Sometimes the bulls are back, sometimes the bears are back. Which stage of this cycle are we in?

Original title: Where Are We In The Cycle?

Original author: 0xsmac, crypto KOL

Original translation: TechFlow

Introduction

The author of this article, 0xsmac, delves into the cyclical position of the current crypto market and questions the effectiveness of "group wisdom" in financial market decision-making. The article reviews market changes since the FTX crash in 2022 and predicts future market trends by comparing the price trends of Bitcoin and Ethereum. In addition, the author discusses the potential impact of ETF approvals, institutional capital inflows, and changes in the structure of the cryptocurrency market on the market, providing a perspective on the deep understanding of the crypto market.

Main content

I tend to think that group wisdom is mostly a joke. Of course, the wisdom of the crowd is important in some things, but there are too many examples of humans behaving irrationally (especially when it comes to money) or not understanding the cognitive biases they experience. More specifically, I'm referring to groups of people who have a tendency to be overconfident/irrational.

For example, financial market participants.

After the FTX crash in November 2022 and QQQ's ~30% drop from its all-time high, I was curious about what people thought about a possible "soft landing". Needless to say, only 1 in 5 people were fairly certain we would achieve this.

A year later, with Bitcoin having doubled in price (to ~$35,000) and in an undeniable uptrend, I was again curious about how people felt. Typically I use polls like this to assess positioning. It's just one data point, but I find that most people answer with what they hope will happen - especially on Twitter. It is not surprising, then, that only half of the people think that a price increase of about 30% is more likely than a 20% decrease.

Even fewer people expect prices to continue to rise.

At the time, I was pretty sure that the $45,000 and $60,000 targets would be achieved, for a number of reasons. Now, I have less confidence in the short-term price action, and to some extent, less confidence in what will happen over the next 6 months or so. But a lot of people have been asking “where in the cycle are we now?” This is a somewhat complicated question, and it already implies something that I am not sure is necessarily correct. But regardless, I will share my feelings so that I can pull this post straight away the next time I am inevitably asked this question again.

The general view seems to be that we are in the middle of the cycle. Interestingly, the most common response I hear is that we are in the fifth or sixth leg. Even if it is true, this feels a bit like a cop-out answer to me. It is something you say when you have no opinion and want to remain neutral. It may be true, but I would not be writing this article if I thought it was.

So where are we in the cycle now, what leg are we in, is it over, or are we back in. Let me start with another tweet from November 2022.

I mention this to illustrate that in “this cycle”, price and time are two very different concepts. If we look at these separately, from a time perspective, we are approximately in week 70 of the bull market. I would say that actually overestimates the true length of this run, as I can count on two hands the number of people who are actually bullish in November and December 2022. If I were being very generous, I would say ~most~ people started to realize what was happening sometime in late Q1 to early Q2 of last year. So we could say it’s been over 12 months.

From a price perspective, Bitcoin is up about 3x from the bottom and Ethereum is up 2.5x from the bottom. I feel like those who have been through multiple crypto cycles think we’re closer to the end than the beginning. This is largely because this time it’s not following the script they’re used to.

We wrote a little bit about this dynamic in our annual letter...

In previous crypto cycles, the logical flow of BTC → ETH → the long tail of crypto assets (risk and token investing) has played out as capital moved out to the risk and spec curve. Market participants buy into the new narrative, which is usually centered around a fundamental shift enabled by crypto, creating a wave of new believers who either convert for life or exit after prices fall back.

This cycle is very different (so far), and many of those who were previously heuristic have been slow or unwilling to adapt. Frankly, this unwillingness leads to self-deception. We are all human, so we can’t help but look around and value ourselves (our assets) on a relative basis — we’re not satisfied when something we own goes up 3-5x because something we don’t own goes up 10-20x. Especially if the thing that went up 10-20x is something we don’t like. In my opinion, this is the key to why many people feel we are either in the middle of the cycle or in the back half. They watch from the sidelines as, for example, Solana goes from less than $10 to over $200. They see meme coins go up 100-1000x and scream inside.

“This isn’t the right sequence!”

“Why isn’t my asset going up like this?”

“This isn’t supposed to be happening now!”

Things simply aren’t going the way they’d hoped. So it’s not that they might be wrong, it’s that the market is behaving irrationally. Or that cycles are compressing, or that financial nihilism is being pushed to the extreme. I’m not ruling out all of these scenarios, but there seems to be very little self-examination going on.

