Weathering the Altcoin Shitstorm (And Investing for the Next One) 2 days ago Google+ Telegram
Brendan Bernstein is a founding member of Tetras Capital Partners, LLC , an investment manager focused on investing in cryptocurrencies and blockchain assets.
The crypto market moves in cycles – and understanding these cycles is key to profiting, managing risk and keeping sane.
Howard Marks describes two ways to profit from markets: (1) Hold more of the things that rise and less of the things that fall, and (2) cycle adjustment, or trying to have more risk exposure when markets rise and less when they fall.
Most people ignore the second part. Yet the key to cycle adjustment is understanding where you are in the cycle and calibrating the risks and rewards to account for it.
Similar to the broader economy, we have both short and long-term cycles. Short-term cycles are driven by the capital flows, investor composition and market sentiment. Long-term cycles result from the aggregate effects of the short-term cycles and ultimately are driven by long-term fundamentals. The past few months in context
Over the last few months, the market has been driven by new capital entering the space and a psychological acceptance of bitcoin. The capital — both retail and institutional (i.
e., new crypto hedge funds) — entered initially through the most liquid crypto assets and fiat currency onramps.
Bitcoin, being the most liquid fiat onramp, has performed well. It was also the first asset many investors became comfortable with during that time.
From July 1st to Dec. 10th, bitcoin dominance (or its percentage of total cryptocurrency market capitalization) increased from 41% to 66% – even as the overall market cap of all cryptocurrencies was increasing outside of bitcoin. BTC’s price increased from $2,492 to almost $20,000.
I’ll stress that this was not driven by fundamentals, but rather the capital flows and accessibility premium of bitcoin. New capital had a bias for bitcoin because it was the easiest to understand, custody and purchase.
The short-term cycle moved in BTC’s favor. The short-term crypto cycle in action
Moving toward December, the market started to become more and more dominated by retail and – let’s be honest – less crypto-educated capital.
Coinbase is a great proxy for this phenomenon. From June to October, Coinbase signups were relatively constant at about30,000 per day.
However, starting in early November, this number started to increase dramatically, exceeding 100,000 on some days.
Initially, this capital continued to pour into bitcoin, putting fuel on the short-term cycle and building new investor sentiment in favor of BTC.
BTC was going to $100,000, and by the time CNBC debuted its coveted “BTC Ticker,” the pendulum had swung too far in BTC’s direction.
Larger investors started to take profits, bitcoin began to falter. It was time to find the next new shiny object…
As capital moved out of bitcoin and into other assets, we saw the end of one short-term cycle and beginning of the next.
Starting in early December, a new cycle began and the “cheaper” Coinbase assets stole the show.
Capital that initially entered the crypto markets through BTC was finally comfortable with the crypto space and willing to move out on the risk curve.
In other words, it was time to play with house money.
The newer retail entrants cared less about fundamental protocol strength and were easily lured into a protocol’s marketing pitch. These were not cypherpunks.
BTC is archaic and overpriced to these investors. There is no EEA of bitcoin .
No marketing team is pushing it.
Why buy a $17,000 digital gold when you could buy a $100, faster alternative? In the first three weeks of December alone, litecoin increased 3.7x from $100 to $371 while BTC continued to lose ground.
LTC, too, would have a fall from grace when longer-term LTC holders began to sell ( ahem Charlie ) and returns started to stagnate. These restless investors moved on once again with more house money to play with.
Their attention moved from the roulette table that is Coinbase to the craps table that is Bittrex, Poloniex and Binance. As a result, signups on those exchanges skyrocketed, and Bittrex even had to close new user accounts.
“Holy shit, even cheaper versions of BTC.” Their marketing budgets lured them in with the siren call of lambos.
It seems ridiculous to say, but the cheaper the asset, the greater the chance of a return.
And when I said cheap, I’m not referring to a fundamental measure of value like a value investor would (P/BV, P/E, etc). I’m referring to its price.
A chart of returns over the past seven days paints this picture. There’s a direct negative correlation between the price of the token and return. It’s scary, but it’s unfortunately true.
TRX, XRP, XLM, ADA, you name it. “Bitcoin 3.0.” Faster, cheaper and more upside. Right? It became a self-fulfilling prophecy. BTC retreated 40% and overall dominance fell from 65% down to 37% this week.
The fire was already smoldering.
New retail investors were the gasoline. Preston Byrne said it best – cryptocurrencies have become the worlds largest penny stock casino. How to weather the shitcoin storm
Investors trying to find fundamental value are ripping their eyes out. XRP, with legitimately zero fundamental usage (see below), just passed BTC in diluted market cap.
Over the last day I’ve asked several people close to banks if banks are indeed planning to begin using Ripple’s token, XRP, in a serious way, which is what investors seem to assume when they buy in at the current XRP prices. This is a sampling of what I heard back: pic.twitter.
com/zbfMqg4TpD
— Nathaniel Popper (@nathanielpopper) January 5, 2018
IOTA has proven cryptographic flaws. What the hell is TRON? RaiBlocks went from a market cap of $30 million to $4 billion in a week. What. The. Fuck.
Meanwhile, assets with real usage, actual code and strong development communities, like monero for example, have not moved.
Are investors supposed to recognize the reality of the situation that, for the current market regime, fundamental protocol strength — adoption, code quality, tech talent, etc. — means less than the price of the asset and marketing budget.
Should you go all-in on coins less than $1? Or do you stick to your guns, find value and weather the shitcoin storm?
The answer comes down to understanding where we are the cryptocurrency cycle. Where we are – and how to profit
The answer to investing is rarely black and white. It’s not “get in” or “get out.
” It’s usually somewhere in the middle.
When people are increasingly willing to take risk and fear of missing out (FOMO) is prevailing over any sense of security and analytical discipline, that’s the time to be worried. When the fundamentally weakest assets are rallying the most and people are proclaiming BTC is dead, we’re starting to near the end of a short-term, altcoin-dominated cycle.
The problem is that investors tend to think of themselves as analytical, disciplined and contrarian, but the fact of the matter is that most tend to magnify cyclical moves. They cannot stomach the possibility they may miss out on gains.
That is why predicting the exact top and bottom is so challenging. But doing so with exact precision is not necessary…
Does anyone still talk about Bitcoin?
— Ran Neuner (@cryptomanran) January 5, 2018
Howard Marks describes the strategy well:
“No one can ascertain when we’re at th.
