Elon Musk’s Twitter account has really been something to watch these past few weeks.
From his meme stock joke egging on the Reddit crowd’s GameStop trade to this past week’s pumping up a literal joke cryptocurrency, he has entertained the masses while simultaneously frustrating the regulators.
I mean, you can’t make this stuff up… much wow.
Source: Twitter
Just as a public service announcement, please don’t buy Dogecoin.
All jokes aside, the Earl of EV’s did put his money where his mouth is regarding crypto markets.
In their SEC filing yesterday, Tesla disclosed that the company had invested a total of $1.5 billion in bitcoin over the course of last month.
And if you happen to follow the Bitcoin subreddit, you might have been given a heads-up, because early last month, Reddit user “TSLAinsider” posted the following message.
Source: Twitter
The detailed message has since been taken down, but if ever verified, that means that Tesla purchased roughly $908 million of that $1.5B total position right around this period on Jan. 11.
Source: Bloomberg
Bitcoin hit a high today of an almost unbelievable $49,400 and the uptrend still appears to be intact.
But honestly, the coolest thing to me about Tesla taking this position is how they happened to enter it using a similar strategy — actually, the reverse — to what I laid out in last week’s article on the silver squeeze.
Essentially, Tesla began to establish their position on a day where Bitcoin’s volatility (blue line in the chart below) broke with its recent trend.
Source: Bloomberg
More significantly, Bitcoin’s average volatility moved more than two standard deviations below the mean (red line in the chart below).
Source: Bloomberg
And that’s right around when Tesla’s algorithms began to incrementally leg into the other side of that trade a little at a time, buying larger amounts on larger moves to the downside.
Now, the optimal trading strategy here would be to sell a little at a time in similar increments as volatility moves back to the upper bound of this range. Doing so would eliminate some downside risk, which currently sits at around -20%.
But that would be the prudent thing to do… And if recent history has shown us anything, it’s that Elon isn’t particularly prudent.
In fact, in the very same SEC filing, there’s a disclosure that Tesla sold $1.6 billion in environmental credits in 2020.
Which in a roundabout way means that Elon essentially bought all that Bitcoin using taxpayer money.
And knowing that frankly makes his recent Twitter schtick way less entertaining.
The reason I’ve been harping on volatility lately is that it has been consistently predictive of price inflection points over the past year.
And the speculative trade on ProShares Ultra Gold (NYSEArca: UGL) that I discussed last Thursday was actually pretty similar to this one.
Before I get into the explanation, I said at the time, “the idea on this speculation would be to sell any gold-price rip back above $1,800.”
Well, today’s closing price was just over $1,834… So if you happened to participate, it’s time to sell for about a 5% gain.
As I mentioned then, gold has been mired in a six-month bearish price trend.
More importantly, though, top-line volatility has been trending lower alongside it.
Source: Bloomberg
In this case, the trend shows us that big spikes in gold volatility are associated with large dips in prices.
And while gold prices have been recovering as those spikes fade, they have in general been recovering to a lower level.
Now here’s the similarity with Elon’s Bitcoin trade above.
A quick look at gold’s volatility shows us that it fell more than two standard deviations below its recent trend last Thursday.
Source: Bloomberg
Now that it’s recovered to the middle of its recent volatility range, we close the position. Because again, gold prices have consistently been recovering to lower levels for the past six months.
While I have confidence that gold prices will be higher a year from now, the stock market is absolutely ripping, so there’s little incentive for institutional investors to buy now.
More concerning, though, is gold’s baseline level of volatility, which is rising in a similar fashion during the period leading up to the COVID crash last March.
Source: Bloomberg
Back then, gold prices drew down by over 15% before soaring to all-time highs. If we have a similar liquidity event in the back half of this year — which economic data indicate we will — then gold’s initial drawdown is likely to be just as violent.
Why?
Because if you remember from the GameStop short squeeze a couple of weeks ago — investors who get margin calls tend to sell their best performing assets.
Source: Bloomberg
In the GameStop Corp. (NYSE: GME) short squeeze case, those assets were tech stocks, like the Nasdaq 100 in the above chart.
Last March, though… The selloff occurred in all assets.
So, if an event like that happens again this year, I fully expect gold will sell off down to the $1,650-1,700 range.
And that will be when we back the truck up.
Be ready.
All the best,
Matt Warder