The strongest dialogue between bulls and bears in the crypto circle: Has the four-year crypto cycle failed?

Original Title: Markets Are Broken: The Crypto Liquidity Crisis Explained

Original Author: Raoul Pal The Journey Man, Youtube

Compiled by: Peggy, BlockBeats

Editor’s Note: The crypto market in 2025 is at a delicate turning point: the approval of Bitcoin ETFs, the intertwining of liquidity cycles and debt refinancing cycles, the AI boom siphoning off funds, and traditional finance and tech giants accelerating their embrace of blockchain. In this context, market structures are showing anomalies, with a lack of buying interest in long-tail assets, underperformance of high-performance public chains like Solana, and investor sentiment swinging between extreme optimism and panic.

In this episode of "The Journey Man," Raoul Pal (former global macro investment manager and founder of Real Vision) engages in an in-depth discussion with Chris Burniske (partner at Placeholder) about market cycles, liquidity drivers, investment psychology, and structural changes in the industry.

Is the four-year cycle still valid? How do liquidity and macro frameworks affect crypto assets? How should investors build their cognition and strategies amid uncertainty? From Solana's unusual performance to the plight of long-tail assets, from the ETF effect to the transformation of VC models, the two guests not only share their respective biases but also reveal how to construct robust investment strategies amidst divergences.

The recording took place on November 13, and here is the original text compilation:

Market Status and Cycle Debate

Raoul Pal: Hello everyone, I’m Raoul Pal, and welcome to my show "The Journey Man." Here, we explore the intersection and understanding between macroeconomics, cryptocurrencies, and the tech index era. It’s a rare privilege for me to sit in this position, having such resources and networks, and to integrate this knowledge together.

Today, I’ve invited one of my favorite guests to converse with, Chris Burniske. He is one of the most insightful thinkers in this field and has always been a source of inspiration for me in how to deal with market volatility and how to invest.

A valuable conversation is not only about discovering resonances in viewpoints but also about exploring divergences. Chris has a different perspective from mine; he believes this cycle may have ended, while I think the cycle is still ongoing. We are both thinking within a probabilistic framework, with no absolute certainties. Therefore, we will delve into these differences and how people can build their cognitive frameworks when faced with differing viewpoints.

Chris has a deep understanding of investment psychology and knows how to think and manage portfolios for survival and prosperity. Now, let’s hear Chris’s thoughts.

Chris, it’s great to see you again, my friend.

Chris Burniske: Thank you for having me again.

Raoul Pal: Yes, today is November 13, and I guess this episode will air a week later. Well, the market, cryptocurrencies, Twitter—everything is in chaos, and everyone is trying to figure out where we really stand. So, I think we should start with this topic and then dive into some more interesting things, like what you’ve seen recently.

So, how do you think about where we are in the cycle, in the market, or their structures?

Chris Burniske: Okay. As of today, Bitcoin has dropped about 20% from its peak, right? In traditional finance, this would be considered a bear market, right? And in the crypto industry, it’s either a "speed wobble" or it could drop deeper, right? I think we have to maintain enough respect because Bitcoin has always been the gravitational center for other crypto assets.

So, there are many ways to look at this issue, and I think that’s where it gets painful for people. You and I might discuss different viewpoints, and we both know these viewpoints are probabilistically weighted in our minds, and we are both prepared to accept that we might be wrong, right? And that’s the subtlety that gets lost online because people either want you to be bullish or want you to be bearish. But I think every professional asset manager is always some degree of bullish and bearish, either bullish and paranoid, or bearish and paranoid, or some other combination.

Raoul Pal: Yes, generally speaking, if you have a very strong viewpoint, then your entire job is to remain paranoid about that viewpoint. That’s how I understand it.

Chris Burniske: Right. So, in the simplest framework, if you follow a four-year cycle framework, then Bitcoin is currently forming a top if you believe in this four-year framework, right? Then you would expect a bottom to appear in about 12 months. You could say this is due to the halving, and I think the argument becomes increasingly dubious as Bitcoin’s inflation rate declines. Especially when you really think about the core of the halving argument, the number of coins paid to miners, the proof of work, the cost of producing Bitcoin, and so on.

So, there’s the halving argument and the liquidity argument, and you’ve done a great job educating everyone on understanding liquidity. Bitcoin aligns with the four-year business cycle, and then there’s a liquidity cycle above the business cycle. But the problem is here because Bitcoin is currently somewhat misaligned with the liquidity cycle, right?

So I think we have to acknowledge that this is a point that makes me a bit anxious. I would think, hey, the liquidity cycle suggests Bitcoin should perform well at some point, but right now it’s struggling a bit. However, I also don’t want to be overly confident about this viewpoint because if I’m under-allocated during an uptrend and the liquidity dynamics suddenly kick in, I could get slapped in the face.

Overall, I started issuing some cautious signals after the crash on October 10 because the market felt heavy to me. Someone commented on crypto Twitter that he views the market more like an organism rather than fixating on specific indicators. I’m not the type to focus particularly on one point, nor have I had the in-depth market detail training like you. So I try to step back and view the market as a whole, integrating various variables to see what the combination of these variables suggests.

