Crypto Market Commentary
14 April 2019
Doc's Daily Commentary
Doc’s Next Trade School will be This Friday
The 4/12/2019 Trade School will be posted in the Trade School archive
Our most recent “ReadySetLive” session from 4/10 is listed below
Much coins, Much Wow
Today I want to talk about a topic where I see the cryptocurrency industry diverging away from the traditional investment space – portfolio diversity. It is generally talked about that portfolio diversity is one of the best approaches to manage risk. By having a small portion of your account allocated across different asset classes and instruments, you limit the risk if one fails or a macro event tanks a heavily correlated market.
The challenge I put to you is to ask yourself – how many coins should be in your portfolio? How many projects do you believe will stand the test of time and be around 2, 5, 10 years from now?
Figure 1 – Doge knows what’s up!
This concept of coin/token diversity was typical chatter in the 2017 bull and to a lessening extent as the 2018 bear wore people down. Many commentators would talk through portfolios containing tens to hundreds of coins which was an excellent shotgun strategy in 2017 when everything was moving parabolic However this exposed people to significant risk and loses when the 2018 bear stepped in. We saw the market shift away from speculation, come back down to earth and realise that the majority of promises by ICOs could never be met and as a result Bitcoin’s dominance has continued to rise.
We continue to see that the entire crypto market remains heavily tied to the sentiment underpinning Bitcoin. I believe this is appropriate as Bitcoin has the longest lifetime (Lindy effect) and arguably, if it black swanned, we would see the cryptocurrency industry lose a vast majority of attention, investment and value, probably for many years to decades. When Bitcoin gets a substantial bid under it, money often overflows into the altcoin space. When the fear takes over, the altcoins experience increased sell pressure as people flee back into the relative safety of Bitcoin. This may evolve as more fiat-altcoin routes open up but for now, BTC is largely the crypto reserve currency. Furthermore, Ethereum acts as somewhat of a bell weather for altcoin sentiment having been an driving force behind the 2017 altcoin boom.
The market capitalization rankings you see on CoinMarketCap and others similar is an example of a massive prediction market. At the moment, Bitcoin dominance is around 55% which indicates that the market perceives a large chance that Bitcoin will survive in the long run in this industry. Similarly, Ethereum commands a 10% share of the whole market which represents 21% of the Altcoin market and is thus the most voted to survive in the context of the current market conditions.
The concept of efficiency of markets is an interesting topic. Essentially, a markets efficiency is a measure of how well the price reflects all the known information about the asset. There is another dimension to this on how closely the price follows the mean across all major exchanges. The recent Bitwise report showed that when you ignore the 95% fake volume data, the top 8 real volume exchanges almost always trade within a few pennies of each other on the BTCUSD price making it the most efficient market on earth.
The predictability of Bitcoin’s supply schedule and the perceived risk of the future sustainability of the fee market may be priced in years in advance. This can likewise be said for the MakerDAO platform where the interest rate, Dai issued and transaction volume data open for anyone to inspect. This is a truly unique value proposition and something which makes cryptocurrency significantly more transparent and understandable when compared to the complexity of the government issued fiat currency.
Figure 2: Snapshot from MakerDAO showing the issuance supply of Dai, inflation rate and the opening and closing of CDPs. No central bank is this transparent.
What this boils down to is that cryptocurrency introduces a transparency and actual performance metrics which are open to the world to observe. We see this in the incredible charts and valuation metrics produced by Willy Woo, Nic Carter and many others in the Bitcoin community. With natively digital currencies, exchange arbitrage becomes more trivial leading to an extremely efficient market.
This means that price is a genuine metric which distills all the information regarding performance, sentiment, technical development and market perception of risks today and in the future. It is a representation of the smart (and dumb) money evaluating the many data points into a single indicator of value. Of course there will always be periods of over-bought and over-sold due to human nature and thus identification of these zones becomes the point of maximum opportunity.
More on this in the future (target mid 2019) when we being out our RSC Bitcoin Network Fundamentals course – stay tuned.
Micro trends in 2019-20
So what does all this market efficiency business this mean for your portfolio allocations?
I believe that we will see micro trends emerge in the (assumed) upcoming bull run as well as a consolidation onto quality, at least in the early market. Personally I see the following micro trends as likely where we see a rotation of capital into these groups of assets based on external sentiment and developments in the space. I see the premier projects leading the market with some overflow of capital into higher risk more speculative bets as the trend continues. Depending on your risk tolerance and beliefs regarding the value of distributed ledgers, your portfolio allocations could follow these trends:
Cryptocurrency protocols with a fixed supply will be led by BTC and followed by currencies with genuine differentiators to Bitcoin such as Nano, Decred, ZCash and Monero. With a fixed supply and pre-determined issuance schedule these coins are Austrian economic dreams and will respond positively to any market forces revolving around deflation of the coin (halving events), inflation of fiat currencies or instabilities in central banks. They are a hedge against central bank currency control and exist in a hostile environment and must build immunity to this hostility – it’s a hard life and the ones which survive will be here to stay.
