Stay vigilant in times of peace. At which stage are we in this cycle?

Original Title: 《Where Are We In The Cycle?》

Author: 0xsmac

Translator: Deep Tide TechFlow

Introduction

The author 0xsmac delves into the current cyclical position of the cryptocurrency market and questions the effectiveness of "collective wisdom" in financial market decision-making. The article reviews market changes since the FTX collapse in 2022 and predicts future market trends by comparing the price movements of Bitcoin and Ethereum. Additionally, the author discusses the potential impacts of ETF approvals, institutional capital inflows, and changes in the cryptocurrency market structure, providing a perspective for a deeper understanding of the crypto market.

Main Content

I tend to think that collective wisdom is mostly a joke. Of course, collective wisdom is important in certain matters, but there are too many examples showing that human behavior is irrational (especially when it involves money) or that people do not understand the cognitive biases they are experiencing. More specifically, I am referring to those crowds that exhibit overconfidence/irrational tendencies.

For example, participants in the financial markets.

After the FTX collapse in November 2022 and the QQQ dropping about 30% from its all-time high, I was curious about what people thought about the possibility of a "soft landing." Needless to say, only one in five people was quite certain we would achieve this.

A year later, with Bitcoin's price having doubled (around $35,000) and in an undeniable upward trend, I was curious again about people's feelings. Typically, I use such polls to gauge sentiment. This is just a data point, but I found that most people answered with what they hoped would happen—especially on Twitter. Therefore, it is not surprising that only half of the people believed the likelihood of a 30% price increase was greater than a 20% decrease.

Fewer people expect prices to continue rising.

For many reasons, I was very confident that the targets of $45,000 and $60,000 would be achieved at that time. Now, I have lower confidence in short-term price action and, to some extent, am not very confident about what will happen in the next six months. But many people have been asking, "What stage of the cycle are we in now?" This is a somewhat complex question that hints at some things I am not sure are necessarily correct. Nevertheless, I will share my feelings so that when I inevitably get asked this question again next time, I can refer back to this article.

The prevailing view seems to be that we are in the mid-cycle. Interestingly, the most common answers I hear are the fifth or sixth rounds. Even if this is true, it feels a bit like an evasive answer to me. This is something you would say when you have no opinion and want to remain neutral. It might be true, but if I thought so, I wouldn't be writing this article.

So what stage of the cycle are we in now, which round are we in, has it ended, or have we come back? 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 about 70 weeks into 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 genuinely bullish in November and December 2022. If I were very generous, I would say that most people started to realize what was happening sometime between the end of Q1 and the beginning of Q2 last year. So we can say this has been over 12 months.

From a price perspective, Bitcoin has risen about three times from the bottom, and Ethereum has risen 2.5 times from the bottom. I feel that those who have experienced multiple crypto cycles believe we are closer to the end than the beginning. This is largely because this time it hasn't followed the script they are used to.

We wrote some content about this dynamic in our annual letter…

In previous cryptocurrency cycles, as capital moved towards risk and speculation, there was a logical flow from BTC → ETH → the long tail of crypto assets (risk and token investments). Market participants believed in new narratives, which usually revolved around fundamental shifts enabled by crypto, creating a wave of new believers, either lifelong converts or those who exited after price corrections.

This cycle has been (so far) very different, and many of those who previously had heuristics 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 fundamentals—when the assets we own have risen 3-5 times, we are not satisfied because the things we don't own have skyrocketed 10-20 times. Especially if what has skyrocketed 10-20 times are things we don't like. In my view, this is why many people feel we are either in the mid-cycle or in the latter half. They watch from the sidelines as Solana rises from under $10 to over $200. They see meme coins surge 100-1000 times and scream internally.

“This is not the right order!”

“Why didn’t my assets rise like this?”

“This shouldn’t be happening now!”

Things have not developed in the way they hoped. So it’s not that they might be wrong, but rather the market's irrational behavior. Or that the cycle is compressing, or that financial nihilism is being pushed to extremes. I do not rule out all these scenarios, but it seems there is little self-reflection.

