8DC Update Q4–2022
[Originally posted on January 13, 2023]
(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
Happy New Year! In many ways — we’re very excited to have the chaotic year of 2022 behind us! The ups and (especially) downs are par for the course in this phase of the market. We’ve still got plenty of dry powder and continue to scale into positions that we believe have significant upside potential over the remainder of this cycle (more on that later).
Crypto Markets are explosive and move very quickly, which means it pays to be in the market, even if that means some short term losses along the way. This chart shows that to a huge degree, gains in crypto come on a handful of the best days. Trying to exactly pick those ten days is like picking a needle from a haystack.
We’ve already seen this play out briefly in the New Year. In the first two weeks of 2023, we’ve seen some good rallies showing signs of life in crypto. We’re not out of the woods yet, but we can glimpse some light at the end of the tunnel as we move into the accumulation phase of this cycle.
As this is the time of year to be retrospective, we wanted to share a bit of a recap from 2022, give some insights into how we see this cycle developing and how the F+F Fund is best positioned for it.
A look back at 2022
What a year we just witnessed! We’ve seen the rise and fall of Luna and UST. We saw CeFi players collapsing right and left from 3AC, Celsius, BlockFi, Voyager, and so on. FTX, the world’s third largest exchange, lost everyone’s trust, billions of user funds and imploded virtually overnight. We witnessed the invasion of Ukraine. We saw sky high inflation and an aggressive Fed that resulted in trillions of value lost across traditional markets. As shown below, it’s rare for both stocks and bonds to be down in the same year, but 2022 represents the biggest outlier in history with the worst combined total return for stocks and bonds dating back to 1872.
Ryan Selkis had a good summary of 2022 in Messari’s Crypto Theses:
A lot of people lost money in 2022. Some poorly managed companies went under (normal in capitalism, pre-2008). But many of the survivors are well capitalized and shipping product. The core theses generally remain unchanged, and now we’re left with true believers and long-term builders — fewer gamblers, scammers, and tourists.
In many ways, just surviving 2022 should be cause for celebration. It has been a tough year for nearly all funds in both traditional and crypto markets. The PIMCO Income Fund was down -11% on the year. The Bitwise BTC/ETH Equal Weight Crypto Index was down over -65% on the year. Multicoin, a prominent crypto hedge fund, was reportedly down -90% in 2022.
A look at crypto cycles
So, where do we go from here? Whether referring to Carlota Perez’ lifecycle of technological revolution, S — Curves, or the Gartner Hype Cycle, it’s clear that new innovation comes in waves with booms and busts.
Bitcoin is still relatively new, but we’ve now seen a pretty clear pattern that seems to revolve around the Four Year Bitcoin Halving Cycle. The following analysis in no way guarantees a clear path forward, but does serve as a rough map of the terrain as we navigate coming years. Zooming out and looking at yearly candles we can gain some interesting insight. Bitcoin has gone through two fairly similar four year cycles thus far in its lifetime and we’re halfway through the third.
Some observations from this chart:
- Principle #1 — The bottom of Candle 2 and Candle 3 mark out the bottoming area (green). (We are just starting the Candle 3 in 2023.)
- Principle #2 — The downside wick in either Candle 2 or Candle 3 forms the absolute bottom. Maybe the absolute bottom is already in? Maybe another wick down to ~$14K in 2023?
- Principle #3 — Candle 4 (set to form in 2024) tends to not only reach but eclipse the top of Candle 1 and Candle 2 (i.e. ~$46K).
- Principle #4 — Candle 1 forms in 2025 and the Bull Market peak occurs.
Another way to look at this is the Logarithmic Growth Curve (LGC) Model, which has been incredibly accurate at predicting Bitcoin bottoms and tops since 2013. According to the LGC, Bitcoin could easily do a 10x over the next couple of years — corresponding with Candles 4 and 1 illustrated above.
When comparing these cycles with broader investments, we can see the bottoms of Bitcoin hitting every four years — 2014, 2018, and 2022. Historically, it then goes on to become the best performing asset the following three years. We use Bitcoin as a barometer for crypto, but many assets in the crypto space will outperform Bitcoin in those high performing years.
And here’s a similar look at Ethereum’s current Four Year Cycle (2021–2024):
The same principles apply. Looking forward to Candles 4 and 1, based on the previous cycle history, we could predict a new ATH in ETH above 15K. More relevant to our current Candle 3 in 2023 however, is that there is decent potential upside available. The last Candle 3 in 2019, price rallied +181%, albeit with plenty of whipsaw volatility along the way. If we were to witness something similar in 2023, we could see ETH testing ~3K again at some point during the year.
What does this mean for 2023?
- We’re still in a bear market and looking for the absolute bottom. Accumulation phase won’t start until markets are convinced that the bottom has been found. We, along with many other institutions, still have money on the sidelines with orders placed ready to buy deep value.
- Volatility is likely to abound. During the last bottom and accumulation phase (2019/2020), Bitcoin rallied nearly 5x before retesting the lows multiple times. This suggests plenty of opportunity in 2023 to hedge some of our long term exposure by trading in and out of some higher volatility altcoins and cycling those potential gains back into long term winners.
- We’re closer to the bottom than to the top. It might be a faint glimmer, but there’s light at the end of the tunnel. Onchain indicators, TA Indicators, Sentiment Analysis are nearly all signaling deep value. Whether it’s the MVRV ratio, the Mayer Multiple, the LGC, or any other number of metrics, we’re seeing increased confidence that buying long term, high value crypto assets in these price ranges, will pay handsomely later in this cycle. Now is NOT the time to quit crypto. It’s the time to take advantage of the deep value prices that we’re seeing.
As a reminder, here’s a rough outline of how we’re structuring the focus of the F+F Fund. This allows us to narrow our efforts around the types of assets and categories we’re looking to invest in, and the types of trades and investments (size and timeframe) that fit into our overall strategy.
Some quick examples of positions in these different categories:
- Foundation Swing Trades — In Q4 we were beta testing and backtesting a swing trading system for longs and shorts on ETH and BTC, primarily driven by PA. Early results are promising, as our backtest over the last six years for BTC resulted in over 50x outperformance of simply holding BTC. We’re scaling this position and system during Q1 2023.
- Frontier Position Trades — We identified Polygon (MATIC) as a key piece of infrastructure, crucial to solving the scaling challenge of Ethereum and other L2s. The tech works and many projects are taking notice, including Starbucks who announced their NFT Program using Polygon. As a Position Trade, we’ve identified several levels where we continue to accumulate MATIC. MATIC price is up 40% in the second half of 2022, and believe there’s plenty of room still for upside as we enter more bullish phases of this cycle.
- DeFi Advanced Position — We’ve been able to cycle “real” yield, earned in ETH, back into our core Foundation positions as we’ve been earning 30–50% APY on our combined DeFi Advanced approach. This has proven to be a great strategy especially as we’re still in a bearish to sideways market.
