Wall Street Adages Meet $100k Bitcoin: Lessons from a Seasoned Trader

Stocks had a mixed close yesterday as traders overcame early session jitters from an escalation of tensions between Ukraine and Russia. All eyes are on lead-horse NVIDIA and its earnings which are expected after today’s close. The results could determine overall market performance for the remainder of the year; of course there is a bit of tension.

For what it’s worth. I can remember back to when I was a neophyte on Wall Street… things were a bit different back then. The trading floor was packed with rows of traders whose desks were covered with green screen monitors piled nearly to the ceiling. The room was filled with a cacophony of laughs, screaming, and fast-talking. You see, there were no mice or keyboards attached to those monitors. If you wanted to place a trade, you had to speak to another human being. Likewise, if you wanted to know what was going on, you had to hear it from someone. There was a digital ticker tape that ran around the floor where you could see what was quite literally trading on the exchanges. Ticker symbols followed by numbers; the number showed prices and round lots traded. There was a Dow Jones news service, also referred to as a tape, which ran so quickly, that one would require a speed-reading certificate from Evelyn Wood Reading Dynamics (look it up, if you don’t know, Millennials 🥸). The majority of one’s day would be dedicated to the pursuit of figuring out what was happening and why. Communication was critical – verbal communication.

I sat next to the head of the trading desk. Remember, we would sit literally shoulder to shoulder. Everyone knew who was having a good day, and who was having a bad day. Spousal arguments, salacious pronouncements, calls with physicians – it was all there. I knew that the head of our desk was having a rough day. I leaned as far in the opposite direction of him as possible, which was not far before I would be touching the shoulder of the trader to my left. I leaned in order to minimize the probability that I would be hit by his phone receiver as he would regularly break them on his desk. I could see one of the head partners get up on the far side of the floor and slowly walk around the room. He was looking at faces, getting a read of the room, so to speak. He zeroed in on my boss. Like a heat-seeking missile he came straight over to him and said, “hey Buddy,” but got no response. The partner didn’t give up and the silence would go on for what seemed like hours as he stared straight at my boss’ downturned face. Finally, the partner asked, “why is the market trading down?” My boss looked up slowly and said simply “more sellers than buyers.” The partner got the message and walked away. It took me a while, but by the closing bell, I figured out what he meant with that answer, and soon learned (at the bar after work) that it was an old Wall Street adage, so I wrote it in that book, which I often refer to in this very note.

I know that you are wondering what in the world is going on with Bitcoin. You watched it for a few years, beginning in 2017. You tried to understand it – on many occasions, but you could not figure it out. Soon it was all over the news, and you finally decided to buy some Greyscale Bitcoin Trust in late 2021, because you didn’t want to miss the party – and you knew that your brother-in-law was going to bring it up at Thanksgiving. By the start of summer, 2022 you had lost more than 50% of your investment. You couldn’t take the pain, and you finally sold out somewhere around 25,000, vowing to never get involved again. That was it. Until January of this year when you heard that the SEC had finally approved some Bitcoin ETFs. At first you ignored it, but then you saw Bitcoin trade up to where you first bought it years ago as demand from ETFs took off. You still wondered what it was really worth, applying your normally stringent analysis, the same analysis that you used to by Apple and Microsoft so many years ago, allowing you to reap great returns. But the analysis failed. No earnings, no cash flows, no products, no stories, no multiples, and no comps. Not even a strong management team.

Ok, so it is a currency. Is it backed by some precious metal? No! But neither is the US Dollar. They are indeed both fiat currencies, but at least the Dollar is backed by the US Government and its military might. Ok, forget it, there were easier ways to get growth with the then rapidly expanding AI ecosystem. Then came the presidential campaign in which both candidates pledged their support for cryptocurrency. At least one of the candidates was a former skeptic. Why the reform? Politics, maybe. Vote bating, maybe. Regardless, it is important to mention that cryptocurrencies are very real. Daily Bitcoin transactions have doubled since 2019, growing steadily each year. Back to the campaign. The candidates’ backing threw the spotlight back onto Bitcoin, which consequently ripped higher.

You voted and put your TV back on mute for a few weeks as you watched your traditional stock portfolio grow. The US Dollar surged higher because bond yields went up and Trump’s proposed tariffs came closer to reality now that he won the election. Then, one day, you looked up at your muted TV and saw that Bitcoin was trading at 90,000! Surprised, you quickly equated its gain with the Dollar, as it is, after all a currency. But wait, it is not a sovereign currency. Oh, boy, more confusion. You turn up the volume and you hear the financial news commentator say something about Trump’s embracing Crypto. “Oh,” you think to yourself, “another meme play.” You think about it more and you realize that, despite all the skepticism, and even concerted efforts by many to discredit crypto, Bitcoin is probably here to stay and a legitimate currency – you just accept it. So, then, what is it worth?

Well, Bitcoin is designed to get scarcer as its supply grows, so you can’t just keep mining for it forever. Ok, now it is becoming a bit clearer. We can apply supply and demand to understand its behavior. Its supply is limited, and demand is growing. Whether the demand is for legitimate use in transactions, investing, posterity or whatever. All that equates to a rise in price, or value. Bingo! Wait, does that sound somewhat similar to the conclusion of my story from above? There are simply more buyers than sellers – for now.

YESTERDAY’S MARKETS

NEXT UP

• No economic releases today.
• Fed speakers include Barr, Cook, Bowman, and Collins.
• Earnings after the closing bell include Snowflake, Palo Alto Networks, and NVIDIA.

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