Privacy coins may have an even harder life. The Bitcoin community is hard at work implementing fungibility and limited privacy tech onto the Bitcoin network. In all honesty, as soon as Bitcoin becomes suitably fungible (i.e. no longer able to identify “dirty coins”) I believe privacy coins will struggle to justify their existence.
Smart Contract Platforms most likely led by Ethereum and will be heavily influenced by sentiment revolving around a) hype for successful release of features and b) actual performance and successful launching of dAPPS. These coins are a software first approach are will be the topic of much VC investment capital. Many smart contract platforms promised the world in 2017 and I believe that 2019-20 will be where many of these platforms drop off the map. Stand up and compete or go home.
Ethereum has an impressive lead in terms of developer capital and dAPPs released in the DeFi industry. The remaining smart contract platforms have this massive hurdle to get over in order to truly compete – although, any that do make it will see tremendous growth. Watch for new contenders who have been developing in the background such as Dfinity, Cosmos, Radix and Polkadot.
Funding of these protocols will be a hot topic. Many projects are running out of money and the bear has cost a lot from the warchests. All projects need capital and poor treasury management or unsustainable models will result in closed doors as time goes on.
Select utility tokens. Now whilst I am personally very bearish on the survivability of utility tokens in the long run (3+ years), markets are irrational and we will still see capital rotate into tokens through the next cycle. Many people (new and old in the market) will expect the moon and greed tends to cloud judgement. What I do believe is that we will see a concentration of capital on utility tokens that deliver an actual product and whitepaper projects will fade away. Nevertheless, these tokens could represent short exposure swing trade opportunities in the hype leading up to a product/feature release. Get in- get your fair share, get out back into quality.
Be aware, ICOs will be the target of regulators in the coming year, there is no excuse anymore and the actions of 2017 will not just disappear unanswered. Legal action and bankruptcy will be the outcome for many projects. Don’t forget that 99.99% of tokens have a central company and people accountable that can and will be shut down – they are NOT decentralised and thus NOT resistant to censorship. It is likely that we see a reverse trend where ICO’s actually continue to see sell pressure well after the bull has commenced until people finally capitulate and accept the token as worthless.
Security Token Platforms and infrastructure will see their own hype cycle although I do believe that the irrationality of the “utility” market will be fueled by IEOs, shillers and human greed. This may make STO’s a topic of hype further in the future although the infrastructure is being built today. When we start to see STO platforms gaining some traction, it will be an indicator of the dumb money finally making their play as well as the aforementioned consolidation onto quality. We are the smart money and we are looking at this space today during the period of maximum opportunity.
The preference here at RSC is always equity in companies however there may still be opportunities in the STO utility coin market. Just be conscious that real world companies/institutions are less likely to buy tokens as collateral so always be critical of the “staked to launch an STO” demand model as Polymath recently proved this is not quite working as desired.
You may notice the semblance of these trends to the RSC Three Pillars of Cryptocurrency, DeFi and Digital Securities. Coincidence?
With these micro trends in mind, think about which ones you see as having the most chance of survival and attraction of investment capital in the short (1yr), medium (3-5yrs) and long term (10yrs). When structuring a portfolio, it is useful to keep these allocations and timelines in focus. If you see a Cryptocurrency like Bitcoin being the global reserve in 20years, it should represent 80+% of you portfolio at that time. Perhaps it represents a smaller portion today whilst the hyper around smart contracts and utility tokens sees gains in these areas. It is ok to ride riskier hype waves so long as you have your exits planned in advance. And remember to rebalance and transition as the market calls for it.
Stay tuned for Part two where I discuss my own journey and how it has shaped my current thinking around a portfolio allocation and the RSC community fund.
An Update Regarding Our Portfolio
We are diligently working on providing you with our new RSC Managed Portfolio (V3.01) in the coming weeks. We will be posting iterative updates in the discord.
We intend on this portfolio being balanced between the Three Pillars of the Token Economy & Interchain:
Crypto, STOs, and DeFi projects.
We will also make a concerted effort to draw from community involvement and make this portfolio community driven, like our Portfolio call on yesterday’s Discord chat.
Thank you for your patience.
Here’s a sneak peek at the new portfolio:
Here’s our past portfolios for reference:
RSC Managed Portfolio (V2)
RSC Unmanaged Altcoin Portfolio (V2)
RSC Managed Portfolio (V1)