đBloody Mondayđ
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To Operators,
Blood on the streets. The second big dip struck the crypto market yesterday with double digit percentage losses posted up and down the stack.
However unlike Alderaan, the market picked itself up, dusted off the planetary chunks, and kept on trucking. Last week I talked about Bitcoinâs halving cycle and the bull/bear cycle within it. This week I want to continue that thread and show you why these big dips are normal and just part of the #game.
âHistory doesnât repeat itself, but it does rhymeâ â Mark Twain (probably)
Bitcoinâs growth has been parabolic since it was first created in 2008, and with it weâve seen some (expected) spectacular dips too. Each bull cycle, marked by a halving, has had its share of large declines.
The bull cycle that occurred after the 2012 halving saw 4 major dips with an average loss of -38%. Note the massive magnitude on the first dip, that is some serious volatility.
The bull cycle that occurred after the 2016 halving gave us 5 major dips with an average loss of -29%.
The current bull cycle weâre in, started by the 2020 halving, has shown 4 major dips with an average loss of -20% so farâŠ
If you combine these charts will the bull/bear halving cycles, you can start to hear the rhyming. Bitcoin is a very mechanical asset in terms of price action. The larger halving cycle drives the macro movement of Bitcoinâs price, and smaller fear/greed cycles within bull cycles drive sell offs that shake out weak hands.
At its surface, Bitcoin can appear extremely volatile, but itâs predictable. Despite the huge dips, Bitcoinâs return since 2016 has been 12,331%.
Volatility =/= risk
Volatile assets are risky assets, right? Wrong. Risk is the chance of permanent capital loss.
Bitcoinâs price is highly volatile, just look at the charts above.
In the short term, the risk of losing money permanently is probably pretty high. If you bought Bitcoin 3 days ago and had to sell today you took a 20% haircut for the trouble. Yikes.
In the long run, things change dramatically. Volatility no longer matters. If you take a 20+ year look on Bitcoin itâs either going to $1M or $0, thereâs no in-between. Who cares if the price dumped 20%, 40%, 90% this year? No one does, because long term, those moves are extremely small compared to the upside, and if you think Bitcoin is worthless you probably didnât buy any anyway.
By lengthening your time horizon and reducing Bitcoin to a binary outcome, the risk of permanent capital loss, or simply risk, is much easier to manage. You either believe Bitcoin has a significant place in the world, or you donât, and that in turn fuels a buying decision. Daily price action is just entertainment.
Tl;dr
Bitcoin likes to crash. Itâs had major movements downward in every bull cycle and will likely continue to do so in the future. This bull cycle isnât over yet, and we certainly will see more spectacular losses before Bitcoin hits its next all time high.
Altcoins generally follow the leader, and as long as correlation coefficients remain positive across alts, they will follow similar dumps though with much more amplitude.
The silver lining here is that I expect Bitcoinâs volatility to compress as it matures. The trade off to this obviously is upside. Those that can stomach a -70% drawdown get to reap the 12,331% returns. #BTFD and hang on.
Forward and upward.
The Portfolio Rundown
Dips are always fun. I ran the portfolio numbers today which means the data is reflecting the marketâs bounce off the lows. I did wake up to a nice -20% (unrealized) loss on Tuesday.
Bitcoin moved downward significantly but the notable movers this week were Cardano and Chainlink.
Link posted a brief -46% loss but quickly traded back up into the $27 range. Regardless, it is currently at a great discount to all-time-highs and I am planning to add more to the portfolio. The trading action is curious, and with candles this big it almost makes me think leaving orders at 40% of spot on the book is a good strategy. Could get lucky who knows.
Cardano had similar action trading down to a low of $0.75 off its local high. Again these big high volatility candles are coming up in alts in recent shakeouts. Some traders likely bagged instant 50% gains on these buys.
The big lingering question is the dip. Is it over? Iâm not sure. The price action is on trend but I also wouldnât be surprised if Bitcoin made run at the nearest support around $38k. The last dip lasted ~20 days in January so this one might linger as well. Where Bitcoin goes alts will follow. If Bitcoin runs to $38k expect heavy selling across alts.
Bottom line: dips are great buying opportunities and Iâll be looking to add to my Link and Aave positions as I think those have the best upside in the near term.
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Nothing in this email is intended to serve as financial advice. Do your own research.
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