Thread by @RevoltCap

1/ This piece of @AlamedaTrabucco got me thinking and resulted in an important conclusion that changes my view on the market and the framework I use, the puzzle is now coming together.

A thread on why we can't compare 2017 with 2021 and why this is BULLISH 🔥

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https://twitter.com/AlamedaTrabucco/status/1395211733212573696

2/ Yesterdays crash and the same goes for the March 2020 crash, are a new phenomena in crypto.

The driver: a highly leveraged trader market in combination with systemic failure of centralized exchanges

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3/ Leveraged crypto trading volume has exploded over the past 3 years, currently accounting for 40-60% of all crypto volume.

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4/ This is mainly driven by the increase in infrastructure (exchanges) that offer leveraged trading compared to 2017 and at the same time the crypto trading movement that on itself has grown exponentially

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5/ This has resulted in a new paradigm in which the pre-2018 price action can’t be compared with the current price action

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6/ I underestimated the impact of the leveraged trading dynamic based on the simple idea that open interest wasn’t that much compared to the total market cap of crypto

Meaning: the actual open trading positions are only a small part of crypto

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7/ Some data on this:

Open interest went up 4x since the start of the year ($11bn > $46bn), as where the total market cap of all crypto went up 3.5x ($750bn > $2.6tn).

So the rise was about the same and OI is *only* 1.8% of the total crypto market cap

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8/ This doesn’t seem that significant and certainly not like something that can cause such a dramatic crash.

Well, OI isn’t the full story. It’s a combination of different variables that when combined build a (potential) timebomb.

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9/ The other variables are:

1) liquidation levels, 2) systemic failure of centralized exchanges, 3) the level of spot bid at time x (supply/demand), and 4) manipulation

I may be missing others, but this already leads to compelling insights IMO

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10/ In addition to that, the volume that goes on in leveraged vs spot trading is significant (see below).

I find it hard to give weight to OI vs % leveraged trading volume but it’s clear it’s an important part of the crypto markets and a big differentiator vs. the 2017 bull run

11/ More leverage means more risk and at a certain point, positions will get liquidated.

When FUD levels (Elon, China, USDT) are high and entities push the price down to liquidation levels, while the bid in the order books is low, it results in a liquidation cascade

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12/ Meaning, the centralized exchanges need to handle the liquidations, but their systems are having trouble with it which results in a freeze of the system.

This subsequently results in a liquidity crisis cause no new funds can enter the exchange to buy the dip.

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13/ And that’s when you get to the situation we had yesterday and in March 2020

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14/ Again, I may be missing other variables, perhaps this isn’t even the full or exact right explanation and of course, each situation is different.

But I’m quite certain that this take is in the right direction.

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15/ So what does this tell us?

Based on this we can conclude that the 2017 30-40% style of correction isn’t a good proxy for the current bull run.

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16/ Due to the combination of the above-mentioned dynamics, it’s possible we’ll get deeper than 40% corrections while still being in a bull market

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17/ The crypto markets will probably stay absurdly volatile for the foreseeable future

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18/ Next to the more obvious reasons (still a relatively small market) this is due to the (leveraged) trading nature of this ecosystem, the lacking quality of the infrastructure (systemic exchange failure), and the manipulation that happens every now and then

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19/ For me this means that I will be trusting even more on my fundamental analysis when it comes to building my thesis (how long will this run last) and that I will no longer be giving too much weight to the price action of the 2017 bull run.

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20/ On-chain data metrics and their historic data points are an exception and still offer a good comparison (MVRV Z-score, R-Hodl ratio etc.)

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21/ See the 2nd part of this thread of a couple days ago regarding why (based on those on-chain datapoints) I believe we (even now after yesterday’s crash) are nowhere near the macro top

https://twitter.com/RevoltCap/status/1394574745010589696?s=20

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22/ So what's next?

I still mainly see 2 scenarios:

Scenario 1, a regular 1 yr bull run:
2 months ranging, a breakout in Q3 and macro top in Q4

Scenario 2, the Super Cycle:
5 months ranging between 25-60K and the 2nd half of the bull run in 2022

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23/ Closing off, there truly is nothing like crypto

Blockchain and the resulting WEB3 tech stack are bleeding-edge technologies that are going to change the world for the better

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24/ At the same time and opposed to the dot com era, every individual (investor) can act as their own VC

This results in many opportunities to change your life for the better and truly is unprecedented

This amongst others is why I love this place 🙏

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