What’s a Crypto Maxi?
Lesson O: Utilizing Down Chain Strategy
A “Crypto Maxi” is someone who believes in the long-term value of cryptocurrencies, not just Bitcoin. If you search the term “maxi” in the context of cryptocurrency, you tend to get links to people who believe that Bitcoin is the only crypto needed. Such proponents are often referred to as “Bitcoin Maximalists”.
In contrast, a Crypto Maxi is much broader in their thinking, recognizing that the decentralized space has much more to offer in terms of value, utility, and speculation.
Sebastian Purcell summarizes “The Crypto Maxi credo”.
- A Crypto Maxi believes that cryptocurrencies will have an enduring place in our world 5 to 10 years from now.
- They hold that we’re not going back to a world of only fiat currencies.
- They hold that very many current forms of social life, from video and music streaming to card and video games, will move onto the blockchain in some form.
- They hold, finally, that some forms of decentralized finance will continue to persist on the blockchain, likely working alongside some traditional finance systems.
In fact, Purcell is the one who coined the term, as well as the strategy involved in being a Crypto Maxi. Its core idea is that while Bitcoin is not the only cryptocurrency of value, it does occupy a unique role as the lead indicator for the rest of the crypto market. This is because Bitcoin not only has about 41% of the market, but is also acting as a store of value as more institutional investors introduce it into their portfolios.
What Is the Crypto Maxi Strategy?
The Crypto Maxi strategy involves a version of “down chain” analysis.
Conventionally speaking, “down chain” strategy is used in manufacturing and supply chain analysis in order to reduce costs. Costs can be broadly construed, not just in terms of finance but with respect to carbon emissions, waste, transparency, and other social responsibilities.
So how can the general idea of analyzing aspects of a supply chain help with financial assets and investments?
Instead of the aim of reducing costs, you’re looking at “down chain” indicators to figure out market action — for example, a rise in the price of an asset. The key is finding reliable indicators.
With the cryptocurrency market, such indicators are relatively easy to find since the market is dominated by Bitcoin (41.83%) and Ethereum (18.71%) at the time of writing (Feb 3, 2023). For a live crypto heat map, you can check out CoinMarketCap.
So how does this work in practice?
Purcell looks at an example from the March 2020 crash:
He notes (ibid.) that
“Ethereum was soaring above BTC, and then crashed (in percent terms) more than BTC too. After the bottom in March, though, Ethereum again shot up even more and went on to make well more than BTC over the next 12 months.”
So what to make of this?
The upshot is that BTC always moves first. So hypothetically, by watching BTC’s movement, you can decide whether to trade ETH.
But why stop there?
As long as the crypto market has coins and other assets that remain inter-correlated (because the market is small and protocols often back their assets with other crypto assets), you can apply the down chain watch program to other cryptocurrencies.
For example, Purcell notes takes into account the relation between UNI and ETH:
He observes:
“You’ll notice the same pattern. UNI moves after ETH and made a much larger move up. In terms of percents, it also crashed more.
So, UNI is basically a 2x-3x bet on Ethereum. If you like Ethereum, then, you’re already conceptually committed to the success of the main coins on the Ethereum blockchain. Might as well own those too.
I’m not saying you should buy in the same proportion, but it’s worth considering these “down chain” coins since they’re crucial to the ecosystem of the main platform token anyway.”
Applying the Crypto Maxi Strategy
The core principle is easy enough to understand. But knowing when to execute the buy/sell transactions is much more difficult. Purcell takes the least square moving average (LSMA) as an use-case. LSMA “calculates the least squares regression line for the preceding time periods, thus leading to forward projections from the current period.”
Here’s a snapshot of BTC and ETH from 2022 with the LSMA line.:
Purcell (ibid.) comments that
“When the closing price is above the line buy into ETH. Otherwise sell into BTC . . . . Remember, the strategy is just asking: should I invest in BTC or ETH? If the signal for ETH is green, beating BTC, then it holds ETH. Otherwise, it’s just holding BTC. In essence, this means that the strategy uses gains in ETH to accumulate more BTC.”
He concludes on three points.
- The crypto maxi strategy performs better than just HODLing.
- The strategy even works in poor market conditions (e.g. a crypto winter).
- The strategy can be expanded to include more than just BTC-ETH, but any cryptocurrency measured against the performance of BTC.
The last point requires an expanded method of measuring coin movements, something on which you can find more information at Purcell’s website, The Art of the Bubble. But here’s a snapshot of the currencies being compared roughly at the time of writing (i.e. before the February rally ceased):
Suffice it to say, the Crypto Maxi portfolio is very dynamic, with its algorithm trading in and out of various alt coins. For most of 2022 and the start of 2023, much of the portfolio has “held cash” in either fiat or USDC stablecoin.
The other important feature to note involves tax consequences. Obviously, if you’re trading as a Crypto Maxi, you’re making trades with short-term capital gains tax consequences. So just be mindful!
This article is a part of the Crypto Industry Essentials educational program presented by 1.2 Labs (formerly The Art of the Bubble).
Though this article is credited to me, it contains some written material by Sebastian Purcell, PhD from his 1.2 Labs education series on cryptocurrencies.
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