Yesterday, the Fed cut interest rates again, but indicated that the pace of cuts is going to slow down next year.

Then markets puked. Crypto, stocks, you name it. Dump city.

So far, thankfully, major prices have held strong at key levels. Bitcoin is still above $100k.

I didn’t make any big trades this week, but did make a lot of progress on the upcoming launch of Positive Skew Premium. As such, this weeks’ newsletter is going to be a little different format than usual.

First, I’ll share some data on forward looking interest rate expectations (spoiler alert: rates are still going lower) and then talk about Texas Hedging, which is a hilarious term for not hedging at all and instead getting even more long :).

Stay tuned over the holiday break for more info on Positive Skew Premium. If you want to get a nice discount (no more free spots available — thanks to everyone who volunteered last week for that), reply to this email and I’ll get you access to the beta.

Market Vibes

Look at the 7-day Z-Scores. You can’t really interpret standard deviations in crypto like you would in stats class because crypto prices changes do NOT have a normal distribution — but even still, the move yesterday was outsized and screaming for a mean reversion (hopefully we get a sharp V-shaped pop over the next few days). Don’t forget, the President-Elect of the United States of America cares about the price of Bitcoin. There is a strong policy wind coming. More on the rates situation below. Don’t panic, fam.

Crypto Reads

Squeezy.lol: Fun tool to see where the shorts are lurking in your bags’ price targets. You’ll find both resistance and breakout levels here. If you click the dumpy.fun tab you can also short memecoins if that’s your thing (requires on-chain wallet).

Crypto Tech Taking Over Commodity Financial Infra (1. Grid Optimization) (2. Uranium): Slowly, and then all at once. Both projects on Solana, btw. Probably nothing.

Joe McCann - Asymmetric Market Update Dec ‘24: McCann is an astute commentator. This was written before yesterday’s Fed meeting, and his take were spot on.

Don’t Panic

The current target Federal Funds rate, as of yesterday’s meeting, is 4.25% - 4.5%. That’s a 25 bp cut, exactly what the market was expecting. No surprises in the headline.

Here’s the 12-month history. Rates are lower. Rates are going to keep going lower. The question is how fast and how far.

CME puts out data on the market’s implied probabilities for future rates. This is where we can start to see something useful.

The percentages are the probability estimates that the target rate will be in a given range on each meeting date.

To state the obvious — the market thinks rates are still going down. Fed Daddy Jerome Powell said as much.

The only real news here is that JPow now expects there to be just two rates cut next year, instead of more than two.

That snapshot above is informative, but more interesting is how the probabilities have changed over the past week, before and after the meeting yesterday.

What actually changed?

I pulled the probabilities from last Friday. Let’s focus on the numbers for December ‘25.

I think this date makes sense because it lines up with the typical crypto cycle timing, plus it’s that longer term expectation that’s going to really drive the market (the probabilities for the near term are pretty baked at this point…91% in January is as close to a lock as you’ll ever get).

I’ll highlight the changes that seem most significant to me.

1. The probability for rates to remain the same this time next year as they are today jumped from about 1 in 10 to about 1 in 5.

2. The probability for rates to drop 25 bps increased from about 1 in 4 to about 1 in ~3.

3. The probability for rates to drop 75 bps dropped from about 1 in 5 to about 1 in 10.

Are rates going to rise? Nah.

Are rates going to decrease? Probably.

Are they going to decrease as much? Maybe?

Are we going back to a zero-interest-rate policy? Not anytime soon.

panic or nah?

I’m not panicking. This policy change, frankly, seems prudent.

For our digital assets (and stocks) to keep rising unabated, we need a strong economy. We need a policy that’s accommodative to growth and keeps people employed.

But we can’t brrrrrr ourselves back into an inflationary shock.

Inflation sucks. It crushed us in 2022 (and was a direct result of stimulative policy).

Inflation steam rolls everything in its path. Cutting rates speeds up the velocity of money. Faster money is more inflationary money.

The changes in the table above are meaningful, but not insane.

The probability distribution and forward guidance did change. It’s an important change - but not crazy.

The most likely outcome is a Fed Funds target rate between 375 and 425. That was true last week and it’s true today. It’s now slightly more likely now that rates will be toward the higher end of that range.

We are, probably, going to end up in the same place. Maybe not. But probably.

I’m not panicking.

Hedging for Chads - the Texas Hedge

I thought this was hilarious. A Texas Hedge is a hedge where you don’t actually hedge, you get even more long.

This is hedging for Chads.

ChatGPT - “Tell me about the Texas Hedging options strategy”

GPT: “A Texas hedge is a term in finance that refers to a strategy that increases exposure to risk, rather than mitigating it. This approach involves taking multiple positions that amplify potential gains or losses, instead of offsetting them. For example, an investor might simultaneously hold a long position in a stock and purchase call options for the same stock, thereby doubling down on their bullish stance.

The origin of the term “Texas hedge” is often linked to the aggressive trading behaviors observed in the early days of options trading. Anecdotal evidence suggests that traders from Texas were known for amplifying their positions when confident, rather than hedging to reduce risk. This led to the term being used to describe strategies that increase exposure instead of providing protection.

In the context of livestock trading, the term is sometimes used to describe cattle ranchers who own cattle and also buy cattle futures contracts, thereby doubling their exposure to the cattle market.

While a Texas hedge can lead to significant profits if the market moves favorably, it also carries a high level of risk. If the market moves against the investor’s position, the losses can be substantial. Therefore, this strategy is generally considered speculative and is typically employed by traders with a high risk tolerance.

It’s important to note that traditional hedging strategies aim to reduce risk by taking offsetting positions. In contrast, a Texas hedge does the opposite by increasing exposure, which can lead to amplified gains or losses. Investors should carefully assess their risk tolerance and market outlook before engaging in such strategies.”

Portfolio Update

I bought more VIRTUAL at $1.8 billion. I sold DEGEN to fund the trade. I bought a small bag of $MEOW (this one is maybe the dumbest memecoin I’ve ever bought — hit yourself in the head with a hammer before clicking this link if you want to truly appreciate how left-curve, tik tok stupid this thing is. If FARTCOIN can go to a billion, then MEOW can go to a trillion).