Thread by @TaschaLabs

Overall crypto market hasn’t grown in past half yr & will meet w/ more headwind in next 6 mos.

But that doesn’t mean there aren’t opportunities if you know where to look.

Here’s my market outlook for coming months 👇

First off, from a speculative flow point of view, price growth of large caps like BTC & ETH rely almost entirely on new money coming into crypto. They’re gateway drugs for new participants, whose gains are then channeled to other tokens.

BTC & ETH are 60% of total crypto mkt cap. Lack of price growth for these two in last 6 mos is a sign that new funding inflow is small.

https://twitter.com/TaschaLabs/status/1475326260532240387?s=20

The lackluster open interest growth in BTC derivatives in past 6 mos echos same assessment.

When I say ‘small’, I don’t mean zero. There’s obv always new inflow into crypto given its growing social economic influence. And institutions are indeed here.

But the beast itself has grown a lot. At beginning 2021, crypto had a mkt cap of $800 bn, now it’s over $2 tn. The beast needs to be fed a lot more ‘food’ now compared to a yr ago to grow the same percentage.

In other words, unless there’s an *acceleration* of inflows, BTC & ETH are unlikely to make new highs.

Why hasn’t there been inflow acceleration?

1) We’ve been in a crypto bull mkt for 3 yrs. Money that are willing & able to long this mkt in short term are already doing so. The rest of inflows are steady & incremental.

2) Prob the bigger reason— the Fed’s liquidity provision is not accelerating. If anything, Fed balance sheet expansion has slowed down.

Are we going to see accelerating inflows in next 6 mos? The answer is almost definitively no.

The Fed is taking foot off gas pedal, b/c US economy is in good shape. Tapering has started & at least 3 rate hikes expected in 2022/23. Central banks in Asia (except China) likely follow suit. (Some have already raised rates, eg S Korea.)

Inflation in US & everywhere else is still mostly b/c of covid-related supply bottlenecks. That part the Fed can do nothing abt.

But in US, unlike in many other countries, a heating up of demand is also happening, partly b/c gov over did on covid stimulus.

Unemployment rate in US has dropped fast & is now close to pre-pandemic level.

Wage growth is the highest seen since 2008 crisis.

From both inflation & biz cycle perspectives, monetary tightening is totally justified & the Fed should follow through in the coming 6 mos.

Since BTC & ETH rely on acceleration of new inflows to perform & there’s no such acceleration on horizon, sideway action is the most I can hope for on these two. (There’re additional bearish factors for ETH as I already talked abt before.)

https://twitter.com/TaschaLabs/status/1477034013265051650?s=20

Not only that, from now till whenever more clarity emerges abt Fed’s pace of tightening, mkt will be on edge constantly. Expect 15-30% sudden selloffs as commonplace.

But if you think worsening macro backdrop means long-only investors can’t make money next 6 mos, think again.

Despite lack of action from large caps, we’ve seen rise of new gen alt layer 1s & other projects taking spotlight. If you’ve held Sol, Avax, Luna through 2021, your portfolio is still close to ATH.

(Though as soon as SoLunAvax became a meme, you know mkt is ready to pivot to other pastures. Are you adapting?)

In previous crypto cycle tail end, existing liquidity flew from large caps to smaller ‘alt coins’ & caused latter to pump beyond fundamentals. Sharp drop of BTC dominance was a sign of cycle ending.

But BTC dominance has barely gone down last 6 mos—stark contrast w/ previous ‘cycle’— despite SoLunAvax & the like going to moon. Why?

(BTW, like this so far? I write about ideas on investment, macro and human potential. Subscribe to my newsletter for updates 👉 taschalabs.com/newsletter .)

Partly b/c of poor performance of ETH, the biggest non-BTC token. Ethereum adoption growth is held back by high tnx fees. This is not going to change in short term (again, pls refer to my ETH article.)

Even though alt L1s surged bazillion percents, they started from nothing & are still small. Meanwhile, boomer alt coins that used to have sizable mkt cap but haven’t kept up w/ time are being hammered hard.

So despite web3 adoption gaining so much ground in 2021 & builders / users rallying around new chains & new projects, BTC dominance barely budged. Does this sound like justice to you? I think not, either.

My assessment is we’re still a mile from seeing the end of this ‘cycle’, where we shall see BTC dominance goes down significantly. And there’s still ample existing liquidity in crypto to make that happen.

https://twitter.com/TaschaLabs/status/1479285648057987075?s=20

All it takes is continued rotation of existing money in crypto. And rotate they will. It doesn’t take much for newer projects w/ potential to grow given how small they are.

Take the ’tier 2’ alt L1s for example— Cosmos, Algorand, Near, Fantom, Elrond, Harmony. They have grown a lot yes, but have combined mrk cap of only $43 bn. Each of them will need to pump another 350% to make BTC dominance drop from 40% to 20%, if BTC price stays where it is.

Mind you I’m not saying these are the exact & only ones that’ll grow. It’s simply to illustrate the magnitude of price increase implied for 2nd & 3rd tier alts if BTC dominance is to lower by meaningful extent.

So I’d be positioned in promising projects where existing liquidity will likely flow in next 6 mos. What are those projects? As I already wrote abt previously, 1) crypto gaming, 2) interoperability/multichain solution, 3) alt L1s/L2s.

https://twitter.com/TaschaLabs/status/1470121284990242817?s=20

For 3), again you may want to look beyond SoLunAvax & into tier 2 if your horizon is shorter. If you’re comfortable holding beyond 1 yr, you may not need to care abt any of this.

Still, since BTC & ETH are essentially funding source of other tokens, if the former tanks, the latter won’t live well for long. And we’re in a macro environment where sudden sharp downside vol will be more frequent.

But the train of crypto adoption is not stopping. Even if we don’t have acceleration of inflow in near term, I still expect enough inflow to hold the fort on BTC & ETH prices but w/o making new highs.

TLDR:

1 Expect higher volatility & more sudden crashes next 6 mos

2 BTC & ETH new highs unlikely

3 Rotation towards higher risk/reward projects is ongoing

4 Growth of gaming / alt L1&L2 / interoperability projects continues lower BTC dominance

5 Position accordingly

Full article at taschalabs.com/my-crypto-mark…

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