Attention Smart Shoppers
This year marks my ninth year investing in cryptocurrencies. As long as crypto includes strong retail participation, there will be cycles — and I have lived through multiple. I believe in the vision of web3 but I’m also a quant that looks at market patterns, particularly markers of retail participation including volume and options implied volatility to determine when to accumulate, hedge, or even dispose of my positions.
Though we’re only half way through the year, the recent turbulence we have experienced in crypto reminds me most of 2018. Given the macro environment and continued deleveraging in crypto, I believe prices could still go lower. That being said, I also believe this is the first reasonable place to start putting new positions on whether buying spot or removing hedges. What kind of positions do I believe make sense to put on? Let’s explore this.
Many altcoins are down 90% — I believe they could still fall more from here. High quality protocols, however, tend to find their lows early in the bear market and begin to diverge from the broader market as the bear goes on. While there are many interesting decentralized applications being built, I believe that web3 infrastructure is still where the most important work is being done. There are just too many critical things that are being, or need to be, built. I also believe most value will accrue to these projects (more on that in future posts).
I believe that Ethereum is the most important web3 infrastructure company and is a bellwether for all smart contract platforms — the most critical piece of web3 infrastructure. Ethereum has gotten absolutely crushed. In January I wrote about this potential liquidation cascade that would see ETH drop to levels we are currently witnessing.
Looking at MakerDAO collateralized debt positions (or CDPs) shows that there is less potential for liquidation cascades as there were at prices between $1,700 and $1,300. The supply of DAI has dropped from 9.7 billion to 6.9 billion which in percentage terms is on par with the reduction in leverage that occurred in 2018. I believe this is the point at which high quality projects (important infrastructure protocols) will begin to diverge from the general crypto market. Chainlink (LINK) is an example of this.
Chainlink supplies thousands of projects with important data that there smart contracts use to execute transactions. In the 2018 bear market, LINK reached its lows in June while the rest of the market carried lower into December. Then LINK went on to 273x gains in the following bull market. The market itself increased 30x. The following chart demonstrates how LINK was trending higher as the market reached new lows.
In the 2018 bear market, LINK reached its lows in June while the rest of the market carried lower into December.
Examples like this have played out in the stock market. When the Internet bubble popped, Amazon reached its all time low on September 23, 2001. The general market didn’t bottom out until almost exactly one year later.
There are many extremely undervalued infrastructure projects available in the public markets right now. I am spending most of my time identifying which of the public projects will be the winners as we go through a new cycle. I have a multi year time horizon, and for those of you that do too, I believe this is a great place to begin to accumulate position in high quality projects for the next bull market — even if the market will go lower.
The foregoing solely represents the views and opinions of the author and is not a personalized recommendation or advice regarding the suitability of, or advisability of investing in, purchasing or selling any particular investment, security, portfolio, commodity, transaction or investment strategy. To the extent that any of the foregoing content may be deemed to be investment advice or recommendations in connection with a particular security, such information is impersonal and not tailored to the investment needs of any specific person. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While the author believes the sources of information to be reliable, the author in no way represents or guarantees the accuracy of the statements made herein. The author does not provide individual investment counseling, act as an advisor in an individual capacity, or individually advocate the purchase or sale of any security or investment. All investment is subject to the risk of loss. Past performance is not an indicator of future results.
