Making the Case for an Alt Reversal
Making the Case for an Alt Reversal
The Ethical Long: Cycles and Capital Formation
Since August 11th/12th, I began writing thoughts to capture my mental model around identifying inefficient capital allocation in crypto assets, and the market forces that drive positioning on the margin – which I believe is under-recognized today due to what has been a programmatic supply overhang (re: alt emissions, chunky BTC/ETH sellers).
The dislocation created by seemingly endless supply has resulted in four mass ~1B long liquidations this year, the most recent of which broke an 8-month BTC-trading range – which I interpret as a unique opportunity to challenge microstructure underpinning a) “flight to safety” positioning and b) decomposing what actually drives liquidity & markets.
My belief is that without new money: in a scenario where total available dollars available has shrunken vs. March & where previous-cycle ATHs have settled, order-book combativeness & psychology of the buyer vs. seller are the fulcrum underpinning how and why money moves.
Herein, I seek to challenge the status-quo of what is considered the “safe” risk-barbell (BTC/SOL/Memes) by framing risk-reward in a structural way: starting at the majors and subsequently walking through the conditions that must be met to create a sustained trickle-down effect buoying alts, or specifically, “OTHERS.” This is the result of my deep dive dissecting and reviewing L5Y price / volume / dilution history for 150+ names:
Chapter 1: Introduction
To start: I believe that BTC can only resolve in 2 directions from here:
i) BTCUSD: down uniformly, marking the cycle-end (~20-30% p-weigh)
ii) BTC.D: down and lagging capital returns against ALTS/OTHERS (~70-80% p-weigh)
Under i) – this needs to be explained in more nuance (which I seek to do below): in contrast to popular trains of thought, I believe that the outcome of BTC is both macro-agnostic and politically-agnostic: these 2 buckets are being far-more weighed than they should be as participants seek to retroactively precursor the future, and I will break open these preconceptions.
Under ii), and supporting the punchline of what I believe: OTHERS – especially targeted ones with low liquidity, short-build up, unsavory tokenomics and correspondingly low resting OI – should receive a significant demand shock creating a market signal for a full-shift in the risk-reward spectrum. This will be done without a gearing narrative, and flow according to capital efficiency.
To me, the question we should all be asking is:
Where can one find the most efficient outcome from inserting $1 of flows relative to EV of wealth creation re: market cap. expansion?
With the subsequent question being: Is this asset still BTC (best performing single asset YTD)? Why or why not?
Chapter 2: Identifying Where We Are in the Cycle
Subject to the table below, I contrast cycle length and amplitude of the previous cycle, which I feel is abject to being the strongest template to retrofit given historical $ deployed.
I measure dominance of each asset class (BTC/ETH/OTHERS) during critical peaks & troughs, as well as showing the corresponding move in equities in arranging side-by-side liquidity available.
Given prior cycle length (~600 days – where we are at roughly today), and structure around the halving, this framework enables us to form 2 conclusions:
1) Either this cycle has been accelerated from ETF flows truncating full appreciation & price discovery – and we are near the end given how/where total dollars have shrunk, OR
2) This will break the mold of prior precedents: gravitating away in length, and in doing so we should challenge the type of market forces that would precede such a move, and what future conditions this shift would be supportive of
Chapter 3A: Consensus Positioning in the Risk Barbell
When we observe trough-to-peak recovery post-liquidation, there is one very noticeable fragment missing in August: the lack of appetite re-bidding ETH despite the forced shift away.
Where has that money gone? My hypothesis is in strength hiding in BTC, or in cash: ready to bid, but waiting for a “catalyst” to move the needle. This is a market efficiency we can exploit – but let’s confirm the following:
1) What does the total pool of money look like today wrt dispersion?
2) Is being in a consensus position necessarily bad?
The exhibit below answers question 1), depicting historical capital expansion and what asset selection has typically looked like: as of August 12th, we are currently at ~16% ETH (even lower today), with OTHERS as a % of TOTAL3 at cycle-lows.
My guess is that relative to December 20, 2021 (last cycle’s TOTAL3 ATH), there is ~$300-400B of free cash that is ready to be deployed.
Chapter 3B: Consensus Positioning in the Risk Barbell
Is being in a consensus position necessarily bad? Does price not beget narrative? When we study the two biggest “catalysts” / “event-driven” moves this year: the BTC and ETH ETF, respectively, we can isolate for relative performance regarding the asset in question.
BTC and ETH, respectively, lagged behind the other majors DESPITE having exit creation in place when we measure performance from the day-AFTER a rumor breaks (BTC cointelegraph leak; ETH BBG 75% report) thru the close on the day of trading where the product goes live.
Regarding the ETH ETF – had you started this measurement the day BEFORE the BBG bros broke the news – performance would be +11% instead of -8%.
Ergo we can quantify how the impact of consensus creeps into momentum: a ~20% swing in the span of 24-48H that completely changes whether or not a position is profitable to take to begin with.
