It has been a while since my last post as I traveled to spend time with my family. So, here are some highlights that I would like to draw your attention to:
In the macro landscape, apart from taper talks, China’s Evergrande debt issue, and inflation prints, there weren’t many activities in the mainstream news. However, crypto market was the place with the most actions. It seems like we have come to an interesting juncture in the 3rd BTC halving cycle, and I think we will have one more leg up before blowing off on the top. As Druckenmiller once mentioned one of the most important skills you need as a money manager is to know when to be hot or cold. I personally believe the next 2 quarters are the period to press hard on crypto bets to maximize returns for this cycle.
Moreover, I made changes in my portfolio allocation as I moved most of my capital from trading into crypto to make almost 95% of my portfolio. The main reason for this shift is that if history is going to repeat itself, most of the growth in the halving cycle takes place in the last run-up before the blow-up. That amount of exponential run-up is hard to ignore, which outweighs the risk significantly. Therefore, In this post, I will provide an update on my views on the crypto market and some of my positioning to take advantage of it.
Let’s start by looking into BTC dominance.
BTC dictates the overall direction of the market. When BTC dominance is going up, it indicates that the market is expecting a risk-on move. What follows is the rotation to ALT coins (all the other coins, except BTC). When ALT coins go up, BTC dominance comes down as price consolidates, and this pattern repeats itself throughout the bull market. Since September has been historically a negative month for the crypto market, the market is poised to run its last leg based on the assumption that BTC follows the previous halving cycle
Considering BTC, its dominance went up from 40% to 45% in the last week of October before decreasing to the current level (42%). At the point of writing, the price is hovering around $61000 after the pullback from ATH of ~67000. It seems like we will have another consolidation phase for BTC before breaking the ATH again. This pullback provides some breathing space for some ALT coins to catch up with the BTC dominance.
When looking at some on-chain data, my ‘go-to’ place to obtain this data is Glassnode. In addition, they will send you weekly reports, which is free when you sign up with them. Apart from that I follow Willy Woo (@woonomic) and Will Clemente (@WClementelll) on Twitter, who are two of my favorites for on-chain insights on BTC. Will is just 19 years old, and it’s amazing to see how much this young lad knows about on-chain data.
I highly encourage everyone to at least read the weekly report from the Glassnode even if you are not investing in BTC. You can gamble with as many coins as your wish as long as the bull trend is intact. I am not telling anyone to gamble, but my point is that even a ten-year-old can make money during a crypto bull market, but keeping the money you earn requires some skill and discipline. This is when most of us get into trouble, especially when the tide turns its direction against us. The on-chain data is there to get some glimpse of what’s ahead of us. My advice is not to ignore them.
At the point of writing(31/10/2021), UTXO (unspent transaction output) chart shows there is little overhead supply(1.66%) at the current level. Once the price hits above ATH, there is no overhead supply, and this is where the price discovery happens. In other words, there is only 1.66% of holders are staying unprofitable. This means long-term holders(LTHs) are at a good place to take profits, and LTHs will gradually take off profits when moving forward. LTHs are also known as ‘smart money’- since they accumulate into weakness and sell into strengths.
One might think taking profits is negative for the BTC price, but it’s quite the opposite. What happens is that supply shocks gradually create demand that pushes prices up. As price rises, LTHs gradually starts to take off profits while short-term holders(STHs) enters into the market with their speculative habits. This basically changes hands from LTHs holders to STHs. According to the supply shock chart, we have already passed LTHs exhaustion point (green band) of BTC. This can be interpreted in two ways for the current cycle:
i) LTHs are still in the accumulative phase.
ii) LTHs behavior has changed as compared to previous BTC having-cycles, which is also possible as crypto becomes more mainstream.
However, LTHs selling pressure will be a good indication that the market is becoming more speculative and has more price appreciation to follow within a short period of time.
Here is the illiquidity supply shock chart by Will Clemente. The uptrend in the illiquidity supply suggests that the majority of the participants are still in an accumulation/holding phase, which is a bullish sentiment for the BTC price.
Leverage is another important metrics to look into when assessing the overall market risk. Excessive leverage is the biggest enemy of any capital market. In comparison to other cycles, leverage participants are significantly higher in this cycle, even at the point of writing.
