I tend to think that collective wisdom is mostly a joke. Of course, collective wisdom is important in certain things, but there are too many examples that show human behavior is irrational (especially when it comes to money) or that people don’t understand their cognitive biases. Specifically, I’m referring to crowds that are overconfident or have irrational tendencies, such as participants in the financial markets.
In November 2022, after the FTX crash and a 30% drop in QQQ from its all-time high, I was curious about people’s views on the possibility of a “soft landing.” Needless to say, only one-fifth of the people were fairly certain that we would achieve this goal.
One year later, the price of Bitcoin has doubled (approximately $35,000) and is undeniably in an upward trend. I was curious again about people’s sentiments. I usually use these types of polls to assess positioning. It’s just one data point, but I found that most people answered based on what they wanted to happen—especially on Twitter. So, it’s not surprising that only half of the people think there is a greater than 30% chance of an increase in price, compared to a 20% chance of a decrease.
Even fewer people expect the price to continue to rise.
For various reasons, I was very confident at that time that the targets of $45,000 and $60,000 would be achieved. Now, I have less confidence in short-term price action and am somewhat uncertain about what will happen in the next six months. But many people keep asking, “Where are we in the cycle?” This is a somewhat complicated question that implies some things that I’m not sure are necessarily correct. But anyway, I will share my feelings so that I can refer to this article the next time I inevitably get asked this question.
The general consensus seems to be that we are in the mid-cycle. Interestingly, the most common answers I hear are the fifth or sixth inning. Even if this is true, it sounds a bit like an evasive answer to me. It’s what you say when you don’t have an opinion and want to remain neutral. It might be true, but if I thought so, I wouldn’t write this article.
So, where are we in the cycle, what inning are we in, is it over, or have we come back? Let me start by referring to a tweet from November 2022.
I mentioned this to illustrate that in “this cycle,” price and time are two very different concepts. If we look at them separately, from a time perspective, we are approximately in the 70th week of the bull market. I would say this actually overestimates the true length of this run because I can count on two hands the number of people who were truly bullish in November and December 2022. If I were being very generous, I would say that most people started realizing what was happening sometime in the late first quarter to early second quarter of last year. So, we can say it has been more than 12 months.
From a price perspective, Bitcoin has increased by approximately 3x from the bottom, and Ethereum has increased by 2.5x from the bottom. I feel that those who have experienced multiple crypto cycles believe we are closer to the end rather than the beginning. This is largely because things haven’t followed the script they are accustomed to.
We have written about this dynamic in our annual letter…
In previous crypto cycles, there was a logical progression of BTC -> ETH -> altcoins (risk and token investments) as capital moved along the risk and speculation curve. Market participants believed in the new narratives, which often revolved around fundamental shifts enabled by crypto, creating a wave of new believers who either stayed for life or exited after the price retraced.
This cycle (so far) has been very different, and many of those who had heuristic positions before have been slow or unwilling to adapt. Frankly, this unwillingness has led to self-deception. We are all human, so we can’t help but look around and evaluate ourselves (our assets) based on relative bases—when the assets we own have increased 3-5x, we are not satisfied because the things we don’t own have increased 10-20x. Especially if it’s something we don’t like. In my view, this is why many people feel that we are either in the mid-cycle or in the latter half. They are watching from the sidelines as Solana goes from under $10 to over $200. They see meme coins skyrocketing 100-1000x and scream internally.
“This is not the right order!”
“Why aren’t my assets rising like this?”
“This shouldn’t be happening now!”
Things haven’t unfolded in the way they hoped. So, it’s not that they might be wrong, but rather the irrational behavior of the market or the compression of the cycle or the extreme financial nihilism. I don’t exclude any of these possibilities, but it seems there is little introspection.
As some background, I am aware that junior personnel at other funds recommended SOL at prices below $30, only to be rejected and ignored. Months later, it’s laughable to see how many people are rushing to buy locked FTX tokens at higher prices.
All of this is to say that people’s collective experience of a market going up will influence their perception of the phase we are in. As we entered this cycle, most people were too focused on the Ethereum ecosystem and not paying enough attention to other things. This positioning distortion has skewed the overall perception of this cycle in crypto and distracted many from evaluating our actual situation.
So, let’s weigh the arguments on both ends: Are we closer to the early stage or the late stage of this cycle?
BTC ETF approval is only 100 days away
ETH ETF has not yet been approved (possibly by late 2024/early 2025)
I have made numerous comments and tweets about the importance of market structure in the crypto market, and although it’s a boring concept, it has significant implications. It may be an exaggeration, but I think of it somewhat like the tectonic plates of the Earth—huge, slow-moving parts of the market. It’s hard to feel how these changes can be so seismic and the ripple effects they will have. But imagine being in crypto for 8, 9, 10+ years and witnessing the pivotal moment of Bitcoin ETF approval.
