Time to Sell Everything?
Disclaimer: This article is written for informational purposes only, and does not constitute investment advice or a solicitation to buy any Address Labs services or products.
Introduction
In our view, no.
But before offering some context, let’s call a spade a spade.
Short-term crypto volatility is awful.
Especially if you bought the top (we’ve all done it).
Since hitting highs in November 2021, bitcoin has crashed by more than 50%.
These extreme declines can make even the most seasoned investors question why they’ve allocated capital to such a wild asset class.
Without further ado, here’s how we’re stomaching and investing through the most recent pullback.
- The Pain Probably isn’t Over
At the time of writing, bitcoin is hovering north of $35k.
Memes and technical analysis aside, the quickest way to estimate bitcoin’s current price floor is by eyeing its realized capitalization.
Realized capitalization values each bitcoin based on the price it was last moved on the network instead of the last transacted price (the latter is market capitalization).
For example, if there were only 2 bitcoin initially purchased for $100, if one of those coins later sold for $200, bitcoin’s market capitalization would be $400 (2 bitcoin * $200 per bitcoin) whereas the realized capitalization would be $300 ($100 + $200).
We like realized capitalization as a floor proxy since it attempts to consider the aggregate profit on the network, and bitcoin’s current realized capitalization would translate to a $24k price based on outstanding supply.
It’s rare for bitcoin’s market capitalization to dip below its realized capitalization — in the past two halving cycles, bitcoin bottomed out at approximately 20% below its realized capitalization.
If this happened again, it would translate to around a $20k bitcoin price, which would coincide with the previous halving cycle’s peak.
To be clear, we don’t expect the bitcoin price to go this low, but preparing for such an outcome helps us formulate the best risk-adjusted strategy.
2) It’s probably a terrible time to sell.
Famed investor Warren Buffet wrote:
Be fearful when others are greedy and greedy when others are fearful.
The Bitcoin Fear & Greed Index recently reported one of its lowest ever readings.
As you can see below, we’ve been in a market fear stage for almost two months.
Based on historical patterns, it would be unusual for this negative sentiment to continue for much longer.
3) Bitcoin network fundamentals are outstanding.
This bears repeating.
Bitcoin’s recent price action couldn’t be more different than its extremely robust on-chain activity.
From a demand perspective, bitcoin wallets with non-zero, greater than 0.1 and greater than 1.0 BTC balances are all at all-time highs.
As it relates to supply, bitcoin mining is also the most competitive it’s ever been, with network difficulty reaching its highest-ever level.
Based on these extremely favorable demand and supply dynamics alone, we are positioning ourselves to buy the dip.
4) Bitcoin crashes are unfortunately common.
Bitcoin is currently down almost 25% for the month, on pace for its third straight monthly decline.
Over the past five years, bitcoin has experienced five months of greater than 25% declines, and four other three-month losing streaks.
In the spirit of managing expectations, the worst ever stretch lasted six months starting in September 2018, which saw an overall decline of 58%.
If bitcoin repeated this awful pattern, the price would bottom out at around $26k, in line with our realized capitalization floor estimate.
Notwithstanding the emotional challenges, market turndowns are frankly an excellent opportunity to take a break from checking prices and learn more about the space.
5) Long-term dollar cost averaging is your friend.
If you bought bitcoin on January 1, 2018 (an objectively terrible entry point), your portfolio would have increased by about 159%, assuming you never sold.
It also would have been nearly three years until you experienced any gains.
Dollar cost averaging over the same period, however, would have resulted in gains of around 264%, and you would’ve been in profit in a little over a year.
Many self-proclaimed investment gurus warn against trying to time the market.
The truth is that over the past four years, the chances of outperforming a dollar-cost averaging strategy would have been a coin flip.
The most important principle, though, is taking a long-term position (e.g. 4+ years) given the market’s volatility.
Conclusion
Bitcoin exists because central banks can’t be trusted not to debase fiat currency.
This value proposition is as strong as ever.
The silver lining of the recent market crash is that it’s not unique to bitcoin or crypto.
Virtually every asset class is tumbling out of fear the Federal Reserve is going to end the era of infinitely loose monetary policy.
Our experience says that the market tends to overreact.
In the way that the emergence of bitcoin lazer eyes early this year indicated that we’d entered a period of extreme greed for crypto, odds are the Fed’s response won’t be as draconian as anticipated.
This could serve as the catalyst for a market reversal, but we’ll have to see.
In the interim, stay strong and let us know if you want to chat.