However, according to Glassnode, bitcoin futures open interest suggesting that, most margin futures are backed by cash equivalents than crypto-backed assets. In May, crypto-backed future open interests were ~66%, but currently, it’s 46%. This means most of the future open interests are related to cash and cash equivalents (54%) than crypto-margined. In other words, compound volatility is muted compared to what we have seen in May, as cash-margined futures are much more stable than crypto-margined futures.
There are plenty of other on-chain metrics in glassnode that provide great insight into the market’s overall trajectory. I highly encourage anyone who wants to learn more about the supply and demand dynamics of the crypto market to look into these on-chain reports. It is truly worth an investment of your time. I am still a newbie to on-chain analytics, and the more I read, the more, I realize how much I don’t know about this vast world.
Finally, I want to leave you with Willy Woo’s top indicator. Willy is regarded as a grandmaster when it comes to on-chain analytics. He uses a multiple of 35 to all-time average prices in his model to create his cycle top indicator. This model was able to pick all four previous macro market tops successfully. However, This does not guarantee that cycle will repeat itself this time because variables and market dynamics are much different from the earlier cycles. However, these types of models help us in creating mental frameworks to prepare for the future.
My Portfolio Update
In this section, I want to discuss my crypto positions and projects that I’m interested in. Unlike other markets, the crypto market is extremely inefficient. Part of it is mainly due to lower market capitalization than other assets and excess retail participation (speculative behavior) in the absence of a large pool of capital from institutions. This, in fact, provides great opportunities for alpha generation. I believe this is the time to make some big money if you are at the right channel of the information flow. As a trader, technical analysis is more important than ever because crypto is driven by supply & demand dynamics and the crowd sentiment. Buy the rumour and sell the news do wonders because most of the projects are just selling hope. Don’t get me wrong, many (even many of the top 20 market cap projects) are still in the beta phase and have yet to produce a fully working product or a platform for the general consumer. It’s a constant battlefield for market share and further improvements. This is the exact risk that makes this space a more vibrant place to generate alpha.
Here are my crypto positions and charts. (Note: All the charts are in log scale).
Without a question, Bitcoin(BTC) is the only asset that I am comfortable holding for the long term. My BTC target for this cycle ranges from $120000 to $160000. I have an average entry price of ~$12000, which gives me more freedom and confidence to hold it for the long term. In addition, it’s a finalized product – digital gold. Currently, 40% of my portfolio consists of BTC. Part of it is stored in cold storage, and part of it is deposited in hodlnaut, at ~7.5% APY. Eventhough i have a long term view, I plan to sell half of my position in hodlnaut when it reaches my target price and keep the rest for the long term.
Ethereum is my second largest position (~20%). Ethereum is the largest smart contract ecosystem in the space, and most of the current Defi applications are built on Ethereum. However, apart from BTC, I don’t have a solid long-term view on any other coin because the smart contract echo system is constantly evolving. Moreover, we will be moving into a more interoperable world where end users can port between multiple smart contract protocols. So there won’t be a place for a single winner.
Eventhough having that bullish sentiment and vibrant developer community around, the success of ETH 2.0 is still in debate as the gas prices are still quite high and demand for Layer 2 solutions keeps increasing as demand for scalability rises.
Nevertheless, in the current BTC having cycle, Etheruem gives one of the best risk-adjusted returns as a large part of Ethereum is still staked to support ETH 2.0 upgrade (move from proof of work concept to proof of stake-POS). That lack of supply in the market provides a greater demand for Ethereum until ETH 2.0 goes live. In addition, EIP 1559 upgrade introduced ‘fee burning’ for transactions which made Ethereum more deflationary. One of the best arguments I heard from the anti-ETH camp is – why someone has to sacrifice decentralization for scalability and still needs an L2 solution to provide an optimal solution? It does not make any engineering sense. Why not have one solution that tackles scalability and sacrifice decentralization, similar to how we work with Computer Memory applications (sacrifice speed for storage and vice versa).
Solana(SOL) is a serious POS contender for Ethereum in terms of Scalability, but at the point of writing, it has to sacrifice decentralization to achieve high transaction speed. It has a Defi market and NFT marketplace similar to ETH. In addition, the transaction fees of SOL are extremely low compared to Ethereum. In mid-November, there is a Solana conference happening in Lisbon. This event can be a massive catalyst for a short-term price surge as many ongoing activities, and upcoming projects will be announced during the conference.