Massive new institutional capital now has a legitimate way to enter this asset class, with initial inflows far exceeding market expectations, and then you declare the top about 100 days after the Bitcoin ETF goes through. But markets are forward-looking! Now that the ETFs are approved, the flows are already priced in!
Yes, markets do look forward. But they are not infallible. Their view on the flow of funds into the ETFs has actually been wrong. People who understand crypto don’t know how traditional market structures work, and people who understand traditional market structures rarely have time to delve into crypto. The approval of ETH ETF is inevitable, and in my view, the time gap between the approval of BTC and ETH is actually quite healthy. It allows for digestion, education, and a clear path after the election. The structural changes in the crypto market should not be underestimated.
Bitcoin just had a 7-month consecutive increase
Bitcoin didn’t provide entry opportunities: 16 out of 21 weeks from mid-October last year to early March this year were green
Honestly, these two clichés seem to be repeated in every cycle. But regardless, they are worth noting—Bitcoin has now had approximately 94% of its supply in circulation, and the recent halving might be the last meaningful one. On the other hand, the market continues to be flooded with new token supplies—new L2s, the Solana ecosystem, bridges, LRTs, So…
BTC ETF is not yet in offline trading centers
13Fs are continuously being filed
Okay, now we’re getting into some technical stuff about banks. When I say access to ETFs hasn’t reached offline trading centers, I mean that advisors don’t have an incentive to recommend these products to their clients.
Recommended trades by advisors are categorized as “solicited” and “unsolicited.” Solicited trades are trades recommended by brokers to clients (“You should buy ABC”), while unsolicited trades are trades brought to brokers by clients (“I want to buy XYZ”). The main difference here is that only solicited trades pay commissions.
When advisors recommend trades, they are classified as either “solicited” or “unsolicited.” Solicited trades are trades recommended by brokers to clients (“You should buy ABC”), while unsolicited trades are trades brought to brokers by clients (“I want to buy XYZ”). The main difference here is that commissions are only paid on solicited trades.
As of now, no brokerage firm allows BTC ETFs to be included in client portfolios. This means that advisors have no incentive to recommend these products to their clients. But it’s just a matter of time—all these firms are in a waiting mode, and when one firm takes action, others will quickly follow.
13Fs are also continuously being filed. Eric Balchunas pointed out an important point a couple of weeks ago that IBIT reported about 60 holders (with more reports to be added), but they only account for about 0.4% of the total shares. This means “most are minnows, but there are a lot of them.” So far, a Kansas advisor has put in $20 million to purchase Fidelity’s BTC ETF, accounting for 5% of their portfolio.
Finally, the last halving had a substantial impact on supply (currently 94% in circulation), and unprecedented new token supplies are entering the market.
cialFi, arbitrage trading. There are numerous examples of these projects, and the total FDV of these projects is both shocking and fascinating. As with each cycle, most tokens tend to trend towards zero as insiders unlock and sell. Although there have been enough articles and discussions about this.
Halving just happened
Google Trends data: Coinbase App Store ranking (currently ranked 270th).
Halving did just happen, supply decreased, it’s as simple as that. Personally, I don’t find these last two reasons very convincing on their own, but it’s interesting how they differ from what people think our position is. If we look at recognized Google Trends data for BTC, ETH, SOL, NFTs, etc., we find a commonality.
We have not reached the true peak of the previous bull market yet.
The same goes for Coinbase App Store ranking (currently ranked 270th). I will soon discuss the involvement of retail investors in this controversial issue, but it is certain that there is still a lot of room for growth in native crypto app usage.
AI narratives saved the market
Unemployment rates will only rise
The breadth of traditional financial markets is weakening
I would like to believe that AI narratives saved the traditional financial market in Q4 2022 and Q1 2023. If ChatGPT hadn’t been released by then, traditional markets might have struggled instead of finding solace in the new paradigm of innovation. But you can’t prove a counterfactual, so we have to deal with the situation as it is today. Indeed, we have seen incredible strength in the labor market, with unemployment rates only rising. Traditional markets are experiencing a decline in overall breadth, and that is a fact.
The main insight here is that the percentage of stocks above the 200-day moving average but below the 50-day moving average has significantly increased (currently over 40%).
I believe we haven’t seen the jaw-dropping upward trend that accompanies breaking new highs yet. I have been bullish for a long time, when people were trying to convince me that the recovery from the damage in 2022 would take a long time. Now, those same people are trying to tell me that we can’t go up anymore. This doesn’t mean they are wrong this time, but the evidence I read today suggests that we still have a lot of upward potential.