For me, the market started to feel strange when Solana didn’t receive significant buying interest during the anticipated ETF launch. You see, Bitcoin’s DAT buying interest drove the market, then shifted to Ethereum’s DAT buying interest, along with Bitcoin and Ethereum ETFs, which were all very favorable events for BTC and ETH. Logically, similar events should also benefit Solana since it’s the high-risk asset I chose for this cycle. But that didn’t happen.

Raoul Pal: I’ve also been watching Solana, and then I switched, but the logic is the same.

Chris Burniske: Right, we’re all looking at high-performance Layer 1s with strong core engineering capabilities and interesting ecosystems. But when Solana performed poorly during the data expectations and ETF announcements, I felt something was very wrong. It indicated a lack of buying interest in the market, with a lot of selling instead.

Then came the crash on October 10, and the only time I’ve seen something similar was during the pandemic crash in March 2020. At that time, I watched my portfolio, and some assets dropped 60% to 90% in a single day; it was insane. I don’t like this situation because the market has been anxious about long-tail assets this cycle: where is the buying interest for long-tail assets? What is their fundamental value? How should they be valued? These are all questions we’ve long expected to resolve, such as the specialization of crypto asset valuation, and you and I have both done early explorations in this area. Now, this specialization is coming, but long-tail assets still lack buying interest. Meanwhile, there’s also an AI bubble.

And the crash on October 10 revealed the true buying positions of many assets. My concern is whether we have to return to those crash lows? Because some of those lows suggest bear market levels, especially for long-tail assets.

Raoul Pal: Yes, it depends on which low you’re looking at. If you use the Binance low, that’s pretty bad; if you use the Coinbase low, many assets are basically back to that position now.

Chris Burniske: Absolutely right. That’s also one of the subtleties. There are other signals, like the Binance and Coinbase you mentioned. The Coinbase premium has disappeared, and now the coins on Coinbase are generally priced lower than those on Binance, indicating that buying interest in the U.S. is not as strong as it used to be. We’ve also seen some aggressively priced venture capital deals, even though there isn’t really a venture capital bubble in crypto.

Raoul Pal: Chris, back to that flash crash liquidation event, who really got hurt in it? Because someone definitely took a big hit, but it’s still unclear who. Most U.S. users aren’t highly leveraged.

Chris Burniske: Yes, people were obviously liquidated, but I feel we haven’t seen the full extent of the real damage yet. I don’t want to spread rumors; I believe everyone has seen some rumors on crypto Twitter, but I don’t have solid information. However, there are indeed questions being raised about certain market makers.

Raoul Pal: What about retail investors? Were they liquidated, or were they just watching in panic? I wonder if this caused some psychological trauma for people, or if it was just like a flash crash in the stock market, leaving people bewildered?

Chris Burniske: I think anyone using leverage got hurt, especially those who leveraged based on Binance prices; they definitely took significant losses. So, some retail investors were indeed affected.

But the more significant damage is that buying interest in long-tail assets was already paused, and this event exacerbated that pause. Because suddenly, even if there are price differences between exchanges, people will still ask: where is the buying interest for long-tail assets? Then this catastrophic event occurs, showing some extreme lows, which really makes people question whether those lows are the true buying positions. That’s the psychological shock.

Raoul Pal: There’s another question that I think is important but many people don’t realize: is it because everyone believes in the "four-year cycle," resulting in everyone collectively making it a reality?

Chris Burniske: Yes, that is indeed a tricky question. My usual principle is, "This time won’t be different unless there’s a strong enough reason for it to be different." We see this pattern in many scenarios because human nature never changes, which you and I both know.

But this time there are indeed many reasons that could make the situation different, such as the clarity of U.S. legislation and regulation, traditional finance and tech giants massively embracing stablecoins and blockchain technology, ETFs entering the market for the first time, and liquidity coming toward us.

So, there are many signs that suggest we might be approaching a turning point. I’m also prepared; for example, now BTC is at 98,000, ETH just over 3,000, and Solana at 140. I’m fully prepared for the market to reverse from here; it’s not impossible.

Raoul Pal: Yes, remember 2021 was also a crazy year; Bitcoin dropped 50% and then quickly rebounded, which wasn’t easy.

Chris Burniske: Right, now BTC has dropped 20% from its peak, ETH has dropped about 40%, and Solana has dropped about 50% from its high last December. I think that might be enough to wash out the weak hands. If we rebound from here, I can imagine that it will be painful for many.

This is also a question I see on crypto Twitter: the sentiment is too extreme, either fully leveraged or completely liquidated. In contrast, I shared my position about a month ago, about 39% cash and 61% long-term capitalist assets, which includes a basket of assets, with cryptocurrencies being part of it.

So, I’m still mostly positioned for capitalism because capitalism is designed to grow capital. Then, when the market is good, I gradually increase cash, and when prices are attractive enough, I deploy cash. Now, money market fund yields are higher than inflation, so slowly accumulating purchasing power, although it’s not a stunning strategy, I really recommend that if you feel anxious about the market now, you can think in a more probabilistic and stepwise manner.

Raoul Pal: But the problem is, your entry point is very good, so you can take your money out early without Solana making new highs, which is actually your advantage. I would categorize this as "paranoia" because almost all assets have not made new highs except Bitcoin, and the entire market basically peaked in January, which is strange for this year.

But the problem is, most people don’t have significant gains because they never buy at the lows. You and I were both vocal at the lows, but most people didn’t buy at the lows; they bought at some point in 2023 or 2024, and now they’re basically flat.

