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Hi Everyone, At long last, the crypto markets have seen a sharp bounce off the lows this afternoon, providing some much-needed relief to weary hodlers. With the market marking lower lows today across the board, it seems everyone is inevitably asking the same question. ... | |
Well, as indicated above, we aren't sure. Some people might think they know, but what's less than helpful here is that crypto analysts have yet to reach any sort of consensus regarding what constitutes a bear market. That simple ambiguity makes the above question virtually impossible to answer. In traditional markets, a bear market is usually said to occur when the major stock indexes drop 20% or more from the highs over a sustained period of time. In crypto, a 20% drop is also known as a Tuesday. So we may need to rely on the second half of the statement "over a sustained period of time." The problem is that time is subjective. Certainly we can say that the two previous crypto winters of 2014 and 2018 were considered bear markets. In both cases, most of the price declines happened pretty quickly and were followed by a prolonged lack of interest in the space. Given the current levels of adoption, utility, and diversification in crypto, I'm starting to believe that we may never see another crypto winter again. | |
Shifting seasons Nowhere is this more apparent than in the stablecoin market, which has been experiencing a sustained market capitalization above $100 billion, up from around $6 billion at the start of 2020. | |
Of course, the stablecoins that make up this market aren't as subject to wild mood swings or price volatility as the other digital assets. So we can probably expect this number to only go up...for real. The rise of the stablecoins is all but guaranteed, however, when thinking of them in the context of DeFi, which is also not going anywhere anytime soon. An 8% yield on a volatile asset like bitcoin or ether is not all that exciting for risk-averse investors. If we want to think about the upcoming migration from low-risk assets like the multi-trillion dollar bond market, then it will have to be done into currencies that are less speculative in nature. Therefore, my running hypothesis is that as the DeFi market moves to more stable grounding and leverage starts to build back up in a more healthy way, a prolonged winter of inactivity may be completely inconceivable. Another silver lining that I'm finding among the current volatility is that the crypto market has returned to its comfort zone as an asset class that is not correlated with others. As we can see below, the correlation between bitcoin and the S&P 500 shot to an all-time high when COVID-19 first struck in March of last year, but has now pretty much returned to zero. The correlation with the U.S. dollar has similarly gone from being strongly negative to neutral. | |
The correlation between the various digital assets, on the other hand, remains as high as ever, with the correlation between bitcoin and ether currently higher than 0.8 out of 1. | |
Is it a crypto bear market though? You're dodging the question, sir.... Yes, I'm good at that. One thing I'm really bad at is telling the future. As some of you may recall, just six weeks ago, on May 5, I wrote a newsletter titled When Top, in which I clearly stated that we were in a bull market. The argument used at the time was that prices were going up and were expected to keep rising, ergo we were in a bull market. Is the reverse also true? Clearly, prices have declined over the last few days, but are they expected to keep going down? In my view, even though the declines since May 11 have been brutal, six weeks is hardly considered a sustained period of time. Therefore, according to the above definition, we're not in a bear market. Also, if we look at the chart, everything since May 19 actually looks more like consolidation, with a relative price range for bitcoin between $30,000 and $40,000. | |
So we can see that the recovery today was indeed quite critical, and only time will tell if this morning's pit of despair was actually a false breakout, similar to the false breakout to the upside that we had last week. Obviously, nobody can tell the future. What I can say however is that we shouldn't let our emotions dictate our investment decisions. The notion of buying an asset after a rise of 1,000% or more is likely driven by greed. Likewise, selling an asset after a fall of 50% or more is probably an act of fear. The secret sauce to all investing, the four magic words, are "buy low, sell high." For some reason, most people seem to impulsively do these in the opposite order. Dollar cost averaging and diversification are winning strategies over time. Anyone who's been diligently rebalancing between stocks, commodities, and crypto right now should be sitting pretty. Likewise, anyone who's been dollar cost averaging for more than a year or two is probably not excited by any of the recent price movements. In the famous words of Matt Odell: "Stay humble. Stack sats." Have a wonderful evening. | |
Mati Greenspan Analysis, Advisory, Money Management | | |
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