I also believe that the delay of an Ethereum ETF is beneficial for extending this cycle, both in terms of time and price. This is another counterfactual, but if it were approved in May, it would be too close to Bitcoin’s approval. Market participants have short attention spans, and cramming these approvals and subsequent product launches together leads to internal competition. How much impact it will have, who can say. But as the only crypto ETF, it is important to leave some room for BTC funds to continue to flow in. This is just an appetizer. ETH ETFs will have their moments to shine, and in fact, BTC’s performance will be their best marketing tool. The new generation of managers is forced to face Bitcoin as an asset class. They can no longer scoff at Bitcoin, and if their performance lags behind competitors who have exposure to BTC, they need an answer. It is no longer a reasonable view to say that BTC is a scam.
This is what a healthy market looks like. An asset is undervalued and slowly rises as more and more people realize they cannot buy it at a lower price. There will be a period of consolidation as the market digests, and then the asset continues to rise. If you are still bullish, a top is not what you want to see.
This time is different
A frightening combination of words. Of course, you can occasionally mutter these words to yourself or confide in a close friend the possibilities you have been dreaming of. But to bring up this point in public? Be prepared for criticism.
We have all been in this situation. Someone mutters these words, and we parrot them in their face, pretending to be clever and sarcastic. Criticizing them on Twitter. Calling them stupid. Implying that this must be their first experience with a bull market, as if that matters.
Unless you are here, and you somewhat believe that there will be one time when things will be different.
If you say that and you are wrong, everyone will laugh at you and call you a fool for thinking it could be different. It’s not a big deal. These people rarely have independent views, so why would you expect them to have a different reaction?
But if you see enough evidence to suggest that it could be different, and you do nothing… then who is the real fool?
Where is the growing capital flowing to?
The biggest lingering question in my mind is to what extent these passive capital flows will eventually move on-chain. The less interesting crypto version is that BTC serves as a new asset class, where institutional capital holds it as a small part of their portfolio, and everything else is the subculture of the internet. But there is no denying that it is difficult to determine the proportion of ETF funds flowing directly or indirectly into the chain. You might think – Smac, you’re stupid, no one buys IBIT and does anything with their on-chain BTC. That may be true today, but that’s not the point. We all know that wealth effect is real in crypto, and ETFs will be an appetizer for some. The question is about the scale, and in my view, we may not have a good answer in the near future. But we can try to find directional clues.
If we look at stablecoin activity, we can find some compelling data. From the chart below, we can see that November last year was the first time in about 18 months when stablecoin supply turned positive. The continued net capital inflow into stablecoins suggests that we are much earlier in the cycle than people think. Given the dramatic inflows we saw in the previous cycle, this is particularly evident.
We can also observe the total supply of stablecoins on exchanges, which has decreased by over 50% from the peak to the trough but is now clearly starting to trend upwards.
The most difficult translation is whether and how these activities are moving on-chain. I remain open-minded about this, but here are the total number of active addresses (blue line) and stablecoins on exchanges. Depending on your perspective, you may draw many conclusions from this, but my understanding is:
During the last bull market, we saw a significant increase in new active addresses, but it sharply declined as people exited and then stabilized since Q3 2021. We have not seen signs of a new wave of activity, which indicates that retail activity has not yet returned.
It is also worth noting that retail activity is likely happening on Solana. It is clear that activity there has increased significantly over the past 6-9 months, and I personally expect this trend to continue.
What about more off-chain data? From last week’s Coinbase 10-Q, we actually see a decrease in monthly transacting users (MTUs) from 8.4 million to 8 million. However, both retail and institutional trading volumes have more than doubled. Interestingly, while BTC’s trading volume share remains unchanged, ETH’s share has significantly decreased, which may indicate an increase in demand for more widespread crypto assets (i.e., altcoins) in the future, which is also very healthy in the long run as a more widespread distribution in crypto assets is the ideal end state. Haters and losers will say that everything in crypto is just empty, and people have reached the ultimate state of super gambling. I would say this indicates that there are more interesting early-stage projects/protocols worth exploring.
How does this compare to what we have seen from Coinbase users in the past few years? First, we are still over 40% below the peak of 2021 MTUs (11.4 million) and below the levels at the end of 2022. For all the discussions about meme coins and the transformation of retail investors, I just can’t see a credible argument that this is happening on a large scale. Does it happen on a smaller scale within people who are very familiar with crypto? Certainly, this once again shows that people get caught up in the crypto bubble and miss the bigger picture. If you log into Twitter and take the discourse there as gospel, you will not have a good time.
