CryptoBull Capital June 2022 Update

Outlook

Fundamentals are as Strong as Ever

No one can predict future prices. I instead like to focus on fundamentals and I can tell you the general population sentiment has a large divergence from one you will experience attending crypto conferences & seminars.

The past few months, I’ve been boots-on-the-ground meeting with digital asset teams at Consensus Austin, BTC Miami, and NFT NYC. At each, I’ve interacted with some of the smartest people in the world collaborating on building disruptive technologies. Projects are launching, networks are getting faster, more reliable, more decentralized and more secure, and existing problems such as impermanent loss or cross-chain movement of assets are seeing innovative approaches to reach a solution.

The space is a hotbed of innovation and most large conferences that used to attract sub 1,000 individuals now each have 15,000 - 30,000 attendees.

Macro Overview

Stocks are Down and Digital Asset's on Sale

Let’s start with the obvious, markets are down. It’s not just digital assets, in the last 90 days the DOW has decreased 11.8% and the S&P 500 is down 15.5%. If you have exposure to risk assets, you’ve felt the pain (I’m there with you).

On a macro scale, there’s a lot of speculation as to what happens next for the US economy. Comprehensively covering this could end up as a short book, so I’ll just summarize that my opinion is:

1. If we do enter a recession, it could be shorter than people think.

2. To some degree, a recession is most likely priced in the broader markets.

Below, I’ll elaborate on why I believe this is a great time to be aggressively increasing your allocation in the digital asset class and we’ll explore some of the drivers for price depression.

Bullish

Stablecoin Holdings are at an All-Time High

From a metrics standpoint, the total digital asset market-cap is slightly lower than it was a year ago. Despite that, stablecoin dominance has been growing (from 3% of total market cap to an incredible 15%).

I like to compare the stablecoin market to the cash position in a brokerage account. Most people would agree that it doesn’t make sense to pull your cash out of a Fidelity or Ameritrade account. This is because for wealth builders, the general use of cash is to be the ammunition used for re-deployment into stocks in the future.

Given that context, the increase of stablecoins to 15% of the total digital asset market-cap signals a few things:

1. Many would-be sellers have already sold (if someone’s a seller, who’s left that hasn’t sold yet?).

2. Much of the capital that’s exited long-positions still remain in crypto (via stablecoin positions) and has not pulled out to Fiat.

3. Conclusion = There’s a significant amount of capital on the sidelines ready for redeployment.

The chart below shows how market prices tend to move in a counter-cyclical manner to stablecoin dominance.

My intuition and experience tells me that once capital starts re-deploying from stable to non-stable coins, it will act as a catalyst for a strong rally. $150B is a lot of firepower.

Indicators

The Stocks, Fear, and Forced Selling Behind This Buying Opportunity

Stocks are down. There’s still a strong correlation between Digital Assets and public stocks. Drivers of the stock decline include:

1. Global Tension and Recession Concerns. The war in Ukraine has resulted in a domestic supply shortage of oil that has driven prices upwards. Subsequently, institutional & retail capital has moved away from growth assets and towards income-generating assets as they anticipate a recession and how that might affect consumer behavior. In a recession, the average person may not have as much discretionary income, especially if accompanied with increased inflation. People may not be able to add as much to their investment portfolio and may allocate even less to assets susceptible to volatility. The fear of an extreme scenario has driven markets lower.

2. Investor confidence. There have been some expensive lessons learned this year in digital assets which have caused a-lot of confusion and general fear. Terra Luna, the algorithmic stablecoin failure, rocked the markets and destroyed approximately $60B of value almost overnight. Digital Asset investors seem unclear on how such an event could happen and general fear has been exacerbated by a lack of understanding of how to differentiate between UST and other projects/ stablecoins. Note: many stablecoins have solid fundamentals and are fully-collateralized.

To further add to the fear, select digital asset funds and custodial solutions have frozen withdrawals as they try to prevent insolvency (more on this below). The combination of all these things can be reflected in the Fear & Index score, which was at an all-time low of 7 recently (low = poor sentiment).

3. Forced-selling. Many funds and custodial solutions in the digital asset class have been “caught swimming naked” (to quote Warren Buffet). Prolific over-leveraging among many of the biggest investors in the space has led to a house-of-cards scenario (Three Arrows Capital, Celsius).

I’m going to resist getting on a soapbox here, but this is why we don’t have a leverage-focused playbook at CryptoBull Capital. From my point of view, it seems border-line impossible to price-in-risk at a level of accuracy which would justify utilization of large amounts of leverage. The digital asset markets are too new. Yet here we are, suffering from in-organic price depression due to firms utilizing massive layering of debt to hold new-synthetics of already completely new financial instruments.

This use of leverage has caused a cascade of margin calls, creating non-organic selling pressure as positions get liquidated. In short, funds are being forced to sell at prices they would never choose to sell at.

Summary

What we are experiencing right now is termed “crypto winter”. It’s not fun, but I will say a few things:

1. Anyone I know that has made a fortune investing in any asset class has had to deal with volatility. Deploying capital during bear markets is where most of the wealth in digital assets is made.

2. The data is overwhelming on our side that this is not the end of the world, not the end of broader financial markets, and not the end of digital assets. If you believe that, then you probably would conclude this is a great opportunity to increase allocations to the asset class.

As always, your feedback is helpful and if there are any topics you’d like to see discussed in the future, suggestions are always welcome.