To add some context, I know juniors at other funds who recommended SOL at prices below $30, but they were repeatedly rebuffed and ignored. It’s ridiculous to see how many people are rushing to buy locked-up FTX tokens at higher prices as the months go by.

All of this is to say that people’s collective experience of the market going up will influence what phase they think we are in. Most people went into this cycle too focused on the Ethereum ecosystem and not enough on other things. This positioning distorts the overall perception of crypto in this cycle and distracts many from assessing where we are actually at.

So, let’s weigh the arguments on both ends: are we closer to the early stages of this cycle or the late stages?

100 Days Until Bitcoin ETF Approved to Trade

Ethereum ETF Not Yet Approved (Late 2024/Early 2025 Likely)

I’ve spoken and tweeted quite a bit about crypto market structure and how it matters, and while it’s a boring concept, it actually has a significant impact. It’s a bit of an exaggeration, but I think of it a bit like the tectonic plates of the Earth’s crust — large, slow-moving sections of the market. It’s hard to get a sense of how dramatic these changes will be and what the aftermath will be. But imagine being in crypto for 8, 9, 10+ years and seeing this momentous moment with the Bitcoin ETF approval.

Massive new institutional capital now has a legitimate way to enter the asset class, initial inflows far exceed consensus expectations, and then you call a top about 100 days after the Bitcoin ETF is approved. But markets are forward-looking! Now that the ETF is approved, flows are priced in!

Yes, markets are indeed forward-looking. But they are not omnipotent. They are actually wrong about ETF inflows. People who understand crypto don't know how traditional market structure works, and people who understand traditional market structure have rarely spent time in crypto. An ETF for ETH is inevitable, and the time gap between BTC approval and ETH approval is actually very healthy in my opinion. It allows some time for digestion, education, and post-election clarity. The structural changes in the crypto market cannot be underestimated.

Bitcoin just went up for 7 consecutive months

Bitcoin offers no entry opportunities: 16 of the 21 weeks from mid-October last year to early March this year were green

Bitcoin has actually been going up for a year and a half. Prior to April, 12 of the past 15 months were green, and there was a stretch from mid-October last year to early March this year when 16 of 21 weeks were green. It was truly relentless. It’s fair to say, though, that few were prepared for what we’re seeing in the first half of 2023. Would it be a shock if we remain choppy for a while? No, I don’t think so. But judging by market trends, it feels like there’s still some PTSD from the last round of whipsaws.

I also increasingly feel like I’m having the same conversations I had in late 2022/early 2023, only Bitcoin is now around $60,000 instead of $18,000. They’re not exactly the same, of course, but the skepticism is mostly around: we’ve already gone up a lot, there’s no new narrative to push us further up, and the meme has gone crazy.

But none of those are really reasons we think it should go down, in my opinion.

BTC ETFs have not yet entered offline trading centers

13Fs continue to emerge

Okay, now we are going to get into some technical content on the banking side. When I say that ETF access has not yet entered offline trading centers, I mean that advisors have no incentive to recommend this product to their clients.

Trades recommended by advisors are classified as “solicited” and “unsolicited.” Solicited trades are trades that a broker recommends to a client (“you should buy ABC”), while unsolicited trades are trades that a client brings to their broker (“I want to buy XYZ”). The main difference here is that commissions are only paid on solicited trades.

When advisors recommend trades, they are classified as “solicited” and “unsolicited.” Solicited trades are trades that a broker recommends to a client (“you should buy ABC”), while unsolicited trades are trades that a client brings to their broker (“I want to buy XYZ”). The main difference here is that commissions are only paid on solicited trades.

For now, no brokerage firm is allowed to include a BTC ETF in a client portfolio. This means that these advisors don’t have any incentive to recommend these products to clients. But it’s only a matter of time — all of these firms are in some kind of waiting mode, and when one firm makes a move, the others will quickly follow.

13Fs are also being filed on an ongoing basis. An important point Eric Balchunas made a week or two ago is that IBIT reports ~60 holders (to be added as more reports are made), but they only represent ~0.4% of the total shares. This means that “mostly small fish, but there are a lot of them”. So far so good, one Kansas advisor has put $20 million into Fidelity’s BTC ETF, representing 5% of his portfolio.