To add some background, I know of junior personnel at other funds who recommended SOL at under $30, but they were repeatedly rejected and ignored. Months later, it is laughable to see how many people rushed to buy locked FTX tokens at higher prices.

All this is to illustrate that people's collective experience of the market rise will influence what they think the current stage is. At the beginning of this cycle, most people were overly focused on the Ethereum ecosystem and paid insufficient attention to other things. This positioning distorted the overall perception of this cycle for crypto and diverted many people's attention from assessing our actual situation.

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

Only 100 days until Bitcoin ETF approval

Ethereum ETF has not yet been approved (possibly by the end of 2024 / early 2025)

I have made quite a few statements and tweets about the structure of the crypto market and its importance; although it is a boring concept, it has significant implications. It may be a bit of an exaggeration, but I think it is somewhat analogous to tectonic plates in the Earth's crust—large, slowly moving parts of the market. It is hard to feel how drastic these changes will be and what the aftershocks will entail. But imagine being in the crypto space for over 8, 9, or 10 years and witnessing the important moment of Bitcoin ETF approval.

Huge new institutional capital now has a legitimate way to enter this asset class, with initial capital inflows far exceeding market expectations, and then you announce a top about 100 days after the Bitcoin ETF passes. But the market is forward-looking! Now that the ETF has been approved, the capital flows have already been priced in!

Yes, the market is indeed forward-looking. But they are not infallible. Their views on ETF capital inflows are actually incorrect. Those who understand cryptocurrencies do not know how traditional market structures work, while those who understand traditional market structures have little time to engage with cryptocurrencies. The Ethereum ETF is inevitable, and in my view, the time gap between the approval of BTC and ETH is actually very healthy. It allows for some time for digestion, education, and clarity post-election. The structural changes in the crypto market cannot be underestimated.

Bitcoin has just maintained an upward trend for 7 consecutive months

Bitcoin has not provided entry opportunities: 16 out of 21 weeks from mid-October last year to early March this year were green

Bitcoin has actually been rising for a year and a half. Before April, there were 12 green months out of the past 15 months, and during the period from mid-October last year to early March this year, 16 out of 21 weeks were green. This is indeed relentless. However, to be fair, very few people were prepared for what we saw in the first half of 2023. Would it be shocking if we remained in a consolidation phase for a while? No, I don’t think so. But from the market trend, it feels like there is still some post-traumatic stress after the last washout.

I also increasingly feel that the conversations I am having are the same as those at the end of 2022 / beginning of 2023, only Bitcoin is now around $60,000 instead of $18,000. Of course, they are not exactly the same, but the doubts mainly revolve around: we have risen a lot, there is no new narrative pushing us further up, and the meme has already skyrocketed.

But in my view, these are not the real reasons we think we should go down.

BTC ETF has not yet entered the offline trading center

13Fs are continuously emerging

Alright, now we are going to get into some technical content regarding banks. When I say the ETF access has not yet entered the offline trading center, I mean that advisors have no incentive to recommend this product to clients.

Advisors' recommended trades are divided into "active recommendations" and "non-active recommendations." Active recommended trades refer to trades that brokers suggest to clients ("You should buy ABC"), while non-active recommended trades refer to trades that clients bring to brokers ("I want to buy XYZ"). The main difference here is that only active trades pay commissions.

When advisors recommend trades, they are classified as "solicited" and "unsolicited." Solicited trades are those recommended by brokers to clients ("You should buy ABC"), while unsolicited trades are those 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 the inclusion of BTC ETFs in client investment portfolios. This means these advisors have no incentive to recommend these products to clients. But it’s just a matter of time—these companies are all in some waiting mode, and when one company acts, others will quickly follow suit.

13Fs are also continuously being submitted. An important point that Eric Balchunas pointed out a week or two ago is that IBIT reported about 60 holders (with more reports to be added), but they only account for about 0.4% of total shares. This means "most are small fish, but there are many fish." So far, a Kansas advisor has invested $20 million in Fidelity's BTC ETF, accounting for 5% of their portfolio.