Yes, that’s psychologically very uncomfortable. Because when you’re flat, it’s very difficult to psychologically accept "reducing positions," especially when all your hopes and dreams are pinned on this trade. I can understand why everyone is struggling because it’s indeed very difficult.

Raoul Pal: Yes, people will overlook your entry in venture capital, but many of your positions were also bought in the open market.

How to Establish the Right Investment Framework in the Crypto Space?

Investor Psychology

Raoul Pal: Yes, for example, your Solana was bought in the open market, and it was done publicly.

Chris Burniske: Yes, I always tell those who are new to the crypto market that if they are just flat at the end of the first cycle, that’s actually a victory because they learned a lot in the process and experienced painful volatility.

So, if someone has no gains now and is just flat but has learned a lot, that’s a victory. Of course, if they are flat at this price level, I can understand that it would be uncomfortable.

I’ve recently been encouraging friends to think with a framework, and these friends all have their own portfolios. When we chat, I share some of what I think are the best methods.

The framework is this: Suppose you sell now, how happy would you be if the price drops? How sad would you be if the price rises? Now suppose you don’t sell, how happy would you be if the price rises? How sad would you be if the price drops?

Use this four-quadrant comparison to evaluate emotional responses in different scenarios, anticipating future feelings to avoid making foolish decisions.

Raoul Pal: I think this method is very helpful for rational investors, especially those who seriously think about how to accumulate wealth. But the problem is, young investors can’t buy houses; they feel this is the only opportunity, the chance to change their fate.

This emotion is too strong; they pin all their hopes and dreams on one trade, which is clearly not the right investment approach. But they can’t bear the pain of missing out on an uptrend, nor can they bear the risk of a downturn. These two forces intertwining really drive people crazy.

Chris Burniske: Yes, that’s indeed the case. But I want to add something about the demand for instant gratification. Because when I entered this industry as a professional in 2014, I had less than $10,000 to my name, no savings, and the industry was completely different, with different opportunities.

I started by buying some very small positions, slowly learning and gradually accumulating. Later, at the end of 2016, I experienced a hack that nearly wiped out my assets. At that time, I had just started writing crypto-related articles, and then entered 2017.

Raoul Pal: By the way, how did you adjust psychologically?

Chris Burniske: It was terrible. I was one of the early victims of SIM swap attacks. They first closed my account with one carrier, then opened a new account with another carrier, reset my Gmail with that account, then reset my Apple account with Gmail, and finally, all my devices were wiped, and I was completely locked out.

It was a very bad experience. Now my security measures are much better, and I’m grateful for that, but it was really painful at the time. The feeling of being wiped out psychologically is like having your sails completely blown away. Moreover, when you experience a cyber attack, it’s hard to determine if those people have really left your "digital house." If someone breaks into your physical house, it’s easy to know they’ve left, but in the digital world, that sense of security is hard to obtain.

However, everything has its pros and cons, and I learned a lot about cybersecurity from it.

Raoul Pal: So how did you adjust your mindset and get back on your feet? Because I think this is great advice for many people, learning how to rebuild after failure.

Chris Burniske: I think failure is the best teacher; it helps you grow more than success. For me, there was no choice. You can sit there and complain, blaming others, or you can say, "Yes, this happened to me, and it’s terrible."

Some things are fate, and some are my responsibility. I have to improve the parts I’m responsible for, then roll up my sleeves and start over. That’s what I want to say to young people: Yes, the world is tough right now, and I can feel the anxiety, but in many ways, modern life is much easier than in the past. It’s psychologically very difficult, but you have to keep moving forward.

Raoul Pal: You lost everything and then had to say, "Well, I have to keep living." After that, did you change your trading style and become more conservative? What impact did this have on your psychology during the process of rebuilding wealth? Because we see many people who have experienced liquidation, whether from hacks, investment mistakes, or leveraged liquidations. Some might be sitting in front of their computers now, 26 years old, just having lost $50,000 in this cycle, thinking, "How do I start over?"

Chris Burniske: I think I was lucky because Ethereum was in a downtrend after the DAO attack. The DAO attack happened in the summer of 2016, if I remember correctly, and then Ethereum dropped all the way until the end of the year. So I was able to buy back a lot of ETH. Looking back, the biggest loss I had was in ETH because I entered very early, while Bitcoin was relatively later. As a young person, my purchasing power was more significant in ETH because at that time, ETH was only a few dollars, while Bitcoin was already hundreds of dollars. So I was able to accumulate some ETH again, which helped me a lot in 2017.

Then we experienced the ICO craze, and I invested in almost every ICO, but in terms of ETH, I lost money. You would think you were making money, feeling everything was great, and in 2017, everything you touched was profitable, but by 2018 and 2019, everything collapsed again. Looking back at those trades, I would think, "Wow, I lost so much ETH, thinking I was a genius, but actually, I was a fool."

So, I’ve gone through many foolish moments and then recovered.

Raoul Pal: I even set a rule for myself: allow at most 10% of my position to make those "foolish" high-risk investments, like meme coins or other ultra-high-risk things, because sometimes you just want to participate, otherwise I basically don’t do short-term trading. Recently, I checked and found that every investment in this high-risk position has lost money.

Chris Burniske: Haha, yes.