Terra stable coin (UST) is the main product of the terra ecosystem. It is the largest and the most successful decentralized stablecoin so far and the first of its kind. Do Kwan, the founder of Terra, mentioned that for decentralized stablecoin to succeed, a constant demand for the stablecoin is crucial. Terra achieves this by enabling UST in multiple application platforms such as, Mirror protocol for investment, Chai for Payment services, and, Anchor protocol for fixed interest rate savings. UST survived the crypto black swan event in May successfully. UST dipped a bit during the crisis and quickly recovered its peg. Luna is the coin used to keep the UST peg to the US dollar. As Luna collapsed in May, most of the participants moved into UST because there was a high demand for UST savings in Anchor protocol which gives 20% stable APY. With the recent Columbus 5 upgrade, Luna will be burnt as demand for UST increases which is a bullish sentiment for Luna. In addition, Terra team is heavily embracing interoperable solutions and UST participation in other Defi echo systems. If things move smoothly as Terra expects, we will see a high demand for UST as we move forward. In other words, Terra needs to burn more Luna, which in return reduces the exciting LUNA supply.
Fantom(FTM) is another high-speed Directed Acyclic Graph (DAG) based Smart Contract blockchain solution which is compatible with Ethereum virtual machine(EVM). FTM has been the best performing Layer 1 solution since May 2021. I actually missed the FTM train. I invested early on, but I also got out early before it had its exponential run. Fantom is still an $8 Billion market cap project, and it has much more room to grow. Recently, Fantom had a conference in Abu-Dhabi, and there were quite a few announcements from the team on upcoming projects.
Moreover, FTM is yet to be listed in Coinbase. Many believe that listing in Coinbase generally gives a lot of fuel to the price of the coin. I will not be surprised if it reaches $10 in Q4 of this year which is 5x the current price. I will be adding FTM if the price drops further from here. Based on my technicals, it just hits my buy zone.
Interoperability will be the key driver in blockchain developments in years to come, and there will be a huge demand for interoperable solutions. Polkadot (DOT) is one of the significantly undervalued projects at the center of this interoperable world, and DOT’s developments are still in their early stages. However, one good news for DOT to perform well in Q4 is the upcoming para-chain auctions, where other blockchain projects need to go through an auction to get a slot in Polkadots 100 parachains. This is one of the significant milestones of the Polkadot project, and it will provide a massive catalyst for the price in the next few months.
Some believe Cardano is one of the hyped-up projects in the crypto space. Cardano is far behind Ethereum and Solana in terms of developments. But if you look at the timeline of its developments, most of the critical developments/milestones are in the future. Eventhough it does not have many applications set up yet to compare with other top Layer 1 POS projects, In terms of decentralization, it is the most decentralized POS project as Ethereum is yet to become a POS blockchain. Cardano has six development stages in its roadmap.
- Byron – Set up Cardano Code and Mine ADA POS algorithm
- Shelley – Set up decentralized network run by a diverse group of participants
- Goguen – Set up smart contracts to enable developers to create Dapps
- Basho – Improve scalability and set up sidechains
- Voltaire – setting and voting and treasury system for self-sustaining governance
Cardano just moved into the Goguen stage to enable smart contract capabilities with Alonzo hardfork. The success of this hardfork is crucial for the projects because it allows Dapps to build on Cardano, which will place Cardano in the same category as Ethereum and Solana. I have a long-term ADA position staking in Exodus wallet while I have another position for this cycle to take advantage of short-term price surge.
Thorchain (RUNE) is a decentralized liquidity provider. Interoperable liquidity provision is an essential aspect for Defi as we move into the multi-chain world, and RUNE’s goal is to provide liquidity across multiple chains.
Arweave (AR) provides decentralized permanent serverless storage solutions in a blockchain. For example, Solana’s Proof of History is fully integrated into Arweave. The main reason I added AR into the portfolio in Q4 is its technical setup. We are right at the buy zone after a long consolidation. This is a perfect technical setup that is ready to explode as BTC dominance goes down.
Chainlink is an essential component for Ethereum Defi growth. Chainlink connects off-chain real-world data to an on-chain smart contract through an oracle. However, I added LINK in Q4 because of the technical setup where the price is in an uptrending channel. In terms of trade management, it gives me clear directions on when to size up the trade and when to take profits.
