Patience trumps all
"Patience trumps all"
- Reflection on June's crypto market
Trading is a battle with emotion, according to a genius I know who managed a billion-dollar fund. Despite being under 30 years old and having accumulated massive wealth during three bull markets, he believes that mindset is the most important factor in his trading journey. This is why I want to start by discussing it.
Long-termism
I'm not sure when it started, but my friends who have made significant profits from trading appear to be taking a break, enjoying life, and not worrying about market trends. Are they no longer motivated because they are financially free? I don't believe so. They understand when to avoid market fluctuations and be "friends with time." They approach daily fluctuations with a long-term perspective which can be more challenging than focusing on the market. Consider being fully invested when the market suddenly crashes or being empty-handed when it suddenly rises (like in June). Those with a negative mindset tend to chase rises and falls. However, from a long-term investor's perspective, these fluctuations are just tremors during a bull market. They may have already established positions within the lowest range and avoiding the market is an effective way to avoid fear of fluctuations.
There are also friends who spend 12 hours a day in front of screens and phones, never missing a Twitter message, chasing short-term gains every day. I must admit that sometimes I envy their ability to double or even triple their trades in a day. However, I believe that most short-term traders are unable to outperform the market, and their overall profits are difficult to sustain.
This is why I emphasize not relying too much on various WeChat trading groups and Alpha Groups. Most information is emotional noise, which can interfere with independent thinking and judgment.
Bull Market Not Yet Here, PvP Inside the Market
After two months of bearish trend, the overall market recovered from the decline in just a week and Bitcoin returned to the $30,000 mark. The market's interpretation is partly from a macro perspective, seeing the rebound as a result of the US suspending interest rate hikes, and partly from a news perspective, with the previously negative news of SEC suing major exchanges being digested and leading to a retaliatory rebound.
Both perspectives make sense, but can also be refuted. The macro perspective can be seen as a positive due to the suspension of interest rate hikes, but can also be seen as a negative with the risk of economic recession due to increased terminal interest rates.
The positive news from the perspective of news can be attributed to the launch of new compliant exchanges by major players, but on the other hand, existing compliant exchanges like Bakkt already have low trading volume, so would adding a new one really attract more funds?
Therefore, from the perspective of long-term investors, these macro analyses and news are always known results used to explain the reasons, and cannot be used as a basis for judgment. Or in other words, these factors can affect investor sentiment and market volatility, but long-term investors do not care about the impact of changes in sentiment.
Zooming out, we are still in a long bear market and the number of stablecoins has not increased significantly. However, it is already likely that we have passed the lowest point of this bear market cycle, as shown by the data on Bitcoin's NUPL on-chain (blue).
Therefore, for long-term investors, decision-making becomes relatively easy in the second half of the year: buy on dips, hold and wait. Sudden changes in sentiment, such as SEC policies, exchange FUD, and other risk events, are all good opportunities to buy on dips. All macro policies, changes in news, and other negative reasons that seemed to be valid at the time can be interpreted as opportunities to add positions when the bull market comes. Conversely, the bull market will also have positive reasons to add positions.
The capital orientation of PvP in the market and the low liquidity after the withdrawal of market makers provide an excellent environment for market makers. The strong performance of platform coins created by former 3ac team and new EDX-listed assets such as BCH indicates that investors' attention in the bear market is more easily focused compared to the bull market. The popularity of meme coins is also a reflection of the lack of innovation. If we look back to the previous bear market, it was the IEO and PoW tokens in early 2019.
Finding Alpha is challenging
In the previous cycle, the former biggest Alpha was the public chain section, but now its valuation skyrocketed by VCs in the primary market. Various Rollups have already launched, zkEVM that has yet to launch, and Raas (Rollup-as-a-service) left opportunities for the secondary market that was equivalent to buying ETH. The Move chains also reached the upper end of valuation in the primary market. The public chain is a good track with high certainty, but not an Alpha any longer
Let's first look at several major categories in Ethereum (including EVM):
DEX: Uniswap's product innovation is excellent and surpasses the same track in terms of innovation. However, it cannot empower tokens itself, and there is no possibility of improvement in the short term. Therefore, innovative projects based on V4, such as utilizing Hook's composability, are better options. The dex based on Uni V3 is taking a road of independent development after improvements, such as Trader Joe, Maverick, etc. V4 will greatly increase the cost and threshold of independent development, and it is not as good as becoming a member of Uni eco for new projects.
LSD/LSDFi: The driving factor for the large-track opportunity LSD is that Ethereum will switch to PoS, and ETH will become an interest-bearing asset. A considerable number of users pledge ETH to exchange for LST (such as stETH). So what is the purpose of these LST? Therefore, DeFi degen created two categories of products. The first category is to generate stablecoins by over-collateralizing LST, represented by Lybra, Prisma, etc. The second category is Pendle's Interest Swap, which trades income rights.The problem with the first category of over-collateralized stablecoins is that the stablecoins generated by collateralization need to have scenarios. The largest on-chain stablecoin exchange, Curve, is doing its crvUSD business and can also use LST as collateral. It is difficult to imagine new players toppling Curve in the same track.