Raoul Pal: Every single one has lost money. I actually did this on purpose because I wanted to prove to myself that most of the time, these investments are losing. If I had just held Solana or made some reasonable adjustments, the results would have been much better.

Chris Burniske: Completely agree. So, the process of getting back on your feet is really about continuous learning and adjusting. You just reminded me of an article written by Lyn Alden titled "Most Investments Are Bad Investments." If you’ve been liquidated, maybe it’s an opportunity to get rid of a bunch of bad investments, learn your lessons, and then concentrate your funds on truly quality assets.

Because the history of investing in crypto assets tells us that there are only a few real winners, and assets that can continue to grow across multiple cycles are even fewer. Most other things are "one-time miracles" that will ultimately become distractions. If you don’t time these "one-time miracles" well, you will lose money. So, in the long run, you should focus on accumulating the assets you are most optimistic about and ensure that their trends can prove they are creating value. In other words, the chart should show that it can maintain higher lows in every bear market, with an overall upward trend.

Grasping Long-Tail Assets

Raoul Pal: Another issue is long-tail assets.

Chris Burniske: Yes, the tail is getting longer because there are too many issuances. People always feel that long-tail assets are their chance to achieve 100x or 1000x returns, only to miss out on the main trades.

The most significant trade in the past three years has actually been Solana, and the logic is very clear: active on-chain activity, a thriving developer ecosystem, and obvious opportunities. But many people missed it because they wanted to go further out on the risk curve. Now the long-tail assets are oversaturated, with too many tokens that can’t even be measured by a power-law distribution because the numbers are too large.

Raoul Pal: I completely agree. The current issuance comes from the VC industrial system, along with a large number of meme coins; we are simply inundated with tokens.

Chris Burniske: If we look back at the entire cycle, most assets bottomed around December 2022, then performed relatively weakly until October 2023 when they started to gain momentum.

From October 2023 to the end of the fourth quarter, the market saw a strong rise, which was the "alt season" for most tokens. Then in the first quarter of 2024, Bitcoin ETFs were approved, Bitcoin performed well, and the entire market was optimistic, with everyone thinking, "Wow, this will happen again like last time." But that was actually the peak, occurring at the end of the first quarter of 2024.

It was also at that time that meme coins began to gain popularity, with a surge in issuance, and then people started to worry about FDV (fully diluted valuation) and VC selling pressure. I think this is a good thing, indicating that people are educating themselves. The result is that from the peak in the first quarter of 2024, most assets entered a painful bear market, declining all the way down.

Now, I believe we are in a consolidation process, and everyone needs to readjust their portfolios and accept necessary losses. Many people think you and I never lose money, but the truth is, we often lose money. The key is how to handle those losses, offset them against profits, settle annual gains, pay taxes, and then start over.

I understand that many people start with only $500, $1,000, $5,000, or $10,000, which can make progress feel too slow. But I want to say that the compounding of wealth is a tedious process. For example, Buffett is not the most exciting person in the world, but he is one of the richest because his method is stable, consistent, and methodical. In contrast, Musk is another extreme, high-risk and bold, and many young people admire Musk more.

But the problem is that many young people have been immersed in gaming and adrenaline culture since childhood, and the internet is filled with dopamine, so they naturally get attracted to traders on Twitter. Those traders post screenshots of buying, selling, and 10x returns, making it feel very exciting.

But we all know that very few traders can make money in the long run; trading is very, very difficult. And the reason people are attracted is that they see someone making 10x on a coin and want that result too. But in reality, slow accumulation is the way to go. Extend your time horizon; doing nothing actually makes it less likely to make mistakes. Especially if you hold a larger Layer 1, the probability of making a big mistake is very low.

Raoul Pal: I completely agree. And I think there’s a problem in trading culture where people like to flaunt profits, which can lead to unrealistic expectations about returns. I even suspect that a lot of the flaunting is fake; it’s too easy to Photoshop or fake screenshots with AI. So, this misinformation is mixed in. I would even say that for most people just entering the crypto market, they should allocate at least 50% of their positions to Bitcoin, and then use the remaining 50% to try other assets.

If you buy Bitcoin at the right time, like near the 200-week moving average, you can basically achieve "never sell," holding it long-term as an anchor asset. This way, you are always bullish on the industry, can remain calm, follow the cyclical fluctuations, and continuously learn.

If Bitcoin returns to the 200-week moving average, you can add to your position, and then consider other assets like Solana, Ethereum, Sui, etc. When the market is overheated, you can reduce your position, accumulate cash, and then buy back when Bitcoin approaches the 200-week moving average again or shows pressure.

Raoul Pal: I’ve also been teaching everyone a principle—don’t mess things up. Specifically, long-tail assets should only occupy a small proportion. If you adopt a barbell strategy, allocating 50% to Bitcoin, you won’t go wrong; then take 10% to try and learn, which might lead to a success that makes you feel like a genius, but most of the time you’ll learn some painful lessons.

The middle positions shouldn’t take too much risk; you can choose some slightly higher-risk but still fundamentally sound assets, like ETH or Solana, but don’t go too far because that will lead to a lot of regrets. The least regrettable portfolio is: most in Bitcoin, a bit in long-tail, and some middle assets that have growth potential but no survival risk.

