Many of you are here because you’ve been left aghast at how I’ve gone “all in” on crypto recently - that I’ve sold every last dime of my equity positions in my fidelity account, emptied my emergency savings, drawn down all possible credit lines on my credit cards, borrowed the maximum against my 401k, and then opened up as many personal loans as I could lay my hands on.
Maybe I’m crazy, but maybe its Maybelline…
I have to admit, the past month or two has been stressful.
Every time I managed to lay my hands on more capital, the worry has always been that the market will run away by the time capital is funded. Often times, these loans can take a couple days from approval to fully funded in a checking account. And of course, my 401k plan only processes loans once every month - at the last trading day of each month.
The wait from my decision on Oct 2nd to submit the loan request, until the first week of November when the 401k loan funded - was a miserable, miserable time as the market continues to rally at a frenetic pace.
Alas, as of last Friday, for better or worse, the capital is now fully deployed.
Now, we wait.
In the meantime, I thought it would be a good idea to begin documenting some of my thought process and musings on the market (thanks, Olivia!) as I painfully await my fate. And what a better way to start than to speak about how it would end!
Some Minor Assumptions
Before we get started on the topic, there are a couple beliefs that we simply have to accept. First and foremost, one has to believe that the crypto market comes in distinct cycles. Extreme booms are followed with violent busts, and each phase comes in multi-year periods. Secondly, we have to assume, and this is a big assumption, that the current market cycle has not peaked - that we are still in the last innings of a multiyear bull cycle that began with the last market cycle bottom in 2018. Lastly, the price movement of the broader crypto market excluding bitcoin (“altcoin market”) has somewhat of a relationship to the price movement of bitcoin. For example, when the price of bitcoin moves - it should mean something for the rest of the market, both directionally and in magnitude.
Timing The Top
With those pesky assumptions behind us, let’s chat about some ways we can discern the market top. At the time of writing, the total cryptocurrency market cap is hovering around just shy of $3 trillion, with bitcoin making up more than a third of the total market size at around $1.3 trillion. Bitcoin is the big daddy asset in the cryptoverse. Bitcoin dictates the market.
1. Retail FOMO
Thus, one crude way to gauge the general interest level for the space is to use google trends and observe the level of historical interest that people are searching for “bitcoin”.
One way to interpret the data is when the search trends breaks out, one can safely assume that general interest in the space is increasing rapidly, and that we are coming to a tipping point where we transition from a market that is defined by the marginal buyer to one that is defined by a marginal seller.
That is, we are about to reach a point where we can no longer find an additional buyer, and the next additional trade is probably going to be executed by a seller for an extended period of time.
For example, in this chart above - we chart the level of search activity of “bitcoin” worldwide in the last 5 years, and we observe that the last time it peaked was in December 2017 - right at the same time when Bitcoin hit its all time high of $20,000 on Dec 17, 2017.
What we can observe for certain today, is that in November of 2021, the level of search activity of bitcoin is nowhere near the 2017 levels, nor was it as high as what it was in April and May of 2021 when Bitcoin hit its local highs of around $60,000.
Assuming that the market cycle did not already end earlier this year, we could be inclined to believe that the market cycle may continue to have room to grow. To the extent we start testing the search activity levels of December 2017, I imagine we would be breaking all-time high levels for Bitcoin in that time period (think $100k+), and it is probably time to start taking risk off the table.
2. Risk Levels
Another way I would look to gauge market froth would be the speed at which price levels are moving. The intuition here is that the faster the price movement, the sooner the party will end. Generally, when asset prices go exponential in a short span of time, it can be an indication that the music is about to stop. In contrast, if Bitcoin goes up a couple percentage points every week at a linear pace, there is an argument to be made that the market still has room to grow.
One way we can gauge the velocity of the price movement is to gauge Bitcoin’s price appreciation against its 20 week simple moving average (“20W SMA”). The 20W SMA is something that market participants tend to like to use to gauge market sentiment based on historical trends. The faster an asset price moves exponentially, the more it will deviate away from its average price of the last twenty weeks.
For example, in this chart above (Exhibit B) of the weekly price range of Bitcoin in the last several months beginning in March 2021, we see that Bitcoin is trading at this moment at around $67,576 (right hand side of chart). We can also see, that the current price is around 40% higher than the red line that we had drawn on the chart, which is the 20W SMA. One can use that as a frame of reference as to how elevated risk levels could be today, and give you a framework as to when the market top may be close.
In this next chart (Exhibit C), we observe the last market cycle peak around December 2017, when the price of bitcoin was around 182% above its 20W SMA. This follows an aggressive and exponential move up for 3 months that saw a Bitcoin rally of 400%+ from around $3,600 in the middle of September, to around $20,000 by December. For comparison, the price of Bitcoin in September 2017 was only around 20% higher than its 20W SMA.
While the 20W SMA is by no means a sure bet to mark the top of the bull market cycle, I do believe it acts as a good framework to gauge how fast prices are moving, and thus how close it is coming to the end of a rally. While this is no science, I’ve come to think that when the price of Bitcoin is more than 100% of the 20W SMA, it is probably time to take notice as the bubble is about to pop, while anything below 25% is either just business as usual or bearish for the asset (especially if it falls below 0).
Some Concluding Thoughts
When I pulled the trigger on taking on leverage to invest in the crypto markets by drawing down on revolver loans and taking out personal loans, I knew I was taking on substantial risk (I like to think of it as calculated risk) and understood that it has consequences.
Well, I took a look at my credit score today, and lo and behold, it has dropped from the pristine 800s I’ve held for years, to the mid-600s!
If you’ve read it all the way through here, thanks for taking part in my crypto journey, and even if you are not invested in the space, hopefully you’ll get a laugh at my foolishness as I await my fate in the cryptoverse.
No risk, no reward - am I right? :)
Nov 8, 2021. 9.34pm ET.