Preparing for the main upward wave of the bull market, my phased thoughts on this cycle

Author: Alex Xu, Research Partner at Mint Ventures

Introduction

Last week, BTC reached a historical high against the US dollar, marking the official start of this bull market phase. Compared to the rebound and recovery from the bear market bottom, the sentiment in the official phase of the bull market will further heat up, and volatility will intensify.

Every official phase of a bull market has some common characteristics, such as:

• A gradual transition from BTC leading the market to altcoins taking the lead, resulting in a decline in Bitcoin's market share.
• More aggressive price increases and growth rates across various cryptocurrencies.
• Becoming the darling of social media and search engines, with rapidly increasing public attention.

In this article, the author attempts to logically deduce the possible differences between this cycle and past cycles, and presents personal thoughts and strategies.

This article reflects the author's thoughts as of the time of publication, which may change in the future. The views expressed are highly subjective and may contain errors in facts, data, or reasoning. Please do not use this as investment advice, and constructive criticism and discussion from peers are welcome.

The following is the main text.

Drivers of the Crypto Bull Market and Alpha Tracks

Drivers of the Bull Market

After BTC's market capitalization reaches a certain scale, looking back at the past three cycles, bull markets have been driven by multiple factors, including:

• BTC halving (expectations of supply and demand adjustments), with the next halving occurring in April.
• Easing monetary policy or expectations of easing, with the market reaching a consensus that the peak interest rate has passed and high expectations for a reduction in the next quarter.
• Easing regulatory policies. This cycle is reflected in updates to US accounting standards, allowing crypto assets to be reported at fair value in public company financial statements, and the SEC's defeat against Grayscale leading to the approval of ETFs.
• Innovations in asset models and business models.

This bull market already possesses the first three points mentioned above.

Alpha Tracks in Each Bull Market

At the same time, in each bull market cycle, the assets that experience the most significant price increases are usually new species that emerge (or first explode) during that cycle. For example, during the 2017 bull market, ICOs were prevalent, and the biggest gainers were ICO platforms (smart contract public chains) like Neo and Qtum; in the 2021 bull market, the biggest gainers were DeFi, GameFi & Metaverse, and NFT assets. The year 2020 was the inaugural year for DeFi, while 2021 was the inaugural year for NFTs and GameFi.

However, as of now in this bull market, there has not yet been a new asset model or business model of similar weight to the smart contract platforms and DeFi of the previous two bull market cycles.

Currently, the Defi, Gamefi, NFT , and Depin projects, whether new or old, have not evolved significantly in terms of product form or narrative compared to the previous cycle; they are more about iterative improvements and fixes in product functionality. In simple terms, they are all "old concepts."

The relatively new species that have emerged in this cycle are mainly two:

• BTC ecosystem: represented by ordinal assets like ORDI and node monkeys, as well as layer two projects primarily based on BTC.
• Web3 AI projects: including distributed computing projects (Akash, Render Network) that existed in the previous cycle, as well as emerging AI projects like Bittensor (TAO).

However, strictly speaking, AI is not a native track in the crypto space; the Web3 AI track is more a result of the AI craze initiated by GPT in 2023 penetrating the crypto industry, barely qualifying as a "new species" for this cycle.

Deduction and Strategy for This Bull Market

Potentially Misjudged Alpha Tracks

In many bull market investment portfolio recommendations that I have seen, altcoins from the GameFi, DeFi, and Depin tracks are often included in the asset pool. The main reason is that they are smaller market cap assets with greater elasticity, which can significantly outperform BTC and ETH during the official phase of the bull market (after BTC reaches a new high), achieving Alpha returns.

However, as I mentioned earlier, "the assets that experience the most significant price increases in each bull market cycle are usually new species that emerge (or first explode) during that cycle." Since DeFi, GameFi, NFT, and Depin do not meet the characteristics of "new assets or new business categories" in this cycle, and as tracks that have gone through a second cycle, we should not expect them to replicate the price performance of the first cycle. This is because an asset category can only enjoy a massive valuation bubble during its first cycle of emergence.

When a new business model or asset category appears in the first bull market, its main challenge is "being falsified," which is difficult amidst the fervent emotions of a bull market. In the second bull market, projects within the same track face the challenge of "having to prove" that their business ceiling remains high and that there is still significant room for imagination. This is also challenging because it is not easy for people to believe in a story that has been told before, especially when they still have lingering fears from being trapped at the previous bull market peak.

Some may argue that the L1 track was the "most eye-catching" in both the 2017 and 2021 bull markets, which serves as a counterexample.

It is not.

The market demand for the L1 track during the 2021 bull market experienced explosive growth at an exponential level, with the massive explosion of various product categories like DeFi, NFT, and GameFi leading to a rapid increase in the size of the user and developer two-sided market, creating unprecedented demand for block space. This not only boosted Ethereum's valuation but also caused the explosion of Alt L1s due to the demand spilling over from Ethereum. The 2021 bull market was indeed the true inaugural year for Alt L1s.