Chris Burniske: Yes, if you anchor to Bitcoin, you can maintain a stable mindset in each cycle, knowing where you stand, how exposed you are, and whether the market is at a low or high point. So, I hope everyone can do that. Of course, Bitcoin also has some supplementary assets, like Zcash, which has performed strongly recently.

Raoul Pal: Okay, let’s return to the previous topic. Now looking at market structure, overall feel, and nuances, you feel that trading conditions are poor, some places don’t align, and there may be some "self-fulfilling" four-year cycle effect causing everyone to push this outcome together. We see some OGs selling coins because why not sell? They bought at $10 and are now selling at $100,000, which is a round number, and they’ve always sold at this time in the past, and it has always worked. Coupled with the structural collapse in October, it may have caused more damage than we currently see.

Chris Burniske: Yes, so from a probabilistic perspective, we might be at a top position. The opinions in the market are almost 50/50, with half believing we’ve peaked and the other half believing we haven’t.

Raoul Pal: Right, and this isn’t a euphoric top; it’s more like a "distribution top."

Chris Burniske: Exactly.

Raoul Pal: There’s also a strange point; if we return to the "paranoia" you mentioned, I find it interesting. The opposite of your viewpoint is: we haven’t seen new historical highs, gold is skyrocketing, liquidity is coming toward us, but most assets peaked in January, not at the end of the year. These are all the points that make me paranoid about your viewpoint.

Chris Burniske: Yes, that’s also my concern. Although Bitcoin made new highs in the second half of the year, this is the first time this has happened without other markets following.

Raoul Pal: If that’s the case, it would be the first time such structural differences have appeared.

Chris Burniske: Yes, but we also have to remember that every cycle breaks some old rules. For example, in the last bear market, Bitcoin broke above the previous bull market’s high for the first time, which had never happened in history. So, there will always be some nuances that invalidate old rules.

When I think about whether ETH and Solana can return to previous highs, my conclusion is that the entire market is now focused on "fundamentals." Here, by fundamentals, I don’t mean valuation, but cash flow, buybacks, and the structure supporting asset valuations.

So, the market’s obsession with fundamentals now leads to projects like Hype performing well because they have strong buybacks and profitability. But people don’t realize that this obsession not only hits long-tail assets but also affects ETH and Solana. In 2021, ETH and Solana were completely exempt from fundamental considerations, but if you look at ETH now, in terms of fee multiples, it’s much more expensive than in 2021.

Raoul Pal: We’ve talked about this before. I think Layer 1 can be exempt because they follow Metcalfe’s Law; the value doesn’t come from cash flow at the protocol level but from economic activity on the network. When I backtrack with this logic, I find the valuations more reasonable. But for DeFi, measuring by fee multiples makes complete sense.

Chris Burniske: I think ultimately everything will boil down to yield. These staked assets will eventually be priced based on real fees rather than inflation rewards, similar to government bonds for digital nations. I believe that with the widespread use of stablecoins, this model will become more stable, reducing severe cyclical fluctuations.

My expectation is that if Ethereum, as a more mature and widely used network, can provide a 5% real staking yield (from fees, not inflation), then I hope Solana can at least provide 7%, and Sui at least 9%. Asset prices will recalibrate to match these yield levels. This is the simplest logic; ultimately, the value of an asset is determined by the yield expectations of its holders, and these holders are always stakers in all scenarios.

Raoul Pal: That makes sense, but it feels like we’re not at that stage yet; the market can’t stabilize its pricing.

Chris Burniske: I feel we are getting closer to that stage. If we really enter a bear market, it will be a "liquidation," as long-tail assets have been in a bear market for a long time, starting from the first quarter of 2024. This is the canary in the coal mine. I believe the valuation pressure will soon transmit to assets like ETH, Solana, BNB, and Sui. The more mature the asset, the more it will be priced as a "digital national bond," and the yield will become increasingly important.

Raoul Pal: If we really enter a bear market, what do you think the probability is? For example, conventionally, we might experience a 12-month downturn; how likely do you think this scenario is?

Chris Burniske: About 65% to 70%.

Raoul Pal: Good, so you basically think this possibility is high. Then in your framework, will this bear market be as deep as in the past?

Chris Burniske: No.

Raoul Pal: Oh, that’s interesting.

Chris Burniske: Yes, that’s also what complicates the situation. If I look at Bitcoin now, its 200-week moving average is around $55,000, which is the extreme level I’m first looking at. Bitcoin has respected this moving average during 2015, 2019, and the pandemic crash. It briefly fell below during the FTX collapse, but overall, the 200-week moving average is a good reference.

If it drops to $55,000, that means a 56% retracement from the peak of $125,000, which is much smaller than past retracements. Previous retracements were about 80%, and before that, 85%. So this time might be shallower; I could even see a 50% retracement, around $62,500, or $70,000 to $75,000, basically holding the tariff low. If it holds that position, that’s just a 40% retracement, which hardly counts as a bear market for crypto.

Raoul Pal: Right, don’t forget that in past cycles, we’ve experienced seven 30% pullbacks.

Chris Burniske: Yes, if we rebound from that position, you could even say Bitcoin is still in a bull market. The frustrating thing is that whether you are bullish or bearish completely depends on the time frame.

If you give me a 10-year time frame, I’m definitely bullish. But if you ask me about the opportunities from the past month to the next 3 to 9 months, I would be a bit cautious, but that doesn’t mean I’m entirely bearish.

