Tactical Framework for Inflection Points
Since this last post I've gotten a lot of angry responses from people I thought were more sophisticated...a few of you were thoughtful in your disagreements and made me rethink a few points.
The following post is for those few and focuses on the tactical side of a probable bearish view.
First off, mediocre crypto investors (by definition most) have a binaristic way of viewing bull and bear markets.
Unlike in tradfi where the term "bear market" is rigidly defined, average investors have no consensus on what bear/ bull markets even mean in crypto!
e.g. If market dips 50% but in a day and recovers in a month, was it a bear market?
e.g. If market grinds down 30% across the board, but across 6 months with minimum respite, was that a bear?
e.g. If nothing but BTC trades up over a 6 month period, was that a bull or a bear?
This lack of precision mostly stems from
1) We are all fucking stupid and emotional animals lol
2) Crypto's heightened volatility, wherein by magnitude alone most conventional definitions of "bull and bear cycles" can play out in a week, and;
3) Misunderstanding of time frames, which is made more confusing by the shortened liquidity horizons in crypto - whereby high-risk, early stage ventures have publicly-traded quasi-equities while in seed stage.
TL;DR you are all logged onto a feed where founders are shilling on a decade time frame, VCs are shilling on a 3-year time fame, traders are fudding on a 1-month time frame, and scammers are pumping on a 4 hour time frame.
And you wonder why people are confused...
However, having a binaristic view on positioning is NOT why most investors fail. The inability to reconcile these conflicting thoughts across time frames is.
Having the view "I'm bullish on crypto" and using that as justification for being max levered long is the reason why every super-cycle bull boy got carried out on a stretcher last cycle.
Having the view "meme coins are overvalued" and using that as a basis to go short on every major meme coin last year was also a recipe for disaster.
Having the view "AI x crypto is the future" and investing in every billion dollar pre-product AI Crypto hyper ponzi with 4 year lockups is why some we are going to see some abysmal DPIs.
All views above could be directionally correct over years, but what's the point if you lose everything betting on them in weeks.
The entire issue is that crypto itself may be a secular mega-trend, but the market KNOWS this and prices it in as such already.
How confident the market is in this supposed knowledge depends on where we are in the cycle.
That's why investors must also know where we are. Predicting where prices go is impossible, but recognizing what regime we might be in, probabilistically, is alpha.
The tricky part is in recognizing the changes in these regimes - the inflection points between bear to bull, and bull to bear, are often only obvious in hindsight.
Sophisticated investors are able to keep this in mind and act probabilistically, and constantly re-evaluate their view based on the assumption the future is massively path dependent on new inputs daily.
"Wait, so if not 'bull = buy, bear = sell', what exactly can we do?"
CT is not a place for nuance, so hopefully these tactical, theoretical examples help illustrate my point.
Naive Approach:
"I think bear market soon"
-> sell everything, goes short, bear tweets every day
Average Approach:
"I think bear market soon, but long term am bullish on crypto"
-> sell lowest conviction positions, free up cash to increase ownership in projects when prices get lower
Sophisticated Approach:
"I have good reason to think are entering a bear market more likely than not over the next 6-12+ months, and VaR in that scenario is above what I am willing to tolerate.
However there are credible catalysts in a 1 month horizon that can prove me to be very wrong and markets can explode to upside.
I am very long term bullish crypto, on a 5+ year horizon"
-> sell most spot exposure to free up cash, buy 1m calls to delta hedge portfolio, tighten risk parameters and shorten time frame on any trades, deploy on 5 year secular growth when prices overreact
etc etc
The above are simplistic examples, but hopefully illustrates how probabilistic views map over to actual tactics.
I have seen first hand these differences in expression in risk make a "bear" outperform a "bull" in a "bull market", and make a "bull" outlast a "bear" in a "bear market".
Finally, remember all this market talk pales in importance relative to the meta-game:
The game of winning public acceptance for crypto.
Without it, bulls, bears, doesn't matter.
There will be no game to play.
