100th Blog Special Pt. 2: What I Learned From the 2020-2021 Crypto Bull Run

The following material is not to be viewed as financial advice, but observations that the author is choosing to bring to light for reflection. Past performance does not mean absolute outcomes.

It was around 2013 when my department ended up hiring a peer, who would become one of my best friends.

I’d been in the financial services industry since 2009 but ironically, I never paid attention to the markets, nor the macroeconomic tides that made them ebb and flow.

My friend spoke with vigor about the trillion-dollar derivatives market, back testing strategies, pattern day trader rules, etc.

It was all over my head at the time, but intriguing.

“If It can make me money I want to be down,” I thought to myself.

After years studying, paying for courses, YouTube University, and hours upon hours of conversation with people smarter than me, things were beginning to click.

Lunchtime in the breakroom with “Squawk Box” playing in the background, no longer sounded like a foreign language. I understood the gravity quarterly earnings, FOMC decisions, and political events had on the financial markets.

I was finally getting it.

That being said, I didn’t have any skin in the game. It’s one thing to have knowledge on a subject, but its totally different when it’s your money riding on the line.

The black swan event that was COVID-19 hit the markets like a truck in February of 2020.

At that point, I had to decide. “If not now, when?”

So, I dipped my toe in the ocean. Not just in the equity markets, but the crypto markets as well.

It was a learning experience to say the least. With the broader economy being in a bear market, what better time to review those experiences in crypto and reflect so that we may sharpen the learning curve.

Bitcoin (BTC) and the Dollar Index (DXY) are Inversely Correlated

One of the narratives that you may hear about Bitcoin coming into the crypto space, is that Bitcoin is designed to be a hedge against inflation.

An asset which can be used as an alternative to cash, which is typically used for flight when the markets are risk adverse or “risk-off.”

In actuality, BTC moves in tandem with other “risk-on” assets, or assets investors speculate with when asset appreciation is more appealing than saving money.

Take a look at the BTC chart, the S&P500 and other tech stocks during the bull market. Notice they were all correlated.

Why is this important?

This would mean that, currently, BTC and the Dollar have an inverse relationship.

Markets that are correlated move in close relation to each other, so inverse correlation would mean, when one market is going up, the other is moving down and vice versa.

I bring this all up because there were tell-tell signs in the market when BTC was going to experience a massive drop.

If you recall, BTC experienced its first major drop from 60K to 30K in April through July of 2021.

As you can see above, there were a slew of bearish signals that BTC was presenting; the writing was on the wall (ascending wedge, declining volume, Double Tops, Head and Shoulders).

In addition to all of that, lets go back and look at where the DXY was right before the drop occurred.

Yup. DXY was hitting a generational bottom.

This isn’t a coincidence, I went back to all the major drops BTC had in post-halving bull runs, and the DXY was at or near a major support level.

Not noticing this occurring, meant the difference between people realizing profits or becoming exit liquidity for others.

NARRATIVES – Entry and Exit

A strong narrative is a powerful speculative factor in the world of crypto.

The crypto markets, although have been gaining market share, are not as liquid as other asset classes/investment vehicles.

Therefore, a prudent investor is able to tell when a theme is getting ready to take flight in crypto and when one has reached a point of exhaustion.

There are tools such as DeFi Llama and Token Terminal that outline which blockchains and protocols are gaining (or losing) in activity.

You don’t have to be first, but you want to be early. If you see a surge in usage, research the protocols and the team behind them. See if there could be a potential theme brewing.

Be objective in your critical thinking.

The moment you say “That’s stupid” regarding a new concept or idea, that’s likely the time you need to dig deeper.

I said that about NFTs when it first was introduced. I wrote it off and thought to myself that DeFi would remain king.  I was wrong.

Numerous NFT related projects went ham during the bull run. Ethernity, Sandbox, Axie Infinity and many more.

Don’t wait until people are hyping up their tokens on social media, it could be too late. Again, don’t be the next person’s exit liquidity if a chart shows a significant price increase.

On the contrary, if you can’t catch a theme on the way up, there may be a way to catch a theme on the way down.

For example, DeFI related protocols as a sector, went bonkers the first half of the bullrun. While the overall trend of the crypto markets bounced back, it was clear the market had moved on to other sectors. A play on the downside of DeFi could have been made.

Lastly, regarding narratives. Based on my experiences, don’t try to be the smartest man in the room.

What I mean by that is, there are lots of interesting ideas that could be too early or may not be fleshed out enough to create a significant buzz.

No buzz means very little liquidity, which means no push in price.

Decentralized real estate was one of my favorite discoveries during the latest bull run.

But I was too early. DeFi, NFTs and Layer 1 chains dominated the space from a narrative standpoint, hence, this was where the money was.

In conclusion follow the money, literally. On chain and from a narrative perspective. Don’t fight the tide.

It’s not wise, to try and “round-trip” altcoins.

In my opinion, outside of BTC and ETH, 90+% of the coins/tokens available are not “round-trip” investments.

This space is very new, and we have no idea which blockchains or protocols will be around 5 to 10 years from now.

Remember the top companies during the .com bubble, are not the same top companies today. The same goes with crypto.

Ride a theme but think twice before marrying it.

Think Like a VC

I quickly came to the realization that investing in the crypto space is very different from investing in equity markets.

In the equity markets you can simply dollar cost average into a S&P500 ETF, set it and forget it.

Or you can review 10Ks and 10Qs to see a company’s cash flows, income statement and balance sheet.

In an emerging space like crypto, its much harder to determine the success of a protocol.

It’s the wild wild west of speculation and this space moves fast.

So, the best thing to do is to try and think in terms of the following:

Product. Market Size. Team.

The first item is fairly simple: What is a protocol or chain setting out to do? What problem are they trying to solve?

Secondly, if the idea is already established, how much money currently exists within that market, and how much of it is the chain/protocol trying to capture.

Smart Contract Chains are widely popular because the use case and revenue model is well defined at this point in crypto, but the idea hasn’t been perfected.

The chains become a vehicle for other protocols to be built underneath it, with the native coin being used for transactions fees; however, scalability and security remain an issue.            

Lastly, team. What is the background of the team working on the project? Have they worked on other reputable projects before? Are they able to pivot and improvise when appropriate.

If you start thinking on these terms, the way you evaluate projects will help you filter out gold from the junk.

Learn the difference between protocol usefulness and token usefulness

This one took me a long time to realize.

I won’t be calling out any specific tokens here.

I just want to highlight that there are some wonderful use cases from protocols that could revolutionize the space.

However, they havent figured out token utility or a token incentive program worthy of high adoption.

Token utility has to extend beyond just “protocol governance.”

Some protocols are doing better in this regard, where holding the native token will give you a percentage of the fees made during operation.

Crypto is still in it’s beginning, so it may be over critiquing as no one knows what makes a token model good (beyond just limiting supply, and even this is being challenged by others in the space).

But there are PLENTY of ways to make a token model bad, and lack of utility is one of them.

In summary, the TL;DR is the following:

  1. BTC and the DXY are inversely correlated, utilize this tool to plan for major drops
  2. Narratives, Narratives, Narratives – Look for data that support surging and exhausted themes
  3. It is not wise to “round trip” altcoins – Ride a theme, but don’t marry it
  4. Think Like a VC – Product. Market. Team
  5. Protocol usefulness =/= underlying token usefulness – Always know the difference

Weather Your Storm, Maintain Inner Reign -E.

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