The last halving had a material impact on supply (currently 94% in circulation)

Unprecedented supply of new tokens entering the market

Honestly, these two cliches seem to repeat themselves every cycle. But they are noteworthy regardless - Bitcoin now has ~94% of supply in circulation, and the recent halving may be the last meaningful halving. On the other hand, the market continues to be flooded with new token supply - new L2s, the Solana ecosystem, bridges, LRTs, SocialFi, arbitrage trading. The list goes on, and the total FDV of these projects is both astounding and fascinating. As with every cycle, most tokens will trend towards zero as insiders unlock and sell. Although enough has been written and discussed about this.

The halving just happened

Google Trends Data

Coinbase App Store Ranking (currently #270)

The halving really just happened, supply decreased, simple as that. Personally, I don’t find these last two reasons very compelling on their own, but they are interesting in terms of where people think we are. If we look at the well-established Google Trends data for BTC, ETH, SOL, NFTs, etc., there is a commonality.

We are nowhere near the highs we have seen during past true bull runs.

The same is true for the Coinbase App Store ranking (currently #270). I’ll get into the controversial issue of retail investor participation shortly, but it’s safe to say there’s plenty of upside left in crypto-native application usage.

The AI narrative saved the market

Unemployment is only going up

Traditional financial market breadth is weakening

I’d like to believe the AI narrative saved the traditional financial markets in Q4’22 and Q1’23. If ChatGPT hadn’t been released then, perhaps traditional markets would have struggled, rather than finding solace in a new innovative paradigm. But you can’t prove a counterfactual, so we have to take it as it is today. It’s true that we’re seeing an incredibly strong labor market, and unemployment is only going up. It’s also true that traditional markets are experiencing a decline in overall breadth.

The key takeaway here is that the percentage of stocks above their 200-day moving average but below their 50-day moving average has risen sharply (currently over 40%).

I believe we have yet to see the jaw-dropping rally that accompanies a breakout to new highs. I was publicly bullish for a long time when people tried to convince me that it would take a long time to repair the damage of 2022. Now, those same people are trying to tell me that we can’t go any higher. That doesn’t mean they are wrong this time, but the evidence I read today suggests that we have a lot of room to go.

I also think the delay in the Ethereum ETF is a positive for extending this cycle, both from a timing and price perspective. This is again a counterfactual, but I think if it is approved in May, it will be too close to Bitcoin approval. Market participants have a short attention span, and crowding these approvals and subsequent product transactions together will lead to internal competition. How much of an impact that will have, who can say. But as the only crypto ETF, it is important to provide some room for BTC flows to continue to pour in. This is just the appetizer. ETH ETFs will have their moment to shine, and in fact, BTC’s performance will be their best marketing campaign. A new generation of managers is being forced to confront Bitcoin as an asset class. They can’t hold their noses up about Bitcoin anymore, and if they’re underperforming competitors that are exposed to BTC, they need answers. It’s no longer a reasonable view to say BTC is a scam.

This is what a healthy market looks like. An asset is undervalued, then slowly rises as more and more people realize they couldn’t have bought it for less. There’s a period of consolidation as the market digests that, and then the asset continues to rise. If you’re still bullish, a top is not something you want to see.

This Time Is Different

A scary combination of phrases. Sure, you can occasionally mutter to yourself or confide in close friends about the possibilities you’ve been dreaming about. Making that argument in public, though? Prepare to be criticized.

We’ve all been there. Someone mutters these words, and we parrot them in their face, smart-aleck and sarcastic. Bash them on Twitter. Call them stupid. Suggesting this must be their first time going through a bull cycle, as if that matters.

Unless you are here, you do on some level implicitly believe that there was one time when things were different.

If you say that and are wrong, everyone will laugh at you and call you a fool for thinking it would be different. No big deal. Almost none of these people have an independent point of view, so why expect them to react any differently?

But if you see enough evidence that it might be different, and you do nothing… then who is the real fool?

Flows are growing, but where are they going?

The big unanswered question in my mind is to what extent these passive flows will eventually move on-chain. The less interesting version of crypto is BTC as a new asset class, with institutional capital holding it as a small part of their portfolio, and everything else is a subculture of the internet. But admittedly, it’s hard to determine what percentage of ETF inflows will flow directly or indirectly on-chain today. You might be thinking – Smac, how dumb are you, nobody is buying IBIT and doing anything with their on-chain BTC. Of course, that’s true today, but that’s not the point. We all know that the wealth effect is real in crypto, and ETFs will be an appetizer for some. The question is about scale, and in my opinion, we won’t have a good answer in the near term. But we can try to find directional hints.

