Thread by @RaoulGMI

There is a lot going on in the digital asset space but also nothing going on and that is the problem...

Let me give you some thoughts... 1/

BTC volumes have been stagnant since the run up in 2020

And active wallet addresses have not gone anywhere either...It seems that retail activity peaked at the beginning of 2021

But that has been replaced by institutions (here measured by wallets with over $10m - which are rising in general but the numbers are still pretty small).

And if you adjust for price, bigger investors liquidated and have barely returned...

If Metcalfe's Law applies then network growth is currently very slow, hence why price is sluggish.

The same is true of ETH but there is a different factor at play here, hence the outperformance.

Due to DeFi and NFT's and the stronger narrative around ETH, volumes have remained more elevated...

Addresses keep rising...

But active addresses have stagnated all year as people rotated into different opportunities in this sideways market.

But with ETH, higher volumes equal more ETH burned (more demand) and then ETH staking has reduced supply.

Burning + Staking + maintained volume is why ETH has outperformed BTC by 4x in 2021.

But with no net real new capital flowing into the space, attention moves to other chains which also have PoS but earlier network adoption, taking volumes away from both BTC and ETH.

This is creating the rapid rotations as people already in the space shift assets around looking for returns - DeFi then NFT's then L1's.

Lots of churn, net net, no new meaningful increase in market cap - an overall sideways market

Many of these L1's also have the same staking + burning dynamic going on but have small market caps, so their prices rise faster if volume picks up.

All assets which are driven by network effects require the network to grow to rise in value.

This is why you see explosive price action in projects that suddenly gain network effects as the market decides what has real traction and what hasn't.

This is a good thing for those super focussed on the details of each part of the market but it tends towards a FOMO driven market where late-comers who haven't done their homework get topped and tailed as the market moves to the next thing.

That churning is in fact a sign that the market is broadening out. It also makes it harder to generate alpha as investors now need much more knowledge to generate excess returns.

My view is that the key reason the market has seen less retail activity is that wages are rising slower than CPI. The cost of living has gone up dramatically and that has removed the marginal investor from crypto. They just can't afford the disposable income.

I don't see stable economic growth and lower inflation for a while so we are going to have to rely on institutions and hedge funds to allocate meaningful capital. I think that is coming and Q1 should confirm that, indeed maybe January, but we have to wait and see...

Most investors on the fence right now tell me that they fear regulation. That is going to be a feature for a while now too. That will keep institution's out of anything but the larger protocols. It's been easier to allocate to VC to avoid market to market and regulation fears.

I think the hedge fund space has been under-allocated capital and markets like these prove that if you can, should should allocate to experts who are focussed 24/7.

Im biased as Ive set up a fund of crypto hedge funds but I expect a lot more institutional participation in funds

The other key driver of digital asset prices is the Fed balance sheet. Digital Asset markets peaked when balance sheet expansion peaked in YoY rate of change terms.

Over time, the market cap of the entire space keeps growing as the digital asset space gets deeper with more use cases.

But for the bigger market cap tokens to appreciate, they need new money. This is a market to HODL a broad mix of quality names on top of main core positions and don't try to chase returns unless you know what you are doing...

New capital will flow in over time and a broader rally, when it arrives, will bring retail investors and a reflexive loop of institutional investors FOMO'ing in.

That day will come. You just have to not over extend yourself, don't use leverage and sit tight. Play the long game.

The best advice I got was from Paul Tudor Jones who once told me the best investors he knew are those whose investment time horizon matches their idea time horizon.

If your model is based on Metlcalfe's Law for all DA's, then you need to be thinking in years, not weeks or months