The Poetic Cycle

During the decade+ long secular bull market ("the everything bubble"), crypto markets have experienced their own multiple intra-bull and bear cycles. We are now seemingly in uncharted territory, with crypto experiencing its first downturn in parallel to a broader macro bear market and monetary policy change.

Anyone in the crypto space prior to 2018 has experienced the psychological unwinding of a bull market into a prolonged bear market, and what that entails. They are hardened in this regard, similar to anyone ~40+ years of age that experienced the 2008 financial crisis and had an eye on markets. Ideally, lessons were learned but unfortunately, humans often have short attention spans and think things are "different this time" after applying loads of mental gymnastics and defense mechanisms. In general, market participants have a long/bullish bias. They want to see companies grow and do well and see technology scale, which is beneficial to human progress, but can also cloud judgement and go too far, especially in "easy money" periods. It then becomes harder to see just how low assets and valuations can go during corrections and how long it can take for the market to find equilibrium again. There is always a long denial phase.

We often write about how psychological market unwinding, once in motion, ends up eerily representing prior/historical corrections, as the market goes through similar peaks and troughs and emotions. Sometimes in the moment it's very hard to notice this, and relief rallies seem to feel uniquely hopeful every single time. Throughout the 2021 rally and melt-up, we bet on this outcome, and took action to de-risk during various bouts of euphoria and high performance, which is easier said than done. In hindsight, it's all so clear the top was imminent when you just take a look at headlines 9+ months ago. In the moment however, it can always feel like "another leg up" is warranted, as irrational as things get. Much of our very overt, constant reminder to ourselves to strategically and consistently take profits was due to experiencing prior crypto hype cycles and seeing just how fast euphoria would turn into dismay, and hope into fear.

With all that said, what would be a most poetic conclusion to this bear market, would be crypto markets still bottoming in a similar fashion to prior cycles and not being uniquely impacted by macro narratives in a way that dents the broader historical trend. So far, it is indeed playing out very similar to other cycles – eerily so. If this plays out, it would show that market psychology truly is fractal, which is somewhat comforting in a way, like some kind of invisible law of nature that guides market behavior – especially in the less tarnished-by-regulation crypto markets. It would also show that despite crypto being a relatively nascent market compared to traditional finance, it was still liquid and legitimate enough to represent a true market cycle, and hold up even in times of broader macro fear. Crypto would come out stronger than ever and perhaps shutdown the naysayer "going to zero" crowd once and for all.

Where do we stand on this? We think it's very possible, if not likely, that crypto holds up in relative terms to its previous cycles, despite macro conditions. This is the scenario we are a largely betting on, especially having a front row seat to all the incredible projects building in the space and talent entering. While correlation between Nasdaq/S&P and BTC is very high and will likely remain so (we never believed in "decoupling"), crypto will continue to oscillate and align with the eventual equities bottom in parallel. Crypto price action acts as beta to equities in relative terms (i.e. deeper corrections, bigger/faster rallies). We believe by the time equities bottom, crypto prices will have also had their journey to typical correction percentages with an end point not much different from previous cycles (give or take ~10-20%). Perhaps more importantly, we believe once a bottom is met, that crypto will be the fastest horse off lows and we are very well positioned to capture this upside.

This general fractal market thesis has been a great benefit so far in preventing the dogmatic belief in the now debunked "supercycle" narrative that went around much of 2021 and early 2022, and helped us instead de-risk at the right time frames. From here, it will also serve as a guide to re-deploy back into markets at deep value. As we've mentioned in previous updates, we have already begun accumulation and plan to continue slow and steady deployment over the next 9-12+ months.

Just as permabulls overshot prices in the culmination of the bull market, "zerohedgian" doomsday permabears will eventually undershoot prices and get complacent at overly beaten-up lows. We're not there yet and perhaps "when" is another question – and a much harder one to answer. But we believe this poetic cycle has a high probability of playing out – where crypto shows impressive relative strength to equities, remains fractal, and leads the eventual market cycle shift through headwinds, coming out stronger than ever.

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