So, I’m very focused on the bottom positions of ETH and Solana and how they perform relative to previous lows.

Raoul Pal: One strange thing about this cycle is that Bitcoin’s dominance hasn’t changed as it usually does.

Chris Burniske: Yes, that’s also a confusing point. It’s not that "this time is different," but there are many structural differences. While the logic of the four-year cycle is still there, most structures have changed, and that’s possible. We always encounter this situation, but it does feel strange.

My preparation now is this: remember 2021? Back then, everyone said Bitcoin was a "pet rock," and nobody was optimistic about it because its performance was relatively flat in 2021.

From the high in 2017 to the high in 2021, Bitcoin only tripled, while from the bear market low to the high in 2021, it increased about 20 times. But this time is different; Bitcoin is very popular now, and it may even underperform in the next cycle. If it follows a flatter logarithmic channel, the return rates will significantly decline.

What I worry about is that people are over-allocating to Bitcoin in this bear market because they feel "Bitcoin is the safe choice." I still believe that if you are in the crypto market, you should hold a lot of Bitcoin, but we must consider another possibility: that MicroStrategy or some structures related to Bitcoin might have issues, leading Bitcoin to underperform compared to ETH, MicroStrategy, or other assets.

So, I think there’s a possibility that Bitcoin could shift from being the "darling of the market" to being "out of favor," while the real high returns might come from some unexpected crypto assets.

Raoul Pal: Let me share my framework; this is one of my biggest lessons: every time I let emotions overturn my macro framework, the results have been very bad. 2009 was my worst year because I made that mistake. So I established a very robust framework called "Everything Code," which is also probabilistic because I acknowledge that there are many other possible outcomes.

But I found an interesting phenomenon: ISM (the business cycle indicator) has historically been a perfect four-year cycle until it suddenly failed recently. I thought, what happened? Why is this cycle no longer effective? Later, I recalculated and found that this is a debt maturity cycle.

After the 2008 financial crisis, we experienced a debt "reset," where everyone postponed interest payments for three to five years and restructured their debts, creating a three to five-year cycle. This is the root of the Bitcoin halving cycle. Then suddenly it stopped.

After recalculating, I found that in 2021 and 2022, because interest rates returned to zero, the cycle was extended to about 5.4 years. So when I put it back into a sine wave model, everything made sense again. We are still at the trough of the cycle, and we should be entering the growth phase of the business cycle next because we haven’t seen it truly grow yet.

Then I used liquidity as the core driving factor because it determines debt financing. Here are the interest payments due, and here’s the liquidity matching it. This is the total liquidity in the U.S., including the Fed’s net liquidity, banks, and M2. I found that financial conditions (dollars, interest rates, commodities) lead total liquidity by six months, and total liquidity leads ISM by three to six months. So we have a nine-month leading indicator suggesting that liquidity should rebound, and the business cycle will also rebound. This is the framework I’ve been using, and it’s very effective.

When I compare the Bitcoin trend with ISM, they are almost perfectly aligned. This tells us that Bitcoin is weak now because the business cycle is weak. And the reason the business cycle is weak is that this year is not a debt reset year; next year is. So the debt reset year is the key factor.

Then I looked at global liquidity, which is highly correlated with the total market capitalization of crypto (excluding Bitcoin), with a correlation of 90% to 97.5%. This means liquidity is the strongest macro factor in history, driven by the debt refinancing cycle, while the business cycle is just one component of it.

So the question is: will liquidity rise due to the debt reset? If it does rise, then ignoring this factor is ignoring the strongest macro driver in history, and any prediction will not work. Coupled with fiscal stimulus and election factors, the government needs to make "Main Street" profitable, not just Wall Street, which means the business cycle must rebound, and corporate profits and household incomes must rise, not just the "seven giants."

That’s why I find it hard to abandon this framework, even though I also see poor market structures, weak trading, and the issues you mentioned.

Chris Burniske: Yes, that’s your "paranoia," and my paranoia is exactly the opposite.

Raoul Pal: That’s also why I wanted to talk to you because I need to hear that voice whispering in my head: "Raoul, you might be wrong." That’s the most important voice.

Chris Burniske: I think you might be right; it’s just a bit early in terms of timing. For example, your framework is based on the debt refinancing cycle, and the real peak of debt refinancing is in 2026.

Raoul Pal: Yes, that’s my point. So, it’s hard for me to believe we will enter a deep bear market unless all liquidity is siphoned off, like flowing into other areas such as the AI bubble.

Chris Burniske: I understand what you mean. The problem is that the pace of crypto Twitter is too fast, which is one of the reasons I’ve been reducing my use of Twitter recently. It’s not only unhealthy for me personally, but it also affects my investment judgment because when you seem "wrong," even if it’s just a timing mismatch, the pressure can be immense. I experienced this in 2021 when the market was crazy, but I didn’t do much venture capital because I felt valuations were too high. As a result, I endured a lot of pressure, and even some questioned whether I was still in the market and whether I still had "influence."

But it turned out my choice was correct; it just took until the end of 2022 for that correctness to manifest, a full two years. And when I was ready to buy Solana at the end of 2022, those who questioned me in 2021 didn’t have the courage to buy at the lows. That’s the problem; Twitter is the worst because anyone can comment freely, and this pressure can lead people away from long-term correct decisions.

