📈 Taking advantage of illiquidity + finding alpha in altcoins.
A thread 👇
A thread 👇
Liquidity in crypto is abysmal beyond the top 30 cryptoassets.
The median sized fund can't build a position without moving prices significantly on exchange.
This means there's less sophisticated price discovery the further you go down the market cap list.
/1
The median sized fund can't build a position without moving prices significantly on exchange.
This means there's less sophisticated price discovery the further you go down the market cap list.
/1
This paves the way for rapid re-rating when liquidity does pick up.
Retails or small funds can front-run big institutions in buying cheap assets. Compare this to VC, where access is difficult and deal flow is edge, and retails can't buy till the company goes public.
/2
Retails or small funds can front-run big institutions in buying cheap assets. Compare this to VC, where access is difficult and deal flow is edge, and retails can't buy till the company goes public.
/2
Examples I've shared in the past year on Twitter:
✅ $SNX: >10x from Mar 19 - Nov 19
✅ $KNC: +500% from Jan 20 - Mar 20
✅ $BAND: +600% from Mar 20 - Jun 20
/3
✅ $SNX: >10x from Mar 19 - Nov 19
✅ $KNC: +500% from Jan 20 - Mar 20
✅ $BAND: +600% from Mar 20 - Jun 20
/3
The common lifecycle:
> A strong project is mispriced
> Asset is thinly traded
> Catalyst for re-rating
> Retails get in and price 🔼
> Volume + liquidity 🔼
> Larger traders and funds get in
> Price ⏫
> Price corrects to re-rated level
/4
> A strong project is mispriced
> Asset is thinly traded
> Catalyst for re-rating
> Retails get in and price 🔼
> Volume + liquidity 🔼
> Larger traders and funds get in
> Price ⏫
> Price corrects to re-rated level
/4
Identifying what is mispriced is difficult as there is no agreed upon way to ascertain fair value.
Good proxy: comparing *quantifiable* growth.
@KyberNetwork volumes & fees outpaced @0xProject v1, but $KNC traded at a significant discount to $ZRX.
/5
Good proxy: comparing *quantifiable* growth.
@KyberNetwork volumes & fees outpaced @0xProject v1, but $KNC traded at a significant discount to $ZRX.
/5
Other factors:
- $KNC (v1) captured fees (burns); $ZRX (v1) didn't
- Thin books on $KNC meant price discovery is unreliable
- Token model revamp as catalyst for re-rating
Result 👇
/6
- $KNC (v1) captured fees (burns); $ZRX (v1) didn't
- Thin books on $KNC meant price discovery is unreliable
- Token model revamp as catalyst for re-rating
Result 👇
/6
$BAND is another example with rapid price growth.
@BandProtocol deliberately focused on Asia first, raising from @Sequoia_India, Dunamu, and onboarding Asia validators only.
Why does this matter?
/7
@BandProtocol deliberately focused on Asia first, raising from @Sequoia_India, Dunamu, and onboarding Asia validators only.
Why does this matter?
/7
By and large, I've noticed that investors in Asia have a more conservative appetite for token valuations.
Going to market with a low profile among Western funds also meant $BAND could grow into its valuation, rather than test the public mkt with a privately set high val.
/8
Going to market with a low profile among Western funds also meant $BAND could grow into its valuation, rather than test the public mkt with a privately set high val.
/8
When $BAND liquidity picked up in early April, the asset began to be re-rated rapidly.
Retails who bet on @BandProtocol's team, community traction and discount to the market leader could have taken advantage of low liquidity before most funds could come in.
/9
Retails who bet on @BandProtocol's team, community traction and discount to the market leader could have taken advantage of low liquidity before most funds could come in.
/9
Important to note that illiquid doesn't mean mispriced, and mispriced doesn't mean undervalued.
It simply means fewer parties are participating in price discovery, making it less efficient. It can work both ways. See some shorts:
/10
It simply means fewer parties are participating in price discovery, making it less efficient. It can work both ways. See some shorts:
/10
Funds or whales don't want to get involved with thinly traded tokens on exchange because of slippage, and if liquidity doesn't pick up they're stuck.
That's partly why projects with strong fundamentals re-rate quickly to the upside once volumes become sufficient.
/11
That's partly why projects with strong fundamentals re-rate quickly to the upside once volumes become sufficient.
/11
I suspect this may also be why while some may think assets like $XRP and $LTC are overvalued, they continue to command multi-billion valuation.
Price discovery has happened; the market just disagrees with you lol
/12
Price discovery has happened; the market just disagrees with you lol
/12
All in all, I think there's massive inefficiency in the way some quality, low cap cryptos w/ thin books are priced.
This could lead to rapid re-rating as liquidity picks up (from listings) and larger players come in, which fuels price growth that draws in more speculators.
/fin
This could lead to rapid re-rating as liquidity picks up (from listings) and larger players come in, which fuels price growth that draws in more speculators.
/fin
cc Am I reading tea leaves? Any feedback welcome!
@Arthur_0x @DegenSpartan @QWQiao @Rewkang @bennybitcoins @iam__vance
@Arthur_0x @DegenSpartan @QWQiao @Rewkang @bennybitcoins @iam__vance
