Last week, we ended our portfolio review with a little foreshadowing of what was to come:
Looking ahead, some market commentators have argued that Bitcoin’s weekly close below its 8 week moving average ($59,000) could portend a more aggressive move by Bitcoin to the downside this week to where the 20 week moving averages are (closer to $50,000).
Perhaps the crypto gods were listening to our little chat, as Bitcoin dropped as low as $53,730 by Friday and Saturday after ending the prior week at around $58,700.
From the prior peak of $69,000 just a couple weeks back, this represents a peak to trough decline of around 22% in three weeks - which in typical financial markets would officially be considered a bear market.
In crypto, however, it’s important to realize it is just another day in the office.
For many new crypto participants, volatility of this magnitude can be quite fearful. It is extremely difficult to hold on to your conviction on days like these particularly if you haven’t done your homework.
Many new investors choose to get out of the markets and end up fulfilling the typical meme of buying high, and selling low.
There are, of course, no guarantees that the markets will go higher from here, and if we are in a long downtrend, then of course holding on to your positions on weeks like these would be in vain.
However, I believe that 1) we are currently in a long extended bull market cycle that has not yet peaked, and 2) that we will go through multiple 20% to 30% drops from now till the cycle peak.
In this week’s review, we’ll take a look at the first argument:
Current Market Cycle Far from Peak
In the chart above, we see the vertical axis as the return on investment in Bitcoin as measured from the market cycle bottom in logarithmic scale, while the horizontal axis is the number of days since Bitcoin reached its cycle bottom.
The purple line was the first market cycle that Bitcoin ever went through which peaked fairly quickly within 246 days, but it also generated the highest rate of return of any market cycle - with return on investments coming to 550x.
The next cycle is reflected in the blue line which peaked in November of 2013. As you can see - the return on investment is not as high as the first market cycle, but the number of days from the bottom to the top has lengthened significantly from 246 days the last cycle to around 745 days in the second cycle. Returns also “diminished” slightly, to only 470x your money.
The most recent cycle (in green) peaked in December of 2017 saw an even longer time period before reaching its market peak, taking 1,069 days from the bottom to the top, and returns were just 100x from the bottom.
What I would argue is that as Bitcoin has continued to attract more investors into the space, the time it takes to reach a bubble top will take longer, and the returns that can be reasonable expected of an asset that is now worth a trillion dollars will be lesser.
In other words, we should expected lengthening cycles and diminished returns.
Looking back at the chart, the red line which reflects the current cycle that we’re in, shows that 1) we have only just begun to exceed the number of days it took for the last cycle to peak, and 2) we have much more room to grow in terms of the returns that this market cycle can achieve - although it would probably be less than the 100x achieved in the prior cycle.
If we believe in lengthening cycles (or even in the concept of a market cycle) - one could argue by looking at the chart that we are far from the end of this bull market cycle - and volatile weeks like these should be a reason to add more risk as opposed to taking risk off the table.
Portfolio Review
As the title suggests, this is the first time that my portfolio balance has dipped below my cost basis since I have fully deployed my capital. To compare against my original cost and portfolio allocations, please refer to my first post here.
As of 7pm ET, the portfolio is down 2.8% on an unlevered basis, and down 7.7% on a levered basis. However, this masks the intraweek volatility during the thanksgiving break. On Saturday, I did a quick refresh of my stats, and found my portfolio to be down 20% on a levered basis at one point.
While the broader crypto market tanked, Ethereum continues to stay fairly healthy and is still in positive territory at around +6% on my portfolio. Given that it makes up close to the majority of my portfolio - that has helped limit the mark-to-market losses this week.
Elsewhere, my losses are driven largely by my number 2 and 3 positions which are Cardano and Polkadot respectively. Cardano is down around 21% from cost, while Polkadot is down around 20% as well.
In other notable mentions, metaverse token Sand continues to hold up extremely well as it is up 192% since I picked up the token. However, it makes up only 0.08% of my portfolio, and clearly isn’t moving the needle as much.
Concluding Remarks
Despite the losses this week, when I look at the increasing number of participants, investors and developer activity in the space, I would argue that the crypto ecosystem continues to show signs of being a fairly healthy market.
While we’ll continue to have significant volatility in the space, it looks like we are far from the market cycle top and should have more room to grow.
Hope this was entertaining, and see you next week!