If we look at stablecoin activity, we find some telling data. As you can see below, last November was the first time in about 18 months that stablecoin supply turned positive. The continued net capital inflows into stablecoins suggests that we are much earlier in the cycle than people think. This is especially evident given the drama of the inflows in the last cycle.

We can also look at the total stablecoin supply on exchanges, which has more than halved from peak to trough, but is now clearly beginning to trend upwards.

The hardest thing to find a translation for is if and how this activity has moved on-chain. Keep an open mind on these, but below is the total number of active addresses (blue line) and stablecoins on exchanges. You can probably draw many conclusions from this depending on your own feelings, but here’s my take:

We saw a massive surge in new active addresses during the last bull run, but then a big drop as people exited, and then activity has been mostly stable since Q3’21. We haven’t seen signs of a new wave of activity, which to me is a sign that retail activity has not yet returned.

It’s also worth acknowledging here that retail activity is likely coming through Solana. It’s clear that there has been a significant increase in activity there over the past 6-9 months, and I personally expect that to continue.

SOLs with 0 or less than 1 DAU are not worth paying attention to (Source: hellomoon)

So what about more off-chain data? From Coinbase's 10-Q last week, we actually saw a decrease in monthly trading users (MTUs) from 8.4 million to 8 million. But trading volume more than doubled on both the retail and institutional sides. Interestingly, while BTC's trading volume share remained the same, ETH's share shrank significantly, which may indicate an increase in demand for a wider range of crypto assets (i.e. altcoins) in the future, which is also very healthy in the long run because wider distribution in crypto assets is the ideal end state. Haters and losers will say that everything in crypto is empty and people just arrived at the end state of super gambling. I would say it shows that there are more interesting early projects/protocols worth exploring.

Q1 2024

Q1 2024

How does this compare to what we’ve seen from Coinbase users over the past few years? First, we’re still over 40% below the 2021 high in MTUs (11.4 million) and below where we were at the end of 2022. For all the talk of memes and retail metamorphosis, I just can’t see a credible argument that this is happening on a large scale. Is this happening on a small scale for users who are very familiar with crypto? Of course, this again suggests that people are caught up in the crypto bubble and missing the broader picture. If you log on to Twitter to see what’s happening about crypto and treat the discourse there as a kind of gospel, you’re going to have a bad time.

End of 2021

End of 2023

The last point I want to make here is about altcoins outside of BTC and ETH. As early crypto investors, we obviously firmly believe that this space will continue to grow, not just the majors. The easiest way to measure that activity is to use TOTAL3, which tracks the top 150 altcoins outside of BTC and ETH. I think it is instructive to look at the cycles we have seen previously from highs to lows. Looking at the 2017 cycle and the most recent cycle, it is clear that the relative upside is compressing (although still astronomical), which is what we would expect as the space expands. The base is larger, so high-speed upside is intuitively more difficult. But even if that leaves plenty of room for further compression, I don't think enough people realize there's a lot of upside left in this space. TOTAL3 is only $640 billion, which may sound like a big number, but is almost insignificant in the grand scheme of financial markets. If we believe this is a $10 trillion space in the next 24 months, and BTC is 40%-50% of that, there's a ton of value left to be created.

2017-18

2020-21

2024-25?

I personally don’t think this will be dominated by memecoins, and I’ve found some who strongly disagree. Memecoins have their place and will continue to be a big part of crypto (and even traditional finance), but I’m also optimistic that we’re seeing a new wave of mature founders. They’re thinking deeply about solving real problems and focusing on decade-long outcomes. We’re interested in working with these types of founders.

I think we’re still early in this cycle. I’d guess we’re about 1/3 of the way through. While there are a lot of people who think it’s all just about memecoins, there are other things going on and building. More innovation is starting to happen with SocialFi, ERC-404 is still underexplored, DePIN is growing in acceptance outside of crypto, RWAs are slowly filtering onto-chain, and we’re seeing more attempts to explore how distributed systems can impact the “real” world. We’re constantly adding new papers to our public database and are always excited to talk to builders at some of the intersections that are trying something weird, new, and ambitious. Despite the many flaws in this space, I remain very optimistic about it. Original link: https://0xsmac.substack.com/p/where-are-we-in-the-cycle

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