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

Unprecedented new token supply entering the market

Honestly, these two clichés seem to repeat every cycle. But nonetheless, they are worth noting—Bitcoin now has about 94% of its 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, and arbitrage trading. There are countless examples, and the total FDV of these projects is both shocking and full of imagination. As with every cycle, most tokens will trend toward zero with the unlocking and selling by insiders. Although there has been enough discussion and articles about this.

The halving just happened

Google Trends data

Coinbase app store ranking (currently 270th)

The halving has indeed just happened, and supply has decreased, it’s that simple. Personally, I don’t think these last two reasons are very convincing on their own, but they are interesting in contrast to what people think our current position is. If we look at recognized Google Trends data for BTC, ETH, SOL, NFTs, etc., we see a commonality.

We are still far from the peaks seen during previous true bull markets.

The ranking of the Coinbase app store is also similar (currently ranked 270th). I will soon discuss the controversial issue of retail participation, but it is safe to say that there is still significant room for growth in the use of crypto-native applications.

AI narrative saved the market

Unemployment rate will only rise

Traditional financial market breadth is weakening

I am willing to believe that the AI narrative saved the traditional financial market in Q4 of '22 and Q1 of '23. If ChatGPT had not been released at that time, perhaps the traditional market would have struggled instead of finding solace in a new paradigm of innovation. But you cannot prove a counterfactual, so we must deal with the situation as it is today. Indeed, we have seen incredible strength in the labor market, and the unemployment rate will only rise. The traditional market is experiencing an overall decline in breadth, which is also a fact.

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

I believe we have not yet seen the jaw-dropping surge that typically accompanies breaking new highs. I have been publicly bullish for a long time, during which people tried to convince me that repairing the damage from 2022 would take a long time. Now, those same people are trying to tell me that we cannot rise any further. This does not mean they are wrong this time, but the evidence I read today suggests that we still have significant room for upward movement.

I also believe that the delay in the Ethereum ETF is beneficial for extending this cycle, both in terms of time and price. This is another counterfactual, but I think if it had been approved in May, it would have been too close to Bitcoin's approval. Market participants have short attention spans, and cramming these approvals and subsequent product trading together would lead to internal competition. How much impact this will have, who can say. But as the only crypto ETF, it is very important to provide some space for BTC funds to continue flowing in. This is just the appetizer. The ETH ETF will have its moment to shine, and in fact, BTC's performance will become its best marketing campaign. The new generation of managers is being forced to confront Bitcoin as an asset class. They can no longer scoff at Bitcoin, and if their performance lags behind competitors who engage with BTC, they will need answers. Saying BTC is a scam is no longer a reasonable viewpoint.

This is what a healthy market looks like. An asset is undervalued and then slowly rises as more and more people realize they cannot buy this asset at a lower price. As the market digests, there will be a period of consolidation, and then the asset continues to rise. If you are still bullish, then a peak is not what you want to see.

This Time Is Different

A terrifying combination of words. Of course, you can occasionally talk to yourself or confide in a close friend about the possibilities you have been dreaming of. But to bring this up in public? Be prepared for criticism.

We have all been through this. Someone mumbles these words, and we parrot them in front of them, acting smart and sarcastic. We criticize them on Twitter. Call them foolish. Imply that this must be their first experience of a bull cycle, as if that matters.

Unless you are here, you do believe on some level that there will always be a time when things will be different.

If you say this and are wrong, everyone will laugh at you and call you a fool for thinking it would be different. No big deal. Very few of these people have independent viewpoints, 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?

Capital Flows Are Increasing, But Where Are They Going?

The biggest unresolved question in my mind is to what extent these passive capital flows will eventually shift on-chain. The less interesting crypto version is that BTC is a new asset class, and institutional capital holds it as a small part of their portfolios, while everything else is subculture of the internet. But undeniably, it is difficult to determine today what proportion of ETF capital inflows will directly or indirectly flow on-chain. You might think—Smac, how stupid are you, no one buys IBIT and does anything with their on-chain BTC. Of course, that is indeed the case today, but that’s not the point. We all know that the wealth effect in crypto is real, and ETFs will be an appetizer for some. The question is just about scale, and in my view, we may not have a good answer in the near term. But we can try to find directional hints.

