An Update on Crypto Markets and Personal Direction

I’ve never been one to write in a blog-related style nor share much regarding personal situations. I don’t believe my experiential position is adequate for telling truly insightful stories. Nevertheless, some thoughts are due for the markets and what I want to be writing about in the near future.

Macro

The Macro looks bad but won’t be as bad as it seems.

I’ve never been a macro person — opting into the very grounded and very self-righteous belief that macroeconomists are always right in the direction but never on the timing. Frankly, I don’t believe anyone ever gets it right on timing hence firms that make themselves out to be armchair anthropological gods do little to actually profit vs everyone else but certainly get the most invitations to be on television and present in economic conferences. Since the dawn of COVID unfortunately the markets have largely been beholden to macro events with everyone’s eyes glued to FOMC meeting notes trying to understand how they can one-up the US central bank as it decides whether to shoot themselves in the heart or the lungs.

Bottom line is that the free money era is currently in steep decline, interest rates will continue to climb and growth + sectors that relied on printing will continue to decline at the pace of rapid spikes down followed by temporary relief spread throughout. The question is no longer when the fed will turn hawkish but whether that hawk is a wild beast or from a zoo (my bet is on the zoo). Neither outcome is good. I don’t foresee the next 8 months being a good environment to DCA into your favourite tech companies that are -80%. However, if you are a legitimate practitioner from the house of DCA — please continue to buy into real companies with real cashflows: Google, Apple, Amazon, and Microsoft. My personal bet on Palantir is listed because this is my article, but also the pending geopolitical state of the world supports Palantir in making a boatload of money.

As I am not a macro expert, there are currently a few narratives being watched by people far smarter than I: The corporate debt crisis, the potential collapse of the European Central Bank and EU, and apparently auto loans are having their own “08 moment”.

My belief in markets overall remains positive, yes the next year or maybe two will continue to be bad and we can let the macro traders continue partying on but eventually, we will make it to the next bull cycle where everything will be good again. Stack cash right now and be ready to hunt once Spring comes back.

TL;DR: Times are bad but get a job and try to make as much cash as possible. Get the cash ready to buy severely depreciated assets, you can DCA or wait a few months to see if the market is ready to stop imploding from government incompetence.

Defi Opportunities

Back to the actual world of crypto. I actually see a great opportunity to buy heavily depreciated Defi governance tokens in projects that have proven utility or mechanisms that can support scale without ponzinomics like Terra. Here is my list and the prices at the time of writing (ToW), they also have quite good tokenomics given that FDV isn’t a multiple higher than 2:

  1. Convex Finance ($50 peak → $7.80 ToW)
  2. Compound ($854 peak → $55.83 ToW)
  3. Aave ($632 → $90.06 ToW)
  4. Maker ($6012 → 986.82 ToW)

The reasoning is quite simple: TradFi wants into crypto, hell crypto-natives are racing to create funds and aching to deploy capital at new generational lows. The first gateway to enter will be Defi projects, particularly the governance tokens. The listed projects all have great Mcap:FDV ratios, working projects with functional utility, and also funds like power, so getting to vote on proposals is their view of “bettering the ecosystem” through their involvement.

I haven’t looked deeply into each whitepaper to figure out whether the value capture happens exactly at the protocol or token level, frankly, I’m a bit lazy to validate this hunch too much but I want to put this into writing as an obvious trade and will gather more evidence down the line. See you in 2024.

NFTs

Surprisingly NFTs haven’t completely died yet. I had an interesting thesis I wanted to witness: In the instance that the underlying asset such as ETH or SOL depreciates heavily, would the NFT price rebase into dollars or remain priced in crypto? To put it into English, would a monkey Jpeg worth 100 ETH = $400,000 given that ETH is $4000 still be priced at the $400,000 tag if ETH declines to $1000 or remain at 100 ETH? As we can see from the graph below on BAYC floor prices from the last 90 days

Prices did fall from a high of 149E to their current floor at 88E, but it’s holding consistent
Price of ETH during the same time period,

This is actually quite fascinating as it disproves that NFTs were by nature purely speculative vehicles and community forces indeed lend a perception of value. Apes together = strong.

Yes, the dollar value fell in conjunction with the fall in price on ETH but the fact that NFTs didn’t go to 0 immediately proves that they aren’t simply a leverage slider on crypto but actually might hold on their own as an asset class that currently traces its underlying asset. Does the same apply to non-blue chips or new kids on the block such as Azuki?

Azuki also had a near 50% drop, also holding the line

I won’t look at every collection on OpensSea but here is Moonbirds as well

30E peak to currently 22E

The conclusion was that we saw declines but the declines in NFTs weren’t amplitudes above their underlying asset. Certain collections even have spikes in price based purely on community speculation and independent trading patterns that disregard the performance of crypto. The only firm conclusion I can say at this stage is that NFTs are certainly going nowhere and will definitely come back stronger next cycle. As to whether they will stand as a flight for capital preservation during an apocalyptic event or worse; an extended bear market is too soon to tell.

Hubris vs Conviction

We had a few instances of complete Hubris that I found incredibly valuable as learning opportunities.

The implosion of 3AC which used non-collateralized loans to margin long crypto to their demise and the creditors that were brave enough to lend hundreds of millions to billions of customer funds is an insane yet exemplary example of the confidence game.

This was not the only example nor the first of its kind, it led me to wonder the following question:

Where is the line between hubris and conviction?

If we look at some of the greatest trading opportunities within the past 5 years, the best examples were:

  1. Holding Bitcoin from $9 to $69,000
  2. Holding Tesla stock from $6 to $1200
  3. Holding Dogecoin from $0.011 to $0.77

These were simply three prominent examples that came to mind, and where one could reason there were several reasons these prices exploded as they did, a part of me wonders whether the difference between conviction and Hubris is whether or not the idea simply worked out or not.

Hardcore early adopters or believers will say that they always saw this coming. We’ve heard the tales of basement tech-bros mining Bitcoin dreaming of a new financial system in 2011, families that sold all their assets to buy Tesla stock and Dogecoin millionaires that might’ve gotten lucky because they liked the dog meme. I find it ridiculous to juxtapose these principles in stating that 3AC were conmen or that Do Kwon was a scammer, to me they were also believers and heroes of their own stories that were fighting important battles.

There may exist a world where Tesla did not have every advantage in the book to help them succeed nor the retail marketing efforts that drove hysteria to prop their stock at 100x earnings valuation. There may exist a world where Bitcoin was shut down by central authorities long before its cult could prosper. There may exist a universe where Doge was never more than a meme. In contrast, there could also be a situation where Terra did indeed reach critical mass to survive without its egregious emissions structure or 3AC’s supercycle did come to fruition. The people at the helm of these ideas or the ones who all-inned their savings at the very beginning often stood by their thesis as “conviction”. I believe that the line between that and Hubris is often just the resultant conclusion that is grandfathered by the onlookers.

My conclusion for this thought-nugget is this, a conviction in an idea is good, but more often than not we must realize that even though we can find a thousand reasons why an idea should succeed, in the event of its failure there will be a thousand reasons dug up for why it failed. We cannot afford to be blind-sighted in good ideas once the market has turned against us, we cannot be arrogant in ever thinking our conviction isn’t hubris. The best way to trade may indeed be Sorisian, recognize and pull out of failures fast but double down heavily on winners, and do not marry ideas. At the end of the day, the market decides who is correct and who is wrong by the dollars in your account and the debt in your legal proceedings.

Here’s to the crazy ones.

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