My final point here is about altcoins beyond BTC and ETH. As early crypto investors, we obviously believe that this space will continue to grow, not just the major coins. The simplest way to measure this activity is through TOTAL3, which tracks the top 150 altcoins excluding BTC and ETH. I find it enlightening to look at the cycles we saw from peak to trough before. Looking at the 2017 cycle and the recent cycle, it is clear that the relative upside potential is compressing (although it is still astronomical), and as the space expands, we expect this to happen. The base is larger, so the rapid rise is intuitively more difficult. But even with enough room left for further compression, I don’t think enough people realize that there is still a lot of room for growth in this space. TOTAL3 is only $640 billion, which may sound like a big number, but it is almost negligible in the macro plan of the financial markets. If we believe this is a space that will reach $10 trillion within the next 24 months, with BTC accounting for 40%-50% of that, then there is plenty of value to be created.
I personally don’t think this will be dominated by memecoins, although I know some people strongly disagree. Memecoins have their value and will continue to be an important part of crypto (and even traditional finance), but I am also optimistic that we are seeing a new wave of mature founders. They are thinking deeply about solving real-world problems and focusing on long-term outcomes. We are interested in working with these types of founders.
I believe we are still in the early stages of this cycle. I guess we are about one-third through. Despite all the discussions about meme coins and the transformation of retail investors, I just can’t see a credible argument that this is happening on a large scale. Is it happening on a smaller scale within people who are very familiar with crypto? Certainly. This again shows that people get caught up in the crypto bubble and miss the bigger picture. If you log into Twitter and take the discourse there as gospel, you will not have a good time.
My last point here is about altcoins beyond BTC and ETH. As early crypto investors, we obviously believe that this space will continue to grow, not just the major coins. The simplest way to measure this activity is through TOTAL3, which tracks the top 150 altcoins excluding BTC and ETH. I find it enlightening to look at the cycles we saw from peak to trough before. Looking at the 2017 cycle and the recent cycle, it is clear that the relative upside potential is compressing (although it is still astronomical), and as the space expands, we expect this to happen. The base is larger, so the rapid rise is intuitively more difficult. But even with enough room left for further compression, I don’t think enough people realize that there is still a lot of room for growth in this space. TOTAL3 is only $640 billion, which may sound like a big number, but it is almost negligible in the macro plan of the financial markets. If we believe this is a space that will reach $10 trillion within the next 24 months, with BTC accounting for 40%-50% of that, then there is plenty of value to be created.
2024 Q1
This is how it compares to what we have seen from Coinbase users in the past few years? First, we are still over 40% below the peak of 2021 MTUs (11.4 million) and below the levels at the end of 2022. For all the discussions about meme coins and the transformation of retail investors, I just can’t see a credible argument that this is happening on a large scale. Does it happen on a smaller scale within people who are very familiar with crypto? Certainly, this once again shows that people get caught up in the crypto bubble and miss the bigger picture. If you log into Twitter and take the discourse there as gospel, you will not have a good time.
2021 year-end
2023 year-end
The most difficult translation is whether and how these activities are moving on-chain. I remain open-minded about this, but here are the total number of active addresses (blue line) and stablecoins on exchanges. Depending on your perspective, you may draw many conclusions from this, but my understanding is: During the last bull market, we saw a significant increase in new active addresses, but it sharply declined as people exited and then stabilized since Q3 2021. We have not seen signs of a new wave of activity, which indicates that retail activity has not yet returned. It is also worth noting that retail activity is likely happening on Solana. It is clear that activity there has increased significantly over the past 6-9 months, and I personally expect this trend to continue.
2020-21
2024-25?
2024 Q1
This is how it compares to what we have seen from Coinbase users in the past few years? First, we are still over 40% below the peak of 2021 MTUs (11.4 million) and below the levels at the end of 2022. For all the discussions about meme coins and the transformation of retail investors, I just can’t see a credible argument that this is happening on a large scale. Does it happen on a smaller scale within people who are very familiar with crypto? Certainly, this once again shows that people get caught up in the crypto bubble and miss the bigger picture. If you log into Twitter and take the discourse there as gospel, you will not have a good time.
2021 year-end
2023 year-end
My final point here is about altcoins beyond BTC and ETH. As early crypto investors, we obviously believe that this space will continue to grow, not just the major coins. The simplest way to measure this activity is through TOTAL3, which tracks the top 150 altcoins excluding BTC and ETH. I find it enlightening to look at the cycles we saw from peak to trough before. Looking at the 2017 cycle and the recent cycle, it is clear that the relative upside potential is compressing (although it is still astronomical), and as the space expands, we expect this to happen. The base is larger, so the rapid rise is intuitively more difficult. But even with enough room left for further compression, I don’t think enough people realize that there is still a lot of room for growth in this space. TOTAL3 is only $640 billion, which may sound like a big number, but it is almost negligible in the macro plan of the financial markets. If we believe this is a space that will reach $10 trillion within the next 24 months, with BTC accounting for 40%-50% of that, then there is plenty of value to be created.