Raoul Pal: Yes, it’s really difficult. I often suffer a lot of attacks for trying to help others. You see, I guess your investment style has a preference; you tend to reduce positions earlier but also buy back earlier at the bottom because it’s easier to grasp the bottom than the top. I feel that’s your structural preference.

Chris Burniske: You’re right.

Raoul Pal: It’s actually not easy to do this; for me, I’m better at buying at the bottom than selling at the top. The top is really hard to grasp, so I’d rather reduce positions early to alleviate psychological pressure.

Chris Burniske: I understand what you mean; I have a few structural preferences. For example, I have two friends who are excellent traders, and their strategy is to only pursue "above the shoulders in a bull market" and "below the knees in a bear market."

In other words, they don’t pursue tops and bottoms; as long as they can sell at a position slightly higher in a bull market and buy at a position slightly lower in a bear market, that’s enough. If you can sell ETH between $3,500 and $5,000 while buying between $1,000 and $2,000, that’s already very good; this logic can be applied to other assets.

Another example is my partner Joel reminded me that JP Morgan was once asked, "How have you achieved such success in life?" His answer was, "By selling too early." This statement impressed me because he has experienced many market booms and busts. I’m sure he faced a lot of questioning when he sold, with others saying, "I made so much money; why aren’t you participating?" But he continuously cashed out during others’ euphoria, accumulating cash so that when the market was bad, he had funds to reposition. This is actually a very simple but effective strategy.

I have similar feelings. For example, when ETH skyrocketed, and Tom Lee announced a $20 billion OTC trading facility, that was last summer, a very crazy moment. I would step back and remind myself, "Wow, I feel great, and everyone around me feels great; people on Twitter are even more excited." That’s the signal to take profits. Of course, if I shared this viewpoint on Twitter, people would scold me: "Are you an idiot? ETH is going to $20,000!" But you have to endure that pressure.

Asset Rotation: Zcash and Privacy Coins

Raoul Pal: If you had looked at the liquidity charts at that time, you would have drawn the same conclusion: liquidity wasn’t rising quickly, and the market couldn’t continue to accelerate.

Chris Burniske: Right, that’s the red turning point you showed, where prices exceeded liquidity support.

Raoul Pal: Exactly, the reason is that starting in July, the M2 chart decoupled, and all indicators decoupled. We were thinking, "What on earth is happening?" Later we found out that the explanation was that the Treasury began rebuilding the TGA (Treasury General Account), which drained liquidity, and reverse repos had no space to release anymore. So suddenly, a significant event occurred, coupled with the government shutdown, causing the market to lose momentum.

Your intuition was very accurate at that moment because prices had reached the upper range, but there was no fuel to continue rising, resulting in a crash, and Solana was the same. Without these factors, we might have just continued to rotate within the crypto market, like "passing the parcel." Now I’m wondering if the rise of Zcash is just part of this rotation or a genuinely meaningful signal? It’s really hard to judge.

Chris Burniske: The recent rise of Zcash is indeed interesting, but not just it; old privacy coins like Dash, Monero, and Decred are also rising, with Zcash rising the most. This indicates it has a certain differentiation advantage, but overall, the privacy coin sector is moving. I’ve heard some Bitcoin OGs say that some whales use these privacy coins to hide profits at the end of cycles or to gain some extra returns. I don’t have solid data on these rumors, nor do I participate, but this might explain why privacy coins tend to rise collectively at the end of each cycle.

However, the real signal will only be clear when the bear market arrives. If Dash, Monero, and Decred return to previous lows during the bear market, while Zcash can hold a significantly higher low, that would be a strong positive signal. Right now, I’m focusing on its 50-week moving average, which is around $50.

Raoul Pal: If your assumption is wrong, and the cycle hasn’t ended but continues to rise, what will you do? For example, you firmly believe Zcash is a long-term big opportunity, and its market cap should gradually increase because the demand for privacy will grow; I completely understand this logic. But if the market continues to rise, how will you handle it? Will you continue to hold long-term, or will you adjust your strategy?

Chris Burniske: I would do this: I have a portion of my Zcash position that is "never to be sold," just like my attitude toward Bitcoin. History tells us that only those who bought Bitcoin at $1, $10, and $100 and held it long-term achieved astonishing returns. So, I would treat a portion of Zcash as a long-term holding, never to be sold. As for other positions, I would decide based on Bitcoin’s movements. If Bitcoin confirms a bottom, I would consider adding to other quality assets, including Zcash.

I would make decisions based on Bitcoin’s movements. This also goes back to the logic I mentioned earlier about "anchoring to Bitcoin." Bitcoin is the tide; the tide must turn first before other assets follow. Perhaps a better analogy is ocean currents: the macro environment is like deep-sea currents, Bitcoin is the mainstream flowing through the coral reefs, while the market’s microstructure is those small whirlpools and undercurrents. So, you must first focus on the macro, then look at Bitcoin’s changes within it, and finally consider the opportunities for other assets.

