Cyclicality is an inherent trait seen vastly in nature.
The annual seasons, the Moon around the Earth, the water cycle, etc.
The crypto (and greater financial) markets are but a reflection of human psychology and emotions, and hence portray a very similar cyclicality. A sound understanding of these cycles can give you an immense edge when looking to trade (and invest) in an otherwise daunting market.
A quick look at the Bitcoin chart since its inception shows us that it is not very different. (chart below)
As seen above, Bitcoin has been through 3 cycles thus far and is currently in its 4th. But what drives this cyclical nature of Bitcoin?
The concept of Halving.
Halving is the phenomenon built into Bitcoin that cuts in half the number of Bitcoin that Miners are rewarded - after every 210,000 blocks mined (roughly every four years) thereby making it harder to obtain and increasingly scarce. This is Bitcoin’s way of implementing synthetic price inflation until all Bitcoins are mined and brought into circulation.
Below we can see the 3 halvings that have taken place so far and how the price of Bitcoin reacted after each one. (chart below)
This shows us that the demand for Bitcoin grows rapidly after every halving. Important thing to note here is that, halving events trigger so called “Crypto Bull Markets” where not only Bitcoin, but the market cap of all (at least most) other crypto rises as well. Below is the Altcoin market cap chart that shows the combined market cap of all of crypto excluding Bitcoin. (chart below)
Armed with this information, I’m assuming it should now be fairly easier to time entries in the market to optimize for higher returns. But then how does one know what coin/token to buy? This leads us to the next part of the article — Narratives and Trends.
Valuations in crypto are largely driven by trends and narratives. When enough number of people get behind an idea or an ecosystem, we tend to see a meteoric rise in its valuation in a fairly short span of time.
Exhibit 1: DeFi (Decentralized Finance)
The summer of 2020 saw the initial explosion of DeFi into the crypto ecosystem. In short, DeFi promises to be a new frontier of finance where borrowing, lending and everything in between happens trustlessly without the need for a middle man, ie. a bank.
DeFi protocols like Chainlink ($LINK), Compound ($COMP), Aave ($AAVE), Uniswap ($UNI), etc., saw an average increase of 1500% in their prices in 6 months. (charts below)
Exhibit 2: Layer 1 Protocols
2021 was the year of Layer 1 protocols. In brief, L1s are blockchains that host decentralized applications and serve as the base layer for other projects to build upon. We saw protocols like Solana ($SOL), Avalanche ($AVAX), Terra ($LUNA), Fantom ($FTM), etc., explode in price as people came to realize that these protocols are the building blocks for the “avalanche” of innovative products being built in the space. They saw an average increase of 20,000% in the span of a year. (charts below)
Exhibit 3: Gaming and Metaverse
I’m fairly certain that everyone reading this has heard about the metaverse given all the attention it’s garnered off late. And as you can guess, this has been our most recent narrative. Projects in this space went on an absolute tear in 2021 and I believe will continue to do so over the coming years. We saw Decentraland ($MANA), Sandbox ($SAND), Axie Infinity ($AXS), Enjin ($ENJ), etc., perform to the tune of around 12,000% in a year. (charts below)
As you can see, crypto is extremely narrative driven. Neither DeFi not Gaming/Metaverse projects in the space are anywhere close to being ready for widespread global adoption. But the valuations paint a different picture. People here are willing to bet on projects that “could” be the next big thing.
And that’s how important it is to be early. The earlier the better.
But how does one spot a new narrative? And how do you know if it has potential? Is it worth investing my time and money in something that “could” be big in the future?
Cue — Asymmetric Bets
(All content presented in this blog are my sole ideas and should not be the basis for any of your financial investment decisions. Tl;Dr — I know nothing and am just rambling. Make of it what you will.)
