Inside Matrix, the protocol that might finally make messaging apps interoperable
Interoperability and decentralization have been major themes in tech this year, driven in large part by mounting regulation, societal and industrial pressure,…
Interoperability and decentralization have been major themes in tech this year, driven in large part by mounting regulation, societal and industrial pressure, and the hype trains that are crypto and web3. That rising tide is lifting other boats: an open standards-based communication protocol called Matrix — which is playing a part in bringing interoperability to another proprietary part of our digital lives: messaging.
The number of people on the Matrix network doubled in size this year, according to Matthew Hodgson, one of Matrix’s co-creators — a notable, if modest, boost to 80.3 million users (that number may be higher: not all Matrix deployments “phone home” stats to Matrix.org).
While the bulk of all this activity has been in enterprise communications, it looks like mainstream consumer platforms might now also be taking notice.
Some sleuthing from engineer and app researcher Jane Manchun Wong unearthed evidence that Reddit is experimenting with Matrix for its Chat feature — a move more or less confirmed to TechCrunch by Reddit. A spokesperson said that it’s “looking at a number ways to improve conversations on Reddit” and was “testing a number of options,” though they stopped short of name-checking Matrix specifically.
Given the bigger swing in support of interoperability — it’s happening also in digital wallets and maps — a closer look at Matrix gives some insight into how we got here.
In the beginning
View from above hands holding mobile phones Image Credits: Malte Mueller / Getty
Anyone who has ever sent an SMS or email won’t have considered for a second what network, service provider, or messaging client their intended recipient used. The main reason is that it doesn’t really matter — T-Mobile and Verizon customers can text each other just fine, while Gmail and Outlook users have no problems emailing each other.
But that wasn’t always the case. In the earliest days of electronic mail, you could only message users on the same network. And as mobile phones proliferated throughout the 1990s, people initially couldn’t message their friends if they were on a different mobile network. Europe and Asia led the charge on interoperability, and by the start of the millennium the big North American telcos also realized they could unlock a veritable goldmine if they allowed consumers to message their friends on rival networks. It was a win-win for everyone.
Fast forward to the modern smartphone age, and while email hasn’t exactly gone the way of the dodo and SMS is still stuttering along, the preeminent communication tools of today aren’t nearly as friendly with each other. Those looking to embrace independent privacy-focused messaging apps such as Signal will hit a brick wall when they realize that literally all their pals are using WhatsApp. Or iMessage. Or Telegram. Or Viber… you get the picture.
This trend permeates the enterprise realm, too. If your work uses Slack, good luck sending a message to your buddy across town forced to use Microsoft Teams, while those in human resources shoehorned onto Meta’s Workplace can think again about DM-ing their sales’ colleagues along the corridor using Salesforce Chatter.
This is nothing new, of course, but the issue of interoperability in the online messaging sphere has come sharply into focus in 2022. Europe is pushing ahead with rules to force interoperability and portability between online platforms via the Digital Markets Act (DMA), while the U.S. has similar plans via the ACCESS Act.
Meanwhile, Elon Musk’s arrival at Twitter has driven awareness of alternatives such as Mastodon, the so-called “open source Twitter alternative” that shot past 2 million users off the back of the chaos at Twitter. Mastodon is powered by the open ActivityPub protocol and is built around the concept of the fediverse: a decentralized network of interconnected servers that allow different ActivityPub-powered services to communicate with each other. Tumblr recently revealed that it intends to support the ActivityPub protocol in the future, while Flickr CEO Don MacAskill polled his Twitter followers on whether the photo-hosting platform and community should also adopt ActivityPub.
But despite all the hullaballoo and hype around interoperability spurred by the Twitter circus in recent weeks, there was already a quiet-but-growing movement in this direction, a movement driven by enterprises and governments seeking to avoid vendor lock-in and garner greater control of their data stack.
Enter the Matrix
Element founders and Matrix co-creators Matthew Hodgson and Amandine Le Pape Image Credits: Element
Matrix was developed inside software and services company Amdocs back in 2014, spearheaded by Hodgson and Amandine Le Pape who later left the company to focus entirely on growing Matrix as an independent open source project. They also sought to commercialize Matrix through a company called New Vector, which developed a Matrix hosting service and a Slack alternative app called Riot. In 2018, Hodgson and Le Pape launched the Matrix.org Foundation to serve as a legal entity and guardian for all-things Matrix, including protecting its intellectual property, managing donations, and pushing the protocol forward.
The flagship commercial implementation of Matrix was rebranded as Element a little more than two years ago, and today Element — backed by Automattic, Dawn Capital, Notion, Protocol Labs and others — is used by a host of organizations looking for a federated alternative to the big-name incumbents sold by U.S. tech giants.
Element itself is open source and promises end-to-end encryption, while its customers can access the usual cross-platform features most would expect from a team collaboration product, including group messaging and voice and video chat.
Element in action Image Credits: Element
Element can also be hosted on companies’ own infrastructure, circumventing concerns about how their data may be (mis)used on third-party servers, ensuring they remain in control of their full data stack — a deal maker or breaker for entities that host sensitive data.
A growing array of regulations, particularly in Europe, are forcing Big Tech to pay attention to data sovereignty, with the likes of Google partnering with Deutsche Telekom’s IT services and consulting subsidiary T-Systems last year to offer German companies a “sovereign cloud” for their sensitive data.
This regulatory push, alongside growing expectations around data sovereignty, has been a boon for the Matrix protocol. Last year, the agency responsible for digitalizing Germany’s health care system revealed that it was transitioning to Matrix, ensuring that the 150,000 individual entities that constitute the health care industry such as hospitals, clinics, and insurance companies, could communicate with each other regardless of what Matrix-based app they used.
This builds on existing Matrix implementations elsewhere, including inside the French government via the Tchap team collaboration platform, as well as the German armed forces Bundeswehr.
“The pendulum has been clearly swinging towards decentralization for quite a while,” Hodgson explained to TechCrunch. “We’re now seeing serious use of Matrix-based decentralized communications across or within the French, German, U.K, Swedish, Finnish and U.S governments, as well as the likes of NATO and adjacent organisations.”
Back in May, open source enterprise messaging platform Rocket.Chat revealed that it would be transitioning to the Matrix protocol. While this process is still ongoing, this represented a major coup for the Matrix movement, given that Rocket.Chat claims some 12 million users across major organizations such as Audi, Continental, and Germany’s national railway company, The Deutsche Bahn.
“We believe that the value of any messaging platform grows based on its ability to connect with other platforms,” a Rocket.Chat spokesperson told TechCrunch. “We put a lot of effort into connecting Rocket.Chat with other platforms. We don’t have to worry about what client we use when emailing each other, and the same should be true when we’re messaging each other.”
Rocket.chat Image Credits: Rocket.chat
What’s perhaps most interesting about all this is that it runs contrary to the path that traditional consumer and enterprise social networks, and team collaboration tools, have taken.
Slack, Facebook, Microsoft Teams, WhatsApp, Twitter, and all the rest are all about harnessing the network effect, where a product’s value is intrinsically linked to the number of users on it. People, ultimately, want to be where their friends and work colleagues are, which inevitably means sticking with a social network they don’t particularly like, or using multiple different apps simultaneously.
Open and interoperable protocols support a new breed of business that’s cognizant of the growing demand for something that doesn’t lock users in.
“Our goal is not to force people to use Rocket.Chat in order to communicate with each other,” Rocket.Chat’s spokesperson continued. “Rather, our goal is to enable organizations to collaborate securely and connect with other organizations and individuals across the platforms of their choosing.”
Bridging the divide
The Matrix protocol also supports non-native interoperability through a technique called “bridging,” which ushers in support for non-Matrix apps, including WhatsApp, Telegram, and Signal. Element itself offers bridging as part of a consumer-focused subscription product called Element One, where users pay $5 per month to bring all their friends together into a single interface — irrespective of what app they use.
Element One subscribers can bring different messaging apps together Image Credits: The Matrix Foundation
This is enabled through publicly available APIs created by the tech companies themselves. However, terms of use are typically restrictive with regards to how they can be used by competing apps, while they may also enforce rate-limits or usage costs.
Bridging as it stands sits somewhere in a grey area from a “is this allowed?” perspective. But with the world’s regulatory eyes laser-focused on Big Tech’s stranglehold on online communications, the companies perhaps don’t enforce all their T&Cs too rigorously.
The DMA came into force in Europe last month — though it won’t officially become applicable until next May — and it has specific provisions for interoperability and data portability. At that point, we’ll perhaps start to see how the Big Tech “gatekeepers” of the world plan to support the new regulations. In reality, what we’re talking about are open APIs that “formally” permit smaller third-parties to integrate and communicate with their Big Tech brethren. This doesn’t necessarily mean that such APIs will be slick and easy-to-use with clear documentation though, and we can probably expect some deliberate heel-dragging and hurdles along the way.
Compliance
WhatsApp and Facebook application displayed on a iPhone Image Credits: Justin Sullivan/Getty Images
Popular messaging apps such as WhatsApp, while offering end-to-end encryption, weren’t designed for enterprise or governmental use-cases as they don’t allow organizations to easily manage any of their messaging data — yet such apps are widely used in such scenarios. Back in July, the U.K.’s Information Commissioner’s Office (ICO) called for a government review into the risks around “private correspondence channels” such as personal email accounts and WhatsApp, noting that such usage lacked “clear controls” and could lead to the loss of key information being “lost or insecurely handled.”
“I understand the value of instant communication that something like WhatsApp can bring, particularly during the pandemic where officials were forced to make quick decisions and work to meet varying demands,” U.K. information commissioner John Edwards said in a statement at the time. “However, the price of using these methods, although not against the law, must not result in a lack of transparency and inadequate data security. Public officials should be able to show their workings, for both record keeping purposes and to maintain public confidence. That is how trust in those decisions is secured and lessons are learnt for the future.”
In the business realm, meanwhile, the U.S. Securities and Exchange Commission (SEC) recently settled with 16 Wall Street firms for $1.1 billion over “widespread recordkeeping failures” related to their use of private messaging apps such as WhatsApp.
“Finance, ultimately, depends on trust,” SEC Chair Gary Gensler said at the time. “Since the 1930s, such record keeping has been vital to preserve market integrity. As technology changes, it’s even more important that registrants appropriately conduct their communications about business matters within only official channels, and they must maintain and preserve those communications.”
Maintaining an accurate paper trail, and ensuring that politicians and businesses are accountable for their actions, is the name of the game — a level of control that something like the Matrix protocol promises. However, mandating that every company over a certain size — as the DMA regulation does — has to make their software interoperable with others raises a bunch of questions around privacy, security, and the broader user experience.
The encryption elephant in the room
Concept illustration of “elephant in the room” Image Credits: Klyaksun / Getty Images
As Casey Newton has noted over at The Platformer on more than one occasion, Europe’s new interoperability regulations come with several pitfalls, chief among them, perhaps, being the hurdles they will create for end-to-end encryption — that is, ensuring that data remains encrypted and impossible to decode while in transit.
End-to-end encryption is a huge selling point for the big technology companies of today, one that WhatsApp hollers from the rooftops. But making this work between different platforms built by different companies is not exactly easy, and many — if not most — experts on the subject say that it’s not possible to enforce a truly secure, interoperable messaging infrastructure that doesn’t compromise encryption in some way.
WhatsApp can control — and therefore promise — end-to-end encryption on its own platform. But if billions of messages are flying between WhatsApp and countless other applications run by other companies, WhatsApp can’t really know what’s happening to these messages once they leave WhatsApp.
Ultimately, no two services deploy their encryption identically, a challenge that Hodgson acknowledges. “End-to-end encrypted platforms have to speak the same language from end-to-end,” he said.
In a blog post published earlier this year to address encryption concerns, the Matrix Foundation suggested some workarounds, including having all the big gatekeepers switch to the same “decentralized end-to-end protocol” (i.e. Matrix, unsurprisingly) which, by the Foundation’s own admission, would be a large undertaken — but one “we shouldn’t rule out,” it said.
To illustrate this point, Hodgson pointed to Element’s 2020 acquisition of Gitter, a developer-focused community and chat platform purchased from GitLab and used by big-name companies including Google, Microsoft, and Amazon. Within two months of closing the deal, Element had introduced native Matrix connectivity to Gitter.
Coordinating such a transition on a Facebook, Google, or Apple scale would be an entirely different proposition, of course, one that could cause all manner of knock-on chaos. In a blog post earlier this year, cryptography and security expert Alec Muffett suggested that messaging apps and social networks adhering to the same standard protocol would lead to “no practical differentiation” between different services.
“Imagine a world where Signal and Snapchat would have to interoperate — what would that look like?” Muffett asked TechCrunch rhetorically in a Q&A for this story. “Specifically, which features from one need to be presented on the other, and what are the educators which surround those features? And how would conflict in functionality be reconciled?”
This is why the Matrix Foundation proposed other potential solutions, such as adopting a TLS certificate-style warning, where the user is alerted to the fact that their cross-service conversation is not fully protected. This is perhaps comparable to how Apple’s Messages app supports both encrypted iMessage texts, and (unencrypted) SMS. But according to Muffett, it would bring unnecessary complexity to the mix.
“Apart from any other reason that I could cite, there is any amount of user interface research which explains that security-pop-up-warnings are generally not understood and not heeded,” Muffett said. “There is tons of research to back this up — popup warnings are an ‘anti-pattern‘.”
The Matrix Foundation also proposed converting communication traffic between encryption languages in a “bridge,” though this would effectively mean having to break the encryption and re-encrypt the traffic safely somewhere.
“These bridges could be run client-side — for example, the Matrix iMessage bridge runs client-side on iPhone or Mac — or by using client-side open APIs to bridge between the apps locally within the phone itself,” Hodgson said. “Alternatively, they could be run server-side on hardware controlled by the user in a decentralized fashion, ensuring that the re-encryption happens in as secure an environment as possible, rather than on a vulnerable centralized server.”
There’s no escaping the fact that breaking encryption is far from ideal, irrespective of how a solution proposes to reconcile this. But perhaps more importantly, a robust solution for addressing the real encryption issues introduced by enforced interoperability doesn’t truly exist yet.
Despite that, Hodgson has said in the past that the upsides of the new EU regulations are greater than the downsides.
“On balance, we think that the benefits of mandating open APIs outweigh the risks that someone is going to run a vulnerable large-scale bridge and undermine everyone’s E2EE,” he wrote in May. “It’s better to have the option to be able to get at your data in the first place, than be held hostage in a walled garden.”
Tip of the iceberg
It’s worth noting that the Matrix protocol, while chiefly known for its presence in the messaging realm today, has other potential applications too. The Matrix Foundation recently announced Third Room, a decentralized and interoperable metaverse platform built on Matrix. This runs contrary to a potential future metaverse controlled by a handful of gatekeepers such as Facebook’s parent company Meta.
For now, Element remains the flagship poster-child of what a Matrix-powered world could look like. The company has secured some big-name customers already such as Mozilla, which is using Element as a fully-managed service, while Element said that it signed a $18 million four-year deal with another (unnamed) company this year. Meanwhile, it also has strategic backers, among them WordPress.com parent Automattic, which first invested $4.6 million in Element back in 2020, before returning for its $30 million Series B last year.
In many ways, the ground has never been so fertile for Matrix to flourish: it’s in the right place at the right time, as the world seeks an exit route from Big Tech’s clutches backed by at least a little regulation. And Twitter, too, has played more than a bit part in highlighting the downsides of centralized control, playing into the hands of all the companies banging the interoperability drum.
“The situation at Twitter has been absolutely amazing in terms of building awareness of the perils of centralization, providing a pivotal moment in helping users discover that we are entering a golden age of decentralization,” Hodgson said. “Just as many users have discovered that Mastodon is an increasingly viable decentralized alternative to Twitter, we’ve seen a massive halo effect of users discovering Matrix as a way to reclaim their independence over real-time communications such as messaging and VoIP — our long-term user base in particular is growing at its fastest ever rate.”
Meet the Bitcoinetas, a fleet of transformative vehicles on a mission to spread the bitcoin message everywhere they go. From Argentina to South Africa,…
You may have seen that picture of Michael Saylor in a bitcoin-branded van, with a cheerful guy right next to the car door. This one:
That car is the Bitcoineta European Edition, and the cheerful guy is Ariel Aguilar. Ariel is part of the European Bitcoineta team, and has previously driven another similar car in Argentina. In fact, there are currently five cars around the world that carry the name Bitcoineta (in some cases preceded with the Spanish definite article “La”).
Argentina: the original La Bitcoineta
The story of Bitcoinetas begins with the birth of 'La Bitcoineta' in Argentina, back in 2017. Inspired by the vibrancy of the South American Bitcoin community, the original Bitcoineta was conceived after an annual Latin American Conference (Labitconf), where the visionaries behind it recognized a unique opportunity to promote Bitcoin education in remote areas. Armed with a bright orange Bitcoin-themed exterior and a mission to bridge the gap in financial literacy, La Bitcoineta embarked on a journey to bring awareness of Bitcoin's potential benefits to villages and towns that often remained untouched by mainstream financial education initiatives. Operated by a team of dedicated volunteers, it was more than just a car; it was a symbol of hope and empowerment for those living on the fringes of financial inclusion.
Ariel was part of that initial Argentinian Bitcoineta team, and spent weeks on the road when the car became a reality. The original dream to bring bitcoin education even to remote areas within Argentina and other South American countries came true, and the La Bitcoineta team took part in dozens of local bitcoin meetups in the subsequent years.
One major hiccup came in late 2018, when the car was crashed into while parked in Puerto Madryn. The car was pretty much destroyed, but since the team was possessed by a honey badger spirit, nothing could stop them from keeping true to their mission. It is a testament to the determination and resilience of the Argentinian team that the car was quickly restored and returned on its orange-pilling quest soon after.
Over the more than 5 years that the Argentinian Bitcoineta has been running, it has traveled more than 80,000 kilometers - and as we’ll see further, it inspired multiple similar initiatives around the world.
In early 2021, the president of El Salvador passed the Bitcoin Law, making bitcoin legal tender in the country. The Labitconf team decided to celebrate this major step forward in bitcoin adoption by hosting the annual conference in San Salvador, the capital city of El Salvador. And correspondingly, the Argentinian Bitcoineta team made plans for a bold 7000-kilometer road trip to visit the Bitcoin country with the iconic Bitcoin car.
However, it proved to be impossible to cross so many borders separating Argentina and Salvador, since many governments were still imposing travel restrictions due to a Covid pandemic. So two weeks before the November event, the Labitconf team decided to fund a second Bitcoineta directly in El Salvador, as part of the Bitcoin Beach circular economy. Thus the second Bitcoineta was born.
The eye-catching Volkswagen minibus has been donated to the Bitcoin Beach team, which uses the car for the needs of its circular economy based in El Zonte.
Late 2021 saw one other major development in terms of grassroots bitcoin adoption. On the other side of the planet, in South Africa, Hermann Vivier initiated the Bitcoin Ekasi project. “Ekasi” is a colloquial term for a township, and a township in the South African context is an underdeveloped urban area with a predominantly black population, a remnant of the segregationist apartheid regime. Bitcoin Ekasi emerged as an attempt to introduce bitcoin into the economy of the JCC Camp township located in Mossel Bay, and has gained a lot of success on that front.
Bitcoin Ekasi was in large part inspired by the success of the Bitcoin Beach circular economy back in El Salvador, and the respect was mutual. The Bitcoin Beach team thus decided to pass on the favor they received from the Argentinian Bitcoineta team, and provided funds to Bitcoin Ekasi for them to build a Bitcoineta of their own.
Bitcoin Ekasi emerged as a sister organization of Surfer Kids, a non-profit organization with a mission to empower marginalized youths through surfing. The Ekasi Bitcoineta thus partially serves as a means to get the kids to visit various surfer competitions in South Africa. A major highlight in this regard was when the kids got to meet Jordy Smith, one of the most successful South African surfers worldwide.
Coincidentally, South African surfers present an intriguing demographic for understanding Bitcoin due to their unique circumstances and needs. To make it as a professional surfer, the athletes need to attend competitions abroad; but since South Africa has tight currency controls in place, it is often a headache to send money abroad for travel and competition expenses. The borderless nature of Bitcoin offers a solution to these constraints, providing surfers with an alternative means of moving funds across borders without any obstacles.
Photo taken at the South African Junior Surfing Championships 2023. Back row, left to right:
Mbasa, Chuma, Jordy Smith, Sandiso. Front, left to right: Owethu, Sibulele.
To find out more about Bitcoineta South Africa and the non-profit endeavors it serves, watch Lekker Feeling, a documentary by Aubrey Strobel:
The European Bitcoineta started its journey in early 2023, with Ariel Aguilar being one of the main catalysts behind the idea. Unlike its predecessors in El Salvador and South Africa, the European Bitcoineta was not funded by a previous team but instead secured support from individual donors, reflecting a grassroots approach to spreading financial literacy.
The European Bitcoineta is a Mercedes box van adorned with a prominent Bitcoin logo and inspiring messages, and serves as a mobile hub for education and discussion at numerous European Bitcoin conferences and local meetups. Inside its spacious interior, both notable bitcoiners and bitcoin plebs share their insights on the walls, fostering a sense of camaraderie and collaboration.
Introduced in December 2023 at the Africa Bitcoin Conference in Ghana, the fifth Bitcoineta was donated to the Ghanaian Bitcoin Cowries educational initiative as part of the Trezor Academy program.
Bitcoineta West Africa was funded by the proceeds from the bitcoin-only limited edition Trezor device, which was sold out within one day of its launch at the Bitcoin Amsterdam conference.
With plans for an extensive tour spanning Ghana, Togo, Benin, Nigeria, and potentially other countries within the ECOWAS political and economic union, Bitcoineta West Africa embodies the spirit of collaboration and solidarity in driving Bitcoin adoption and financial inclusion throughout the Global South.
All the Bitcoineta cars around the world share one overarching mission: to empower their local communities through bitcoin education, and thus improve the lives of common people that might have a strong need for bitcoin without being currently aware of such need. As they continue to traverse borders and break down barriers, Bitcoinetas serve as a reminder of the power of grassroots initiatives and the importance of financial education in shaping a more inclusive future. The tradition of Bitcoinetas will continue to flourish, and in the years to come we will hopefully encounter a brazenly decorated bitcoin car everywhere we go.
If the inspiring stories of Bitcoinetas have ignited a passion within you to make a difference in your community, we encourage you to take action! Reach out to one of the existing Bitcoineta teams for guidance, support, and inspiration on how to start your own initiative. Whether you're interested in spreading Bitcoin education, promoting financial literacy, or fostering empowerment in underserved areas, the Bitcoineta community is here to help you every step of the way. Together, we will orange pill the world!
This is a guest post by Josef Tetek. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Over the last few years, digital currencies and gold have become decent barometers of speculative investor appetite. Such isn’t surprising given the evolution…
Over the last few years, digital currencies and gold have become decent barometers of speculative investor appetite. Such isn’t surprising given the evolution of the market into a “casino” following the pandemic, where retail traders have increased their speculative appetites.
“Such is unsurprising, given that retail investors often fall victim to the psychological behavior of the “fear of missing out.” The chart below shows the “dumb money index” versus the S&P 500. Once again, retail investors are very long equities relative to the institutional players ascribed to being the “smart money.””
“The difference between “smart” and “dumb money” investors shows that, more often than not, the “dumb money” invests near market tops and sells near market bottoms.”
That enthusiasm has increased sharply since last November as stocks surged in hopes that the Federal Reserve would cut interest rates. As noted by Sentiment Trader:
“Over the past 18 weeks, the straight-up rally has moved us to an interesting juncture in the Sentiment Cycle. For the past few weeks, the S&P 500 has demonstrated a high positive correlation to the ‘Enthusiasm’ part of the cycle and a highly negative correlation to the ‘Panic’ phase.”
That frenzy to chase the markets, driven by the psychological bias of the “fear of missing out,” has permeated the entirety of the market. As noted in “This Is Nuts:”
“Since then, the entire market has surged higher following last week’s earnings report from Nvidia (NVDA). The reason I say “this is nuts” is the assumption that all companies were going to grow earnings and revenue at Nvidia’s rate. There is little doubt about Nvidia’s earnings and revenue growth rates. However, to maintain that growth pace indefinitely, particularly at 32x price-to-sales, means others like AMD and Intel must lose market share.”
Of course, it is not just a speculative frenzy in the markets for stocks, specifically anything related to “artificial intelligence,” but that exuberance has spilled over into gold and cryptocurrencies.
Birds Of A Feather
There are a couple of ways to measure exuberance in the assets. While sentiment measures examine the broad market, technical indicators can reflect exuberance on individual asset levels. However, before we get to our charts, we need a brief explanation of statistics, specifically, standard deviation.
“Like a rubber band that has been stretched too far – it must be relaxed in order to be stretched again. This is exactly the same for stock prices that are anchored to their moving averages. Trends that get overextended in one direction, or another, always return to their long-term average. Even during a strong uptrend or strong downtrend, prices often move back (revert) to a long-term moving average.”
The idea of “stretching the rubber band” can be measured in several ways, but I will limit our discussion this week to Standard Deviation and measuring deviation with “Bollinger Bands.”
“Standard Deviation” is defined as:
“A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of the variance.”
In plain English,this meansthat the further away from the average that an event occurs, the more unlikely it becomes. As shown below, out of 1000 occurrences, only three will fall outside the area of 3 standard deviations. 95.4% of the time, events will occur within two standard deviations.
A second measure of “exuberance” is “relative strength.”
“In technical analysis, the relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can read from 0 to 100.
Traditional interpretation and usage of the RSI are that values of 70 or above indicate that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.” – Investopedia
With those two measures, let’s look at Nvidia (NVDA), the poster child of speculative momentum trading in the markets. Nvidia trades more than 3 standard deviations above its moving average, and its RSI is 81. The last time this occurred was in July of 2023 when Nvidia consolidated and corrected prices through November.
Interestingly, gold also trades well into 3 standard deviation territory with an RSI reading of 75. Given that gold is supposed to be a “safe haven” or “risk off” asset, it is instead getting swept up in the current market exuberance.
The same is seen with digital currencies. Given the recent approval of spot, Bitcoin exchange-traded funds (ETFs), the panic bid to buy Bitcoin has pushed the price well into 3 standard deviation territory with an RSI of 73.
