Market Cycle Analysis | April 19, 2024
Below are my current thoughts on the market, all of which are subject to change and all of which are speculation and could be wrong.
We are now in a crypto bubble.
Random memecoins are trading at 10 and 11 figure valuations.
The lows of the next bear market will very likely be lower than current prices on most coins.
If you asked me “Where in the cycle do you think we are?” My best guess would be the halfway point. We just had our first violent mean reversion in many altcoins.
See Solana last cycle vs this cycle:
If I had to guess, and keep in mind it’s just a guess, we have one more big leg up in the market before distribution begins. If I’m wrong about this, and we have more than 1 leg up from here, then that’s still fine. Catching 2 of 3 bull market legs is still a huge win, and there is still plenty of money to be made in a 3rd leg up with lower risk strategies.
On Memecoins
We’re seeing extreme saturation in the memecoin market.
From here, most new pumps become very short-lived while winners continue to rise in value.
The current memecoin climate is quite similar to last cycle’s NFT boom. The success of a few projects, mainly Bored Ape Yacht Club and CryptoPunks spawned an endless supply of copy-cats. Most of which had one or two brief, violent pumps followed by a long-term bleed to 0.
Here are a half dozen examples:
^This is what 99.9% of memecoin charts will looks like after a few years. Note the time duration after which most of these projects peaked. Some reached their peaks in a few days, some a few weeks. Some of the best ones sustained positive price action for 3-4 months.
Now look at the market leader’s chart:
BAYC, as the market leader, was able to sustain positive price action for almost a full year before crashing 90%.
Assuming this bull market continues, the established market leaders will generally see longer-sustained rallies. New emergents are likely to lose attention more quickly.
This phenomenon occurs as the market becomes more saturated with copy-cats that have no real differentiating qualities. Their only advantage is that they are “new”, which quickly fades.
In practice, this means we should more willing to ride established winners, and look to aggressively take profits on later emerging projects.
On Positioning
As far as positioning goes, I see a lot of people making the following mistakes in mid-late stage bull markets:
- Mistake #1: Buying low quality copy-cats because they are new and hyped, then holding on to unrealized profits too long. There was plenty of money to be made buying CloneX, Meebits, and Moonbirds early, but you had to actually take profits when they pumped. Never marry your bags. Too frequently I see people buy garbage and treat it as a “long-term HODL”.
- Mistake #2: Over-sizing on the low quality micro-caps. It’s fine to play the current memecoin/runes/ordinals metas but too often people allocate way too much capital to these low hit-rate investments and end up underperforming had they just held BTC or large caps.
- Mistake #3: Riding dead investments. This is the big one that gets most retailers. They have married their bags of some random dead L1 or NFT from last cycle with no TVL and no narrative and expect it to magically rise from the dead. No one is coming to buy your dead bags. Some dead projects will pivot to new narratives and come back to life, but that is different than people just randomly returning to a project when nothing has changed.
- Mistake #4: Generally treating crypto investments like they are higher quality investments than they actually are. Note that most everything in this space is highly speculative. There are still very few real use cases with product market fit in crypto at the moment. Even tokens from high quality teams and solid use cases will see large drawdowns in a bear market.
This is why I predominantly choose high conviction catalyst-based investments and invest with size.
Ask yourself:
"Who is going to buy [my bags] in 3 - 12 months and why are they going to be willing to pay 3x - 10x what I paid?"
If you can't answer that question, you should probably reposition.
If you’re playing the low-cap meta which moves exponentially faster, ask yourself:
"Who is going to buy [my bags] in 3 - 12 days and why are they going to be willing to pay 3x - 10x what I paid?"
What makes your investment so special that tens or even hundreds of thousands of other people are going to come in and buy from you at a higher price?
Why specifically, are they going to be willing to pay a higher price?
Here are a few potential reasons to keep in mind:
- The people buying your bags were not previously market participants, but now are. They have only just entered as the bull market has attracted their attention.
- Availability improved. Your bags were not previously available to the people who are now buying at a higher price. For example, the investment gets an ETF or a Robinhood listing and more people now have access to purchase.
- Fundamentals improved. The investment is now more useful, has onboarded significant individuals, or the outlook for the investment has greatly improved due to some catalyst or shift in the market, attracting new buyers.
I’ll walk through this exercise with my current investments as an example:
TRUMP
"Who is going to buy TRUMP in 3 - 12 months and why are they going to be willing to pay 3x - 10x what I paid?
Who: Retail just entering a frothy market, gamblers looking to speculate on the outcome of the election, traders/investors who did not deploy capital into the trade early, and general Trump supporters who are not yet aware of the token.
