Week 2017-11-20 - Thanksgiving - Bitcoin - Sugar

This Week

Thanksgiving occurs in the USA this week. This is an opportunity for traders to spend time with their families and remember why they moved to New York. Any contract that can be traded from a smart phone with a limited signal will be pinged as bored adrenaline junkies try to ignore their in-laws and family members. So look for some hot action in crypto-currencies when old eyes place fat finger orders in currencies like yen instead of dollars on a thinly traded market.

Don't expect any major moves until after next weekend. Be aware that Monday is Black Monday, when online retailers have a flood of Christmas buying. This may even be so fierce as to slow your connection to distant markets with recent changes to bandwidth. Next weekend and Monday will give a good indication if brick-and-mortar retailers that are struggling will continue to do so. Volume of online sales will also give a boost to Amazon shares, so expect some decent price action in online retailers.

Bitcoin Forks

Bitcoin has been very exciting for traders. Last week the price dip had the longs reeling and naysayers touting the end of crypto-currency. For me, I had my hanging buy orders zippered across the day. Even my enthusiastic out-out-of-the-money orders managed to fill. That can be frightening, especially when you are watching a tick-by-tick move. As buying support came into the market, price rebounded and longs breathed a sigh of relief. This brought more speculator action into the market giving price support at levels below the $7000 range. As a trader, having your 'overly enthusiastic' orders filled means that when price rebounds, you are doing a dance before cashing out. However, with longer term prospects being quite good for Bitcoin, many traders - myself included - are looking more at a buy-and-hold position while trading only a small percentage of core holdings.

Is this smart to hold Bitcoin? Truth is that I don't know and right now, neither does anyone else.

There is still plenty of speculator demand. There is only 3% of the world that has adopted this technology. The CBOE contract (which would have been in chaos this week) will show some institutional demand. But the REAL question is: Will this technology be utilized as a currency or store of value into the future?

For crypto-currency to be useful it needs to have some basic principles:

- Use as a currency (or convertibility into currency)

- Market acceptance (miners need to support it)

- Store of value (humans need to want to hold it)

Recent Bitcoin forks (equivalent to share splits) have created multiple block-chains. Bitcoin Gold was a flash in the pan, and likely won't survive into the future. Bitcoin Cash has performed better than I ever expected considering that it is not being used as a primary currency. The current split of Seqwit2x has left holders of Bitcoin wondering which chain will be most useful.

Bitcoin Extended ticks all of the boxes. Recent code updates mean that it can survive into the future. It is convertible to cash at ATMs around the world. Humans are investing in it both for speculation and as a REAL store of value over many local currencies (it is trading at a premium in Venezuela and Zimbabwe). Miners are still fulfilling transaction because they receive a good premium to do so. However, the cost of transfers relative to native currencies is the reason Segwit2x was executed - to cut transaction fees.

Segwit2x blockchain is designed to ensure that Bitcoin can continue to be used as a currency in transactions. This is an age old debate, similar to credit card and bank fees. Those fulfilling the transaction want to grab the most service fees possible, while those doing the transaction want to minimize the cost of those transactions. Micro payments do not work when the cost of transaction is 10x the payment but people still use credit cards with high fees. So if the chain is not supported by miners, then it will not be able to function as a payment system, nullifying any benefit to users.

Crypto currencies like Bitcoin Lite - Lite Coin - were created to lower transaction fees to users. Without broader market acceptance as a medium of exchange, these low fee block chains will not be used as the primary store of value. The true test of survivability for a block chain will likely be infrastructure. In this market that means that the chain will have support of miners.

Another test of a crypto currency is this: At a Bitcoin ATM, which blockchain is supported? For now, that is mostly the primary Bitcoin chain.

High transaction costs do not nullify a block chain, but it makes it only a store of value. Physical gold has relatively high transaction costs, but it continues to be used as a store of value over paper cash. Volatility in that market does not push out buy-and-hold investors because price action dips are viewed as a buying opportunity. With loose monetary policies and questionable vales of stocks and bonds, alternate stores of value like gold will continue to perform. Similarly, crypto-currencies will continue to be a store of value (easier to transport than gold) into the near future.

In the near term, expect some higher volatility in the crypto markets. Bitcoin (primary chain) will continue to move higher. As more traders figure out which blockchain is being used as the primary chain, then look to that one to be in demand. This is not school, you can look at your neighbors answers and copy them because the more people that choose the same blockchain, the more likely it will survive these minor technology hurdles.

Sugar

My recent call to sell sugar (buy sugar puts) is well behind - out of the money. I can admit when I am wrong, and this time I got it wrong. However, the reason I choose to trade 2018 puts is to have some time for the physical market to overcome the speculative market. I also limit my loss risk by using puts (the maximum amount of loss is the price of the put when they close worthless). So I still have some time to see where price action goes and if I assume that I have already lost, then I do not stress while waiting. Currently, my loss would be high enough to warrant holding, so I will be holding for a few more weeks (at least), to see if I can cash out at break-even or better.

I would like to have shorted this market at the higher price. But I might as well be saying that I would like to sell at the top and buy at the bottom. We would ALL like to do that but that rarely happens.

Fundamentals still seem to favor consistent demand with higher levels of supply relative to market history. Current price action does not have me wanting to add to my short position. If you are bold, you may want to take a punt at some sugar shorts. You will be getting a better price that I did.

DISCLAIMER:

YOU ARE AN ADULT and must make your own decisions. ONLY YOU know what level of experience you possess. ONLY YOU know what level of risk you are willing to take. ONLY YOU know what your financial goals are, and to what lengths you are prepared to go to meet those goals. You will be the one to wear your losses, so trade with caution and do your own research.

Henry Ledyard is an independent trader. He has NO affiliations with banks, brokerages, funds, trading houses or markets. He trades for himself and posts trading ideas merely to share information. He does NOT want your money, advice or opinions. He does NOT want your unsolicited emails. If you require further financial advice, seek it elsewhere. Henry`s opinions should be considered as addled as his blog site:

www.addlepated.com.au