In other words, the stock market frenzy to “buy anything that is going up” has spread from just a handful of stocks related to artificial intelligence to gold and digital currencies.
It’s All Relative
We can see the correlation between stock market exuberance and gold and digital currency, which has risen since 2015 but accelerated following the post-pandemic, stimulus-fueled market frenzy. Since the market, gold and cryptocurrencies, or Bitcoin for our purposes, have disparate prices, we have rebased the performance to 100 in 2015.
Gold was supposed to be an inflation hedge. Yet, in 2022, gold prices fell as the market declined and inflation surged to 9%. However, as inflation has fallen and the stock market surged, so has gold. Notably, since 2015, gold and the market have moved in a more correlated pattern, which has reduced the hedging effect of gold in portfolios. In other words, during the subsequent market decline, gold will likely track stocks lower, failing to provide its “wealth preservation” status for investors.
The same goes for cryptocurrencies. Bitcoin is substantially more volatile than gold and tends to ebb and flow with the overall market. As sentiment surges in the S&P 500, Bitcoin and other cryptocurrencies follow suit as speculative appetites increase. Unfortunately, for individuals once again piling into Bitcoin to chase rising prices, if, or when, the market corrects, the decline in cryptocurrencies will likely substantially outpace the decline in market-based equities. This is particularly the case as Wall Street can now short the spot-Bitcoin ETFs, creating additional selling pressure on Bitcoin.
Just for added measure, here is Bitcoin versus gold.
Not A Recommendation
There are many narratives surrounding the markets, digital currency, and gold. However, in today’s market, more than in previous years, all assets are getting swept up into the investor-feeding frenzy.
Sure, this time could be different. I am only making an observation and not an investment recommendation.
However, from a portfolio management perspective, it will likely pay to remain attentive to the correlated risk between asset classes. If some event causes a reversal in bullish exuberance, cash and bonds may be the only place to hide.
BUFFALO, NY- March 11, 2024 – Impact Journals publishes scholarly journals in the biomedical sciences with a focus on all areas of cancer and aging research. Aging is one of the most prominent journals published by Impact Journals.
Credit: Impact Journals
BUFFALO, NY- March 11, 2024 – Impact Journals publishes scholarly journals in the biomedical sciences with a focus on all areas of cancer and aging research. Aging is one of the most prominent journals published by Impact Journals.
Impact Journals will be participating as an exhibitor at the American Association for Cancer Research (AACR) Annual Meeting 2024 from April 5-10 at the San Diego Convention Center in San Diego, California. This year, the AACR meeting theme is “Inspiring Science • Fueling Progress • Revolutionizing Care.”
Visit booth #4159 at the AACR Annual Meeting 2024 to connect with members of the Agingteam.
About Aging-US:
Agingpublishes research papers in all fields of aging research including but not limited, aging from yeast to mammals, cellular senescence, age-related diseases such as cancer and Alzheimer’s diseases and their prevention and treatment, anti-aging strategies and drug development and especially the role of signal transduction pathways such as mTOR in aging and potential approaches to modulate these signaling pathways to extend lifespan. The journal aims to promote treatment of age-related diseases by slowing down aging, validation of anti-aging drugs by treating age-related diseases, prevention of cancer by inhibiting aging. Cancer and COVID-19 are age-related diseases.
Agingis indexed and archived byPubMed/Medline (abbreviated as “Aging (Albany NY)”), PubMed Central, Web of Science: Science Citation Index Expanded (abbreviated as “Aging‐US” and listed in the Cell Biology and Geriatrics & Gerontology categories), Scopus (abbreviated as “Aging” and listed in the Cell Biology and Aging categories), Biological Abstracts, BIOSIS Previews, EMBASE, META (Chan Zuckerberg Initiative) (2018-2022), and Dimensions (Digital Science).
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