s no simple answer. If you have a long-term time horizon, “One quarter alone doesn't usually make a huge difference,” says Paradigm’s income-investing maven Zach Scheidt. “We may get a slightly higher or lower price depending on when we buy. But over the next few decades, our gain or loss will depend on many different quarterly profit announcements.”

If you have a more short-term mindset, the calculus changes: “For my family's trading,” Zach tells us, “I often buy in-the-money option contracts to take advantage of short-term moves in a particular stock… I do a lot of heavy research to understand how economic trends, company fundamentals and technical patterns are likely to drive a stock's next move.”

But no matter your time horizon, you get your best results when you create a plan ahead of time.

“This means,” Zach says, “understanding why you're buying a stock, what you expect to happen and how you will know if you are wrong. (Spoiler alert: We all get it wrong sometimes.)

“If you’re buying a stock because you expect the company to grow earnings over time, it can be a good idea to own the stock before the earnings announcement. That way if you're right and the company reports strong earnings, you benefit from the trade.

“If you're expecting a short-term move lower for a stock and shares jump higher after an earnings report, that probably means your analysis was wrong. Cases like this require humility. And the best course of action is to close a position that isn't working out and move on to the next opportunity.”

The Rally Couldn’t Last Forever

“It’s becoming clear that the rip-roaring rally that began more than five months ago is cooling,” says Paradigm trading pro Greg Guenthner.

The S&P 500 notched a record close of 5,254 on March 28. As we write this morning it’s 5,018 — a drop of 4.5%.

And on a chart going back to the COVID crash in 2020, volatility as measured by the VIX is at a crucial inflection point…

“Yesterday’s action was telling,” says Greg. “The averages went everywhere and nowhere” — especially when Federal Reserve chair Jerome Powell opened his yap and confirmed what was already obvious: Interest rates will remain higher for longer.

Really, Powell is in a pickle now: If inflation is so persistent that he and his confreres can’t raise rates in June or July, the next opportunity won’t be till mid-September — and a rate cut then would look like a brazen attempt to goose the economy for the incumbent president before Election Day.

Anyway, in the near term, Greg says, “We have to be on the lookout for choppier action.” All three major indexes are in the red on the day, the Nasdaq taking it worst.

Speaking of choppy action, gold was taking another run at $2,400 this morning, but at last check it’s been knocked back to $2,370. Silver, however, is in the green at $28.26.

Crude is sliding steeply after the Energy Department’s weekly inventory numbers — down 3% to $82.89, the lowest since the first of this month.

The Key to IRS Compliance: Refunds!

It wasn’t my intention to do an income-tax item three days in a row, but…

As we mentioned on Monday, a survey by the Tax Foundation shows that 48% of Americans understand the fact that a big tax refund is not a good thing. (28% percent think it is, 24% aren’t sure.)

Well as it turns out, the number of refunds so far in 2024 is down 3.3% from the year before. It’s the third-straight year of declines. Pre-COVID, about 75% of filers got refunds. Now, it’s closer to 65%.

Politico has a long article about the phenomenon and it seems there’s no consensus about why this is the case. But one thing is for certain: The feds aren’t particularly happy about it.

Of course, there’s the fact that Uncle Sam likes it when you give him an interest-free loan in the form of overwithholding.

But here’s something I confess I hadn’t realized before: Overwithholding and the resulting refunds are key to the IRS ensuring compliance with the tax code.

“We want to make sure that people are, in fact, filing,” says Bob Kerr, an ex-IRS official who’s now a tax practitioner in Washington. “And there are a whole bunch of people who do it because it pays to do it.”

With fewer people collecting refunds, Kerr tells Politico “I think this is really going to be a problem.”

Eek… It occurs to me that — as our macro maven Jim Rickards has warned for nearly two years now — this is one of many “problems” that could be “solved” with a CBDC or central bank digital currency.

With a keyboard stroke, the government could withhold a percentage of any currency that comes into your hands — from a paycheck or any other source — to make sure you file that 1040.

But let’s not go too far down a dystopian road today. Time to check the mailbag…

Mailbag: The Daily Numbers… and a Word Coined in 1961

On the subject of the market numbers we tuck into these daily dispatches, a reader writes…

“I appreciate getting a once-a-day read of the market dipstick from the 5. Saves me from having to go elsewhere myself, and helps me avoid the temptation to waste time checking that elsewhere throughout the day.”

Dave responds: Yeah, that’s the purpose and that’s why we think it’s worthwhile — even if it’s logistically impossible to make the numbers up-to-the-minute.

Obviously if you’re day trading, the numbers we pass along here will have limited utility. Even so, we uphold a standard for the market-notes section of this e-letter that we do for every other section: We aim for context and “the story no one else is telling.”

After the mailbag section last Thursday, in which I used a verb first coined in a sci-fi novel, another reader chimes in…

“‘Grok what this crazy newsletter biz is all about’ you say?

“I had almost given up on anyone being literate enough to have read Stranger in a Strange Land. “Puts a different spin on everyday human stupidity.”

Dave: Feels as if the word has achieved more circulation in the internet age than it ever did during Robert Heinlein’s lifetime (he died in 1988).

It’s not ubiquitous, to be sure. But I do see it used by a cohort of millennials and Gen-Zers on message boards and social media — enough to make me wonder how many of them have even read the book!

Best regards,

 

 

 

 

Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets