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Sunday night was insanity.
I was glued to my portfolio as altcoins printed double-digit percentage gains. While I didn’t take any screenshots at the time you can still see the residual effects in the 7-day numbers…
Altcoins pumping is nothing new for crypto veterans but the rise did bring back the “tulip bubble” calls from those who I can only imagine don’t own any crypto. I would link to tweets but these people don’t deserve any airtime.
Today I want to talk about why the rise in alts (#altszn) makes perfect sense.
The Bitcoin/altcoin relationship (for the purposes of this discussion Ethereum is an altcoin) has been and remains inverted. I like to call this the “Crypto Tide” effect:
When Bitcoin rises, capital is sucked out of alts and moved into BTC (likely FOMO induced). This causes a drop in altcoins.
When alts rise, capital is sucked out of Bitcoin (usually in the form of profit-taking) and moved into altcoins. This causes a drop in Bitcoin.
When total crypto market cap remains stagnant, this effect is roughly zero-sum. The money lost from Bitcoin is the money gained in alts.
When total crypto market cap expands upward, things get very very interesting. That’s what we saw over the last few weeks…
On December 14th (just prior to Bitcoin’s run) BTC market cap was $355B and total crypto market cap was $569B. Altcoin market cap was $214B.
On January 2nd (just prior to Sunday’s explosion in alts) BTC market cap was $628B and total market cap was $848B. Altcoin market cap was $220B, almost flat.
On January 4th (just post Sunday’s explosion) BTC market cap was $540B and total market cap was $854B. Altcoin market cap was $314B, a 70% increase.
What’s Going On Here?
Bitcoin went on a huge run fueled by the institutional buying narrative, and put on $300B in weight. As Bitcoin stalled, investors went looking for return and moved $100B of this newly created value into altcoins resulting in a massive pump.
The huge double digit returns scream scam and volatility to some, but if you look closely it makes perfect sense. Altcoins are a thin market compared to Bitcoin. The $100B taken from Bitcoin may be small to BTC, but to the altcoin market it’s HUGE. That $100B added 50% of the existing altcoin market cap almost instantly.
This all ties back into Bitcoin dominance which currently sits at a record high 70%.
As Bitcoin absorbs 100s of billions in new value, a fraction of this will spill into alts eventually. The asymmetry set up by Bitcoin dominance opens the door for massive gains in altcoins as double digit percentages of existing market cap are added via this new money.
Institutions may venture into alts but right now they’re not needed. Retail investors are getting rich off of Bitcoin and are moving that money into alts seeking higher returns.
Tl;dr altseason is just beginning, buckle up.
The Portfolio Rundown
The year is off to a great start fueled mostly by the altseason we just experienced. My decision to not rebalance the portfolio played out well as alts surged and the Bitcoin allocation receded closer to 50%.
I expect this trend to continue as alts rise. Specifically I’m looking at Cardano (ADA) and Chainlink (LINK) to move significantly. Near term I expect ADA to move towards $1 while LINK works to reclaim it’s all-time-high near $20. If this happens these allocations should settle around 20% of the portfolio and give Bitcoin a run for it’s money.
With altseason here it’s also time to clear out the tail end of the portfolio and reallocate to my developing thesis for 2021. I’ll be dumping 0x, Golem, and Siacoin for a concentrated position in a coin I’ll discuss next week that I think is very promising.
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Nothing in this email is intended to serve as financial advice. Do your own research.