The second category Pendle targets a new market, so the market has given a higher ratio in terms of valuation (TVL/MC) than the first category. However, the problem is that the market ceiling is lower, and the current market value is already a reasonable pricing range, making it difficult to have excess returns. Previously, the best opportunity for investing in Pendle was to seize the logic of Pendle using LSDfi for a turnaround.
Derivatives Dex: After GMX, no new models have been seen yet. Some high-performance Orderbook Perp on-chain will be launched in succession. Overall, further observation is needed.
NFT market: The market still lacks innovations and attraction. The most recent event is the Azuki Elementals sale, which I don't think is very optimistic. This sale form is actually a reappearance of old fans and does not bring in new players and users. I prefer the approach of Pudgy Penguins, which sells toys on Amazon to expand outside the circle of users. Although the amount of money raised may not be comparable to Azuki, one is to absorb money from within the circle, and the other is to expand outside customers. From a business logic and emotional point of view, I support the latter. By the way, the collapse of BAYC's price is also the result of overly harvesting fans. Count how many different series of Yuga NFTs and Tokens have been sold, knowing that these are all assets that absorb money rather than generate cash flow.
Other new tracks such as Game/Onchain Game, ZK, Social, etc., either tell stories to raise VC funds or require the heat of a bull market to catalyze them, and are far from secondary market trading opportunities.
In summary, as the largest and most prosperous Ethereum ecosystem, innovative tracks have been overhyped by a large number of VC funds in the bear market, and it is difficult to find Alpha opportunities to lay out first-line tracks in the secondary market. For example, Uniswap's Dex, Aave's lending, Lido's LSD, etc. are all beta markets; limited opportunities lie in the second-tier leaders of the above ecosystem, such as the ecological projects of UniV4 and LSD's LSDFi, which belong to the second-tier leaders. If the ceiling of first-tier leaders is the top 30 in terms of market cap ranking, then second-tier leaders may only rise to around rank 200-300.
Some Further Thoughts
1. The Fill-in-the-Blank Question of the Bitcoin Ecosystem
There have been two waves of hype in the Bitcoin ecosystem this year. The first is the Meme type, mainly consisting of BRC20 and Ordinals. The hype logic corresponds to what I wrote at the beginning of the article. It is an emotional hype of the hungry on-chain funds in the bear market, where innovation is lacking. Compared with Ethereum memes, Ordinals can also borrow from the NFT story, belonging to a combination of Meme and NFT, which can have more ways to play. Therefore, there may be phenomena like Doge and Shib that become memes. The second is the Layer2 story of Stacks, which is repeatedly pulled and dumped (P&D) in the secondary market, with the narrative of Bitcoin halving.
From the logic of market capitalization, the Ethereum ecosystem ETH corresponds to the bottom-level infrastructure and value storage, Layer2 corresponds to the computing platform of applications, and DeFi/LSD/stablecoins/NFT corresponds to various application ecosystems. The market capitalization space is ETH > Layer2 > first-tier leaders of application ecosystems > second-tier leaders. Because Bitcoin has the highest market capitalization, the overall ceiling is also the highest. But besides Bitcoin, what applications should be built on it, and what kind of middleware and infrastructure do we need to build such applications? The logic of Stacks is to make Bitcoin better copy a set of Ethereum applications. Ordinals/Brc20 are applications with heat but unproven persistence, and the middle layer is centralized accounting. The logic of Lightning Network is more self-consistent, which is both native Bitcoin and decentralized, and it has native application scenarios such as payments, orderbook dex, etc. But progress is really slow. By the time Lightning Network applications can be used on a large scale, the next bull market may have been missed.
2. Cosmos Ecosystem
It is actually difficult to say that the projects on Cosmos constitute an ecosystem, or that each project is creating its own ecosystem. Non-composability is much greater than composability, and it also leads to each project (each chain) having to repeat making wheels. Although they are all repeating making wheels, the difference is that each Layer2 of Ethereum is almost the same set of wheels, while Cosmos uses different ones. In addition to having high token inflation, it is difficult to find a unified standard to evaluate projects in the Cosmos ecosystem. For now, it seems to be more of a price game. For example, Neutron's public offering price of FDV at $160M has a price advantage compared to Sei's $800m and Berachain's $400m. Therefore, participating in Neutron's public offering or buying below 0.4 in the secondary market is a good choice.
The evolution logic of Cosmos technology is still under study, and experts are welcome to enlighten us.
Conclusion
To summarize, the market as a whole lacks investment opportunities that would dramatically increase returns. For long-term investors seeking stability, the recommended strategy is to wait for the market to hit low points due to volatility, minimize the cost of holding mainstream assets, and gradually increase investment positions while maximizing returns. More aggressive investors and those willing to take on greater risk can pursue opportunities in second-tier projects and meme assets driven by emotions to potentially achieve higher returns. Still, they should do so while managing the risks associated with such positioning.