Why: As the election approaches, the amount of media attention on Donald Trump will begin to move parabolically, which should be reflected in the price of TRUMP token. As the timeline for the election draws nearer, the perceived risks and opportunity cost of deploying capital into TRUMP greatly diminishes as it’s a straight-forward catalyst trade. Many participants are willing to tie their capital up in TRUMP for a few weeks or months, but not for 12+ months. Availability may also improve if TRUMP gets additional exchange listings. Fundamentals continue to improve as the team onboards large marketing partners (Dom Lucre & Roger Stone).
DOGE
"Who is going to buy DOGE in 3 - 12 months and why are they going to be willing to pay 3x - 10x what I paid?
Who: Retail, tradfi entities who want exposure to the “memecoin narrative”, and traders/speculators who have not yet connected the dots on the launch of a DOGE ETF.
Why: A DOGE ETF filing is likely. Coinbase Derivatives LLC recently filed with the CFTC for DOGE, BCH, and LTC futures trading in the US, a crucial step before being able to file for ETFs. A DOGE ETF greatly increases the availability of DOGE exposure and greatly improves its long-term outlook. Additionally, the market’s view on memecoins in general continues to shift in a more positive direction and this trend is likely to continue.
BCH
"Who is going to buy BCH in 3 - 12 months and why are they going to be willing to pay 3x - 10x what I paid?
Who: Retail, tradfi entities who want beta exposure to Bitcoin, and traders/speculators who have not yet connected the dots on the launch of a BCH ETF.
Why: A BCH ETF filing is likely. Coinbase Derivatives LLC recently filed with the CFTC for DOGE, BCH, and LTC futures trading in the US, a crucial step before being able to file for ETFs. A BCH ETF greatly increases the availability of BCH exposure and greatly improves its long-term outlook. BCH also benefits from unit bias. Many unsophisticated tradfi investors may feel like they are buying Bitcoin at a cheaper price (BCH currently trades at <1% of the value of BTC).
AMPL
"Who is going to buy AMPL in 3 - 12 months and why are they going to be willing to pay 3x - 10x what I paid?
Who: Crypto funds and sophisticated DeFi participants looking to capture the AMPL demand generated by SPOT demand, driven by the need for an inflation resistance decentralized stablecoin.
Why: Coinbase, led by Brian Armstrong, may support SPOT markets on Base and/or Coinbase. This is highly speculative, but if it happens, will provide a lot of legitimacy and demand for SPOT, which drives demand for AMPL. This would be a massive improvement in the fundamental use and outlook for AMPL, which would attract many investors.
Gold and Silver
I am extraordinarily bullish on Gold and Silver. It’s a bit overbought at the moment, so it certainly has room to see a correction in the short-term. That said, gold and silver are the assets that benefit from the three most likely potential macro scenarios.
- Fed loses the tail-end and we see hyper-inflation. China and other BRICS countries continue dumping US treasuries for which there are already few buyers for currently. US has to print to buy back debt and avoid Us Treasury collapse and bank failures.
- Multi-year recession. Yield-curve has been inverted for longer than ever. Fed has to continue QT longer than anyone expects to avoid hyper-inflation.
- Multi-year stagflation, chop, and continued economic degradation and uncertainty.
China and other countries are significantly bolstering their gold reserves.
I believe one of the biggest mistakes people will make this cycle is treating Bitcoin as beta on Gold, thinking its a risk-off asset. Bitcoin has always traded as a risk-on asset.
Here is a screenshot of BTC vs Gold’s reaction to the news about Israel attacking Iran on April 18, 2024:
Summary
To summarize my current views on the market and positioning, I believe we likely have another leg up in crypto but am open to the possibility of considerable downside from here given the bleak macro-economic outlook.
When the music stops and the market tops, most tokens will see huge crashes. One of the reasons I am focused on catalyst-based trades is because in the event of market downturn, the catalyst trades can bail you out by providing an opportunity for exit liquidity.
Even in bear markets we see big trades and narratives take place. For example, in the last bear market we saw isolated pumps in things like PEPE, Rollbit, and Friendtech. If the market tanks, I believe there will still be significant speculation on TRUMP around the election and DOGE + BCH if ETF applications are filed.
Should we see another leg up in the market (~$90k BTC or so) I’d like to move mostly out of the crypto market. Even if BTC rips to $150k+ on an addition leg thereafter, the volatility becomes so high in such a scenario that we can make significant amounts of money deploying significantly less capital. Also, the delta neutral and low risk strategies in such an environment are still quite lucrative.