I’m also watching for some risks; while leverage has been mostly cleaned up, there are still hidden dangers. For example, we previously discussed DAT (Digital Asset Trust), and we still don’t know how they will perform in a bear market, especially when they trade at significant discounts. Another risk is those "yield-generating stablecoins." We’ve already seen them decouple on Binance, which worries me because we’ve seen this story before. I estimate that the main players combined might have around $18 billion in scale, essentially risk arbitrage funds, but they are not prominent in the market, which makes me alert. If someone theoretically has a large amount of leverage or positions but is not visible in the market, that’s a red flag.

Raoul Pal: Yes, we’ve seen this before.

Chris Burniske: I’m even more inclined to call them "yield instruments" rather than stablecoins now. I think it would be better if the industry referred to them as "stable but risky yield instruments" instead of "stablecoins," as this would imply the risks involved.

Raoul Pal: Okay, the last question. My argument is that we have hardly seen any capital inflow into the crypto space from VCs or hedge funds; the only capital inflow comes from ETFs, and there’s almost none from other channels. Why is that? I know the AI boom has siphoned off a lot of funds, but why hasn’t crypto attracted capital like before? In the past, you were always inundated with fundraising in the VC space, but now almost no one is raising funds.

Chris Burniske: First of all, the bubble is indeed in AI, which has sucked away all the hot money. I think this is healthy for the overall crypto industry. At the same time, we’ve also talked about the oversupply of tokens. I believe the "token industrial complex" has reached its end, and people are starting to realize how it operates and its problems. I used to be a bit naive about this, and now I have to correct that thinking.

Now, the alarm bells for valuations have rung; everything must prove its reasonableness. This is not just a valuation issue; it also involves capital flow. For example, I often discuss with the Celestia team that they need to achieve this: as unlocks are completed and inflation decreases, their inflation rate might drop to 0.25%. If the demand for data availability is strong enough, it can create structural buying interest. BNB has performed well across multiple cycles because it has structural buying interest, and Hype is similar; Bitcoin and Ethereum are too. So, the future focus is on finding assets with structural capital flows.

Returning to VC, many crypto VCs used to bet on new concepts and models, but now these models face structural selling pressure due to the way tokens are issued. So everyone must return to the starting point and rethink the models. For example, should they issue at lower valuations? I’ve always been an advocate for low-valuation issuance. Or, in a better regulatory environment, could they allow 100% of the supply to be circulating from day one, like Solana did at the end of 2020? They unlocked about 80% of the supply in one day, and from then on, Solana had a crazy year because the market achieved true price discovery.

Overall, I think the crypto token VC model that has been popular in the past decade is now under pressure, and everyone must redesign it. We will see more investments in "truly profitable companies," such as in the stablecoin sector, or in more mature "traditionalized" sectors, or investing at smaller, undervalued scales. Another important trend is that the distribution channels for blockchain technology are being monopolized by big tech and big finance companies because they have tens of millions or even hundreds of millions of users who can directly drive traffic to these protocols.

We originally expected crypto-native distributors, but in reality, there are only a few, like Coinbase, Robinhood, MetaMask, and Phantom, with limited scale. Now, the distribution advantage is shifting to big tech and big finance, which is squeezing the opportunities for crypto VCs.

Raoul Pal: Will these middle-tier projects be acquired? For example, if you invested at a $20 million valuation early on, their final acquisition price might be $100 million or $200 million, rather than the tens of billions like before. Just like how Coinbase recently acquired Kobe’s project.

Chris Burniske: Yes, that situation will happen. I saw Arthur Hayes recently raising a fund that seems to be specifically for acquiring distressed assets. I’m not sure, but I guess his logic is that there are many mid-sized companies in the market that aren’t making enough money to be acquired cheaply, then integrated or repackaged for traditional finance. This could lead to a "crypto version of private equity" that specializes in acquiring distressed assets.

There’s no doubt that the season has changed, and strategies have changed. I’m now more inclined to build large positions in liquid, high-performing crypto assets. Venture capital can indeed bring astonishing multiples, but in terms of cash returns, the biggest gains often come from buying and selling large liquid assets at the right time, concentrated in a very short time window. My long-term view has always been that if you can time it well, the returns from liquid assets can even be higher than from venture capital, and the cycles are shorter.

Raoul Pal: I completely agree, and these opportunities are open to everyone. But the problem is that people must accept the fact that this strategy is very "boring." For example, Bitcoin is already a high-risk asset for those who are not Gen Z or millennials. So, holding Bitcoin and a few of its friends, allowing value to grow slowly through compounding, is the best strategy.

I think the key is always to maintain a certain exposure to Bitcoin while dynamically adjusting the cash ratio based on market opportunities, establishing a cash buffer that can be entered or exited at any time.

I’ve tried both ways. I’ve gone through the entire cycle. For example, in that round in 2013, I held all the way to the peak and then back down to the low, and then continued to hold until 2017. That time, I reduced my position too early; I really did it too early, selling Bitcoin at $2,000, and it went all the way to $20,000. In the last cycle, I hardly reduced my position; instead, I aggressively added at the lows, and that worked out very well.

In this cycle, I might reduce a portion of my position, but I will never sell off the majority because my time frame is long, and I believe Bitcoin is the best wealth compounding tool, and I can’t mess that up.

Recommended Reading:

Rewriting the 18-Year Script: Will the End of the U.S. Government Shutdown Cause Bitcoin Prices to Soar?

$1 Billion Stablecoin Evaporates: What’s the Truth Behind the DeFi Chain Reaction?

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