Chapter 3C: BTC is Consensus Amongst Money Managers
Over the last 2 weeks, I polled positioning amongst fund managers, some of the most respected single-manager leviathans and even CT. Flavor has clearly accentuated around expected, and continued, BTC strength. Exhibit below regarding polled views
Legend:
Green = Bullish
Red = Bearish
Grey = Flat
No Color = No View Identified
Chapter 3D: Putting This Altogether
Abridged with my theory that long-liquidations are in of themselves the catalyst to drive capital re-allocation: let us visit asset-dominance since the 12th (when I started putting together this analysis): +7D outperformance from OTHERS:
Chapter 4A: BTC is well-positioned, but there is likely not enough demand by YE to support a new ATH
This level of BTC-consensus permeates even outside managed money: let’s look at miners to depict our game theory participant of someone who is, by commercial description, focused on BTC-only:
MARA: 19K BTC owned @ cost basis of ~$41K pre-2024, added 4K BTC @ cost basis of $59K. 270 BTC sold YTD.
CLSK: 2K BTC owned @ cost basis of ~$25K pre-2024, aggregate 6.5K BTC @ mixed basis of $48K. No BTC sold.
RIOT: 9K BTC; strategic announcement in June this year to not sell any BTC for remainder of the year.
In addition to Saylor’s $2B TWAP (if he can fundraise that much), and the exhaustive list of sellers (Gemini, Celsius, MTGox, Germany, US Gov’t), we are in an equilibrium where BTC has absorbed these supply shocks due to the programmatic demand that has appeared supporting ~$50-60K.
I believe this is a unique environment for BTC to thrive in: as a non-yield-bearing asset, I expect entropy surrounding rate-cuts and macro-events to be mostly muted on both sides – where the marginal seller is not as aggressive, but the marginal buyer beyond the existing inflows that have appeared (and in great volume) this year will be limited, thereby preventing “new money” from equities/fixed income “leaking” into crypto-assets.
The argument against BTC here is that last cycle had multiple loops of leverage and COVID-adjusted income & stipends supporting easier liquidity conditions – which are not in place this cycle. Therefore we should temper our expectations in reaching for a capital outcome where new money must come in beyond the limits of what we have seen prior (< $3T dollars).
Chapter 4B: BTC is a political lever, but net-effects by either party will have diminished impact given the shock already appeared in July
See exhibit below: there are still many anti-crypto proponents post-FTX fallout / people who are hesitant about crypto in general.
The echo chamber reinforcing crypto = higher chance of winning is abundant per natural crypto-bias.
Per CB, consider the top 5 states w the highest % of population that owns crypto: CA, NJ, WA, NY and CO in that order. The first 4 states have traditionally been heavy blue. Being pro-crypto does not necessarily break a swing state; having a unique & polarizing position anti-crypto could be an equally strong platform to garner anti- votes rather than chasing (weakly, may I add) the pro- votes.
Super PACs have traditionally been anti-Dem in the first place given Gensler/Warren's endeavors this regime & I doubt a lukewarm shift to "supporting crypto" will sway things.
Chapter 5: Order of Operations
Let us form the conditions / order of events that must elapse for the picture to transform away from an 8-month / YTD precedent around OTHERS underperformance, and today’s focus on BTC/memes that penetrates capital formation:
i) Liquidations re-allocate capital around “flight to safety” harbingers (re: MEMES/BTC/SOL)
ii) Drift appears: assets range and direction is both un-sustained and apathetic: measured by possibly peak-to-trough OI and/or coin volume
iii) Stables/cash collects, “freeing” discretionary capital away from previous price-anchors iv) Returns compress from what used to be successful: flavors hit their expiry date without knowing they have eclipsed (eg. memes post-liquidation weaken in the +7D vs. +14D vs +21D window relative to prior). Empirically, capital willing to bid smaller memes tightens (eg. http://pump.fun) as well
v) Initial pumps are faded – especially as they resemble short-squeezes of events prior – and initial rotations seem to predate nonsensical strength. The average portfolio composition is still long majors / short ALTS, guided by complacency
vi) Sentiment bubbles: provenance around alt-emissions are over-weighted as a contradictory force, despite most chunky emissions having already occurred and new-age assets not having significant supply coming online until 2025+
With every liquidation period we have had since the beginning of the year, OTHERS underperformance continues to compress – and this period (post-August) being uniquely differently thus far. I believe most funds and money managers have underperformed YTD relative to their benchmark (BTC) and the rotation of capital will be fierce in “beating each other” to the races; there will be a contest of trying to deploy capital fastest in arranging a quickly escalating house of cards.
These $$ matter because they are the “frontier” upon which outcomes start becoming recursive (as we identified with jettisoning ETH w/ Jump/Gemini; but the other way around)
Chapter 6: Name Selection & Sector Outperformance
I argue that emissions, when embedded, are flavorless – on alts that are down 90-95% from TGE, we acquit that SOL and AVAX launched at <5% FDV items and reached $10B valuations+.
I center on two buckets as best-in-class name to indulge in:
1) L1s
2) New coins
Exhibits below around MtM performance and peak-to-discount exhibit that these categories of coins have the most room to grow relative to historical allocation & lack-there of today:
Chapter 7: Case Studies (Back-Testing Theory)
When we look at the following examples: DOGE, LISTA, SUI, MKR, AAVE and NOT – these squeezes relative to OI additions harbor an amplified outcome beyond the degree to which $ can impact/move a major. Impulsive moves guiding price expansion (weighing $ inserted via OI increase vs. MCAP increase) have ranged 6-10x this cycle on bFUTS – and with the combination of atrophied OI and low funding (incumbent short legs)– there are multiple assets with incredible expansion opportunity to replicate a similar result:
See disclaimer here: https://pastebin.com/1mRkzEsh