Have fun and good luck out there all.
Since this last post I've gotten a lot of angry responses from people I thought were more sophisticated...a few of you were thoughtful in your disagreements and made me rethink a few points.
The following post is for those few and focuses on the tactical side of a probable bearish view.
First off, mediocre crypto investors (by definition most) have a binaristic way of viewing bull and bear markets.
Unlike in tradfi where the term "bear market" is rigidly defined, average investors have no consensus on what bear/ bull markets even mean in crypto!
e.g. If market dips 50% but in a day and recovers in a month, was it a bear market?
e.g. If market grinds down 30% across the board, but across 6 months with minimum respite, was that a bear?
e.g. If nothing but BTC trades up over a 6 month period, was that a bull or a bear?
This lack of precision mostly stems from
1) We are all fucking stupid and emotional animals lol
2) Crypto's heightened volatility, wherein by magnitude alone most conventional definitions of "bull and bear cycles" can play out in a week, and;
3) Misunderstanding of time frames, which is made more confusing by the shortened liquidity horizons in crypto - whereby high-risk, early stage ventures have publicly-traded quasi-equities while in seed stage.
TL;DR you are all logged onto a feed where founders are shilling on a decade time frame, VCs are shilling on a 3-year time fame, traders are fudding on a 1-month time frame, and scammers are pumping on a 4 hour time frame.
And you wonder why people are confused...
However, having a binaristic view on positioning is NOT why most investors fail. The inability to reconcile these conflicting thoughts across time frames is.
Having the view "I'm bullish on crypto" and using that as justification for being max levered long is the reason why every super-cycle bull boy got carried out on a stretcher last cycle.
Having the view "meme coins are overvalued" and using that as a basis to go short on every major meme coin last year was also a recipe for disaster.
Having the view "AI x crypto is the future" and investing in every billion dollar pre-product AI Crypto hyper ponzi with 4 year lockups is why some we are going to see some abysmal DPIs.
All views above could be directionally correct over years, but what's the point if you lose everything betting on them in weeks.
The entire issue is that crypto itself may be a secular mega-trend, but the market KNOWS this and prices it in as such already.
How confident the market is in this supposed knowledge depends on where we are in the cycle.
That's why investors must also know where we are. Predicting where prices go is impossible, but recognizing what regime we might be in, probabilistically, is alpha.
The tricky part is in recognizing the changes in these regimes - the inflection points between bear to bull, and bull to bear, are often only obvious in hindsight.
Sophisticated investors are able to keep this in mind and act probabilistically, and constantly re-evaluate their view based on the assumption the future is massively path dependent on new inputs daily.
"Wait, so if not 'bull = buy, bear = sell', what exactly can we do?"
CT is not a place for nuance, so hopefully these tactical, theoretical examples help illustrate my point.
Naive Approach:
"I think bear market soon"
-> sell everything, goes short, bear tweets every day
Average Approach:
"I think bear market soon, but long term am bullish on crypto"
-> sell lowest conviction positions, free up cash to increase ownership in projects when prices get lower
Sophisticated Approach:
"I have good reason to think are entering a bear market more likely than not over the next 6-12+ months, and VaR in that scenario is above what I am willing to tolerate.
However there are credible catalysts in a 1 month horizon that can prove me to be very wrong and markets can explode to upside.
I am very long term bullish crypto, on a 5+ year horizon"
-> sell most spot exposure to free up cash, buy 1m calls to delta hedge portfolio, tighten risk parameters and shorten time frame on any trades, deploy on 5 year secular growth when prices overreact
etc etc
The above are simplistic examples, but hopefully illustrates how probabilistic views map over to actual tactics.
I have seen first hand these differences in expression in risk make a "bear" outperform a "bull" in a "bull market", and make a "bull" outlast a "bear" in a "bear market".
Finally, remember all this market talk pales in importance relative to the meta-game:
The game of winning public acceptance for crypto.
Without it, bulls, bears, doesn't matter.
There will be no game to play.
Have fun and good luck out there all.
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