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GM. This is Milk Road, the crypto newsletter that’s fresher than cracking open a cold one on a Friday night.

Here’s what we got for you today:

HOW TO TAKE THE MARKET’S TEMPERATURE 🌡️

We once told our older brother that we’d tell mom about his alcohol stash if he didn’t give up the PS2 controller.

…which earned us an almost immediate punch to the throat.

Moral of the story: using leverage can be risky.

Same rule applies in crypto.

When traders borrow money to trade in higher amounts, it’s known as ‘taking leverage.’

E.g. If you put down $100 and take out a 10x leveraged long position, you’re borrowing $900 and buying into the market with a total of $1,000. 

If the trade goes down 10%, you lose your $100, the position is closed and the $900 loan is automatically returned to your lender.

If enough people take on leverage like this, it can push the market way up! So much so that it puts a target on the back of those with high leverage…

It works like this:

Here’s a heatmap chart that visualizes leveraged trades that will be forced to sell at certain price points, and how market movers will ‘sweep’ these concentrations:

…ok, that sucks.

So how do you protect yourself from buying in ahead of these gut wrenching pullbacks?

One trick is to look at the market’s funding rates. 

It’s a weird little mechanism, and you don’t have to fully understand it to be able to leverage it, but just in case you want to nerd out, here’s a brief overview:

If the majority of people are using perpetual futures contracts to bet the price will go up in the future, they have to pay a fee to the minority of folks that are betting the price will go down. 

This helps encourage more people to take the opposing bet and keep the market balanced.

Confused? Same. 

All you need to know right now is: funding rates are basically a thermometer for the market.

Now, here’s the number to watch: 

When funding rates move into the high positive region (0.05 - 0.08), it indicates that there’s an excess of leverage (loans) in the system and risk of pullbacks is increased.

Take the massive pump leading into March as an example…

As the price surged, people got greedy and started to take on leverage – pushing funding rates to almost 0.08 at one point!

Then, the music stopped. 

The big-dogs saw their opportunity and came for everyone’s leveraged positions, prices tanked and funding rates spent the next month resetting back to neutral.

It was rough. And getting caught in these crossfires can be painful!

…but here’s the silver lining:

When the funding rate resets, inflated prices get smacked back to reality, giving us all an opportunity to buy-in before a new wave of demand hits. 🎉

So, next time the market is pumping and you feel the urge to ape in: 

Remember to check the funding rates first.

(Cause – take it from us – getting punched in the throat sucks).

KRAKEN ANNOUNCES ITS ‘INK’ L2 🐙

Alright, quick one to close out the week!

Kraken just announced the coming launch of its very own Ethereum L2 ‘Ink,’ that will exist within the Superchain Ecosystem, and aim to make both the crypto user/developer experience silky smooth.

If you’re thinking “Hmmm, sounds kinda like Base”...

You’re right! It does. Here’s why that’s a good thing:

Kraken is the largest centralized exchange in the US (second only to Coinbase) with 10M+ users.

If Kraken’s rollout of Ink is anything like the rollout (and subsequent adoption) of Base, it could result in millions of new people coming onchain.

This move by Kraken (and Coinbase before it) is kinda like the crypto version of the iMac launch (the first ever internet connected Macintosh). 👇

Apple had an established customer base of (offline) Macintosh users → and brought them online with the iMac.

Ink and Base have the potential to do the same for Kraken and Coinbase users.

(Hell yeah!)

BITE-SIZED COOKIES FOR THE ROAD 🍪

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Microsoft is placing a proposal for shareholders to vote in December on whether the company should assess the potential of investing in Bitcoin. The company notes that the board of directors recommend voting against the proposal.

A hacker reportedly breached a U.S. government-linked wallet containing funds seized from the 2016 Bitfinex hack, draining $20 million. Arkham Intelligence reports that the stolen funds are being converted and moved through various wallets.

South Korea will require individuals and companies to report cross-border cryptocurrency transactions. This new mandate aims to curb money laundering and improve oversight of international crypto flows.

Trump vs. Harris in 2024 could be a game-changer for crypto—Trump’s hands-off approach versus Kamala’s tighter regulations. Milk Road and Gemini explore how the outcome may shape the future of crypto and what investors need to watch for.*
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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.