The Ethical Long: Cycles and Capital Formation

Since August 11th/12th, I began writing thoughts to capture my mental model around identifying inefficient capital allocation in crypto assets, and the market forces that drive positioning on the margin – which I believe is under-recognized today due to what has been a programmatic supply overhang (re: alt emissions, chunky BTC/ETH sellers).

The dislocation created by seemingly endless supply has resulted in four mass ~1B long liquidations this year, the most recent of which broke an 8-month BTC-trading range – which I interpret as a unique opportunity to challenge microstructure underpinning a) “flight to safety” positioning and b) decomposing what actually drives liquidity & markets.

My belief is that without new money: in a scenario where total available dollars available has shrunken vs. March & where previous-cycle ATHs have settled, order-book combativeness & psychology of the buyer vs. seller are the fulcrum underpinning how and why money moves

Herein, I seek to challenge the status-quo of what is considered the “safe” risk-barbell (BTC/SOL/Memes) by framing risk-reward in a structural way: starting at the majors and subsequently walking through the conditions that must be met to create a sustained trickle-down effect buoying alts, or specifically, “OTHERS.”

This is the result of my deep dive dissecting and reviewing L5Y price / volume / dilution history for 150+ names Chapter 1: Introduction

To start: I believe that BTC can only resolve in 2 directions from here:
i) BTCUSD: down uniformly, marking the cycle-end (~20-30% p-weigh)
ii) BTC.D: down and lagging capital returns against ALTS