Moonriver is a smart contract platform that brings Ethereum compatibility into the Polkadot ecosystem. It was one of the first-round winners of the Kusama parachain auctions. Moonriver is the Canary Network of Moonbeam, which will be participating in Polkadot auctions. Many believe that Moonbeam(GLMR) is one of the first projects to win in November’s first round of auctions. Since Moonbeam is still not tradable, Moonriver will be the beneficiary of liquidity flows from exchanges due to positive sentiment. Moonriver has a max supply of 10 million tokens and a fully diluted market cap of ~$3 billion at the time of writing. This is a project with a massive amount of upside potential. So far, I have not entered any position yet. But, looking at the technical setup, it has room for price to come down to the $300-$320 range which will be my ideal buy zone. However, if it breaks the trend without hitting my ideal zone, I will not hesitate to buy into strengths either.
Harmony(ONE) is also a highly scalable project similar to fantom (FTM), which tries to bridge Ethereum and other chains. It’s just that the supply of Harmony tokens is five times higher than the FTM supply. In October, Harmony had some serious traction in the Defi space due to multiple Defi projects launching in the platform, which provided some attractive yields. I am very bullish in the short term as the price chart looks decent for me to add more. My ideal add zone for harmony is $0.2-$0.25.
Other Opportunistic Trades
Following are some of the other trades in my portfolio, based purely on the public sentiment and technical setup. I don’t have strong fundamental views on these projects in the long term, but technical structures show that prices are ready to explode. These are high-risk trades, so each position holds about 0.5% of my portfolio
Theta is a peer-to-peer video streaming platform on the blockchain.
Hedera hashgraph (HBAR) uses distributed ledger system, which mainly aims to support the enterprise community. However, I am bullish on the technical setup than on fundamentals. In terms of transaction speed, it is right up there, along with Solana and Fantom. Perhaps better than them. However, there are not many projects built or announcements around HBAR to have a similar adoption like Fantom or Harmony.
Similar to HBAR, Vechain is another blockchain dedicated to enterprise solutions in supply chain management and related processes.
Thoughts on NFTs
Some of my friends asked me why don’t I get into NFT space and gaming DAOs. My answer was I don’t understand them, and it’s too much work for me to track everything when working full-time. In addition, I am a bit skeptical about some of the NFT projects right now. There are some great projects out there, especially in the gaming space like Axie Infinity. Since I was never into gaming or collectibles, they are not my taste. Also, I still can not comprehend someone paying $500 million for a crypto punk. Some might find value in NFTs and play to earn protocols, and these projects might pay you 10 times the money than investing in Layer 1 projects. However, you have to get into them very early, which requires spending time on discords and telegram channels. I also believe that easy money in NFTs is slowing down as we come into Q4 and Q1 next year. Sure, there will be great NFT applications in the metaverse as we move deeper into the 2020 decade. However, I am not ready yet to spend too much time on them.
Micheal Sailor said the best when one interviewer asked why he doesn’t invest in Ethereum. His reply was, When I can generate an average annualized return of ~112% with one simple asset (BTC), which is significantly higher than the inflation rate or any other asset in the TradFi space, why should I worry about an additional 100% or 200% return which requires lot more effort in terms of research in addition to having some unknown risks?
Cryptocurrencies are slowly becoming mainstream, and it’s great to hear so many stories on how crypto transformed many people’s lives around the world. We live in a unique period in history, and these opportunities will not come that often. Perhaps the next five years may present us with the best opportunities of our lifetime. Past 18 months have been one of the best periods in generating alpha for me. Crypto helped me to multiply my portfolio by four times. These kinds of returns are unheard of these days in TradFi without excessive leverage. Yes, It is volatile because of its inefficiencies and the pure nature of speculations by the retail participants. However, there are methods to look at the data, such as on-chain metrics and sentiment analysis together with technical analysis. The other wonderful thing is that you don’t even need to fully understand every individual project in the space. Just following the top 50 cryptocurrencies with the largest market capitalization and applying technical analysis is enough for someone to get over 50% annualized return in a bull cycle. In my view, as long as you are not taking leverage while having some sort of diversification with multiple bets ( majority in large-cap space), it is hard for someone to blow off an account in a bull market.
Morpheus: “You take the blue pill, the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in wonderland, and I show you how deep the rabbit hole goes.”
Disclaimer – ” I am not a financial advisor and this article is a construct of my personal views on various markets and the economy. Therefore, information shared in this article should not be used as investment advice by the reader”