Whether this cycle can replicate the explosion of DApp product categories and asset categories from the previous cycle, leading to further growth in demand for L1s, remains to be seen.

Currently, there is no sign of that. Therefore, the premise for L1s to achieve the same upward momentum as the previous cycle does not exist, and expectations for Alt L1s in this bull market should also be lowered.

BTC and ETH Have Better Odds in This Cycle

The biggest driving force of this bull market so far appears to be the inflow of funds brought about by the opening of the ETF channel, along with optimistic expectations for this long-term inflow. Therefore, the primary beneficiaries of this cycle are mainly BTC and ETH (potential ETF listing candidates). Combining the earlier views on GameFi, DeFi, and L1s, the difficulty of seeking Alpha in this bull market is higher, and the risk-reward ratio of holding BTC + ETH will be better than in the previous cycle.

So, among BTC and ETH, which is the better choice, both of which benefit from the ETF?

In my view, in the short term, it may be ETH, as the ETF expectations for BTC have already been priced in, and after the halving in April, there are no other hotspots for BTC. For ETH, the ETH/BTC exchange rate is still at a low level, and with the gradual warming of ETF expectations for ETH, the short-term odds for ETH are superior to those for BTC.

In the long term, BTC may be the better allocation choice. Overall, ETH is increasingly resembling a tech stock, with its value tied to providing block space services, similar to a Web3 cloud service project. This market is highly competitive, and it continuously faces erosion and pressure from other block space service providers (L1s, Rollups, and DA projects) and various new technological solutions in terms of narrative and market share. If Ethereum's technical route goes wrong or if its product iteration speed is too slow, these could become reasons for capital to vote against it.

Conversely, BTC's positioning as "digital gold" is becoming increasingly solid with the stabilization of its market cap and the opening of ETF channels. Its consensus as a value reserve asset against fiat currency inflation is gradually gaining acceptance from financial institutions, publicly traded companies, and even small countries.

The argument that "ETH's value storage can surpass BTC" has become increasingly rare.

Summary of Strategies for This Bull Market

Although I believe that over-allocating to BTC + ETH will have a better risk-reward ratio than the previous cycle, this does not mean we should not allocate to other altcoins; we just need to consider the allocation ratios carefully.

In general, the strategies I am currently considering are as follows:

• Higher allocation ratios for BTC and ETH.
• Control the allocation ratios in older tracks like DeFi, GameFi, Depin, and NFTs.
• Look for new tracks that can serve as directions for seeking Alpha in this cycle, such as:
• Meme: The best speculative medium, with concepts being refreshed in every cycle and astonishing wealth stories emerging, making it the easiest project category to understand and spread beyond the circle.
• AI: A new Web3 business category, with constant external commercial hotspots.
• BTC ecosystem: Including ordinal assets and BTC L2, etc. I am relatively more optimistic about the former, as it represents a new asset category that has emerged in this cycle, while BTC L2 is essentially a rebranding of the Ethereum Rollup concept, belonging to the "old wine in a new bottle."

Cycles Still Exist, but Have Clearly Advanced

Additionally, in terms of cycles, I believe that unlike past bull market cycles where "the year after the halving is the main upward wave," the biggest main upward wave year for this bull market should be 2024, not 2025.

The years of past BTC halving events were 2012, 2016, and 2020, with the next halving occurring in 2024.

Tonghuashun Finance conducted a comparison of the returns of major financial assets over the past decade last year, as follows:

Overall, BTC conforms to the pattern of "three years of increase, one year of decrease," meaning it rises in the year before the halving, during the halving year, and in the year after the halving, followed by a year of decline.

In the first Bitcoin halving cycle, BTC rose 186% in the halving year, and 5372% in the year following the halving in 2013. A similar pattern occurred in 2017, so before the 2017 bull market cycle, BTC basically followed the pattern of "small rise before the halving, large rise in the year after the halving."

However, this pattern began to break in the last cycle, as the year before the halving in 2019 saw a significant increase (93.4%, higher than 40.9% in 2015), and then the halving year in 2020 saw a rise of 273%, which was higher than the 62.3% increase in the year following the halving in 2021.

The trend of this "upward cycle" advancing further is becoming more evident in this cycle, as BTC achieved a 147.3% increase in 2023, the year before the halving, surpassing the increase in the previous halving year (2019). Moreover, the first quarter of 2024 has not yet concluded, and BTC has already achieved nearly a 60% increase.

I believe that it is highly likely that 2024 will be the main upward wave year for this bull market. We should not delay and wait for a significant rise in 2025; increasing our positions to seize the present may be a more prudent strategy, while 2025 should be our year for profit-taking.

Finally, I wish everyone a successful hunt in this bull market, returning with a full load.