If we observe the activity of stablecoins, we see some compelling data. From the chart below, it can be seen that November of last year was the first time in about 18 months that the supply of stablecoins turned positive. The continued net capital inflow of stablecoins indicates that we are much earlier in the cycle than people think. This is especially evident given the dramatic inflows in the last cycle.

We can also observe the total supply of stablecoins on exchanges, which has decreased by more than half from peak to trough, but is now clearly starting to trend upward.

The hardest translation is whether and how these activities will shift on-chain. Keep an open mind about these, but below is the total number of active addresses (blue line) and stablecoins on exchanges. Depending on your own feelings, you might draw many conclusions from this, but my understanding is:

During the last bull market, we saw a surge in the number of new active addresses, followed by a significant decline as people exited, and then activity has been relatively stable since Q3 of '21. We have not yet seen signs of a new wave of activity, which in my view indicates that retail activity has not yet returned.

It is also worth acknowledging here that retail activity is likely taking place through Solana. It is clear that activity there has significantly increased over the past 6-9 months, and I personally expect this to continue.

DAU of 0 or less than 1 for SOL is not worth paying attention to (Source: hellomoon)

So what about more off-chain data? From last week's Coinbase 10-Q, we actually saw monthly trading users (MTUs) decrease from 8.4 million to 8 million. But trading volume has more than doubled on both retail and institutional sides. Interestingly, while BTC's trading volume share remains unchanged, ETH's share has significantly shrunk, which may indicate an increasing demand for a broader range of crypto assets (i.e., altcoins) in the future, which is also very healthy, as a broader distribution in crypto assets is the ideal end state. Haters and losers will say that everything in crypto is empty, and people have just come to the ultimate state of super gambling. I would argue that this indicates there are more interesting early projects/protocols worth exploring.

Q1 2024

Q1 2024

How does this compare to what we have seen from Coinbase users over the past few years? First, we are still more than 40% below the peak of MTUs in 2021 (11.4 million) and below the levels at the end of 2022. For all the discussions about memes and retail metamorphosis, I just don’t see a credible argument that this is happening on a large scale. Is this happening on a small scale for users very familiar with cryptocurrencies? Certainly, this again indicates that people are caught in the crypto bubble and are missing the bigger picture. If you log into Twitter to see crypto-related content and take the discourse there as gospel, you will have a terrible 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 are obviously confident that this space will continue to grow, not just the major currencies. The simplest way to measure this activity is to use TOTAL3, which tracks the top 150 altcoins outside of BTC and ETH. I think it is enlightening to observe the cycles we have seen from peak to trough before. Looking at the cycles of 2017 and the recent cycle, it is clear that the relative upside space is compressing (though still astronomical), and as the space expands, we expect this to happen. The base is larger, so the rapid rise intuitively becomes more difficult. But even allowing for enough space for further compression, I don’t think enough people realize that this space still has significant room for growth. TOTAL3 is only $640 billion, which may sound like a large number, but is almost negligible in the macro scheme of financial markets. If we believe this is a space that will reach $10 trillion in the next 24 months, with BTC accounting for 40%-50% of it, then there is still a lot of value to be created.

2017-18

2020-21

2024-25?

I personally do not think this will be dominated by memecoins; I find some people strongly disagree. Memecoins have their value and will continue to be an important part of cryptocurrency (and even traditional finance), but I am also optimistic that we are seeing a new wave of mature founders. They are thinking deeply about how to solve real problems and focusing on results over the next decade. We are interested in collaborating with these types of founders.

I believe we are still in the early stages of this cycle. I guess we have gone through about 1/3 of it. Although many people think everything is just about memecoins, there are other things happening and being built. SocialFi is starting to see more innovation, ERC-404 has yet to be fully explored, DePIN is gaining acceptance outside the crypto circle, RWAs are slowly penetrating on-chain, and we are seeing more attempts to explore how distributed systems impact the "real" world. We continuously add new papers to our public database and are always happy to talk to builders who are trying some strange, novel, and ambitious intersections.

Despite the many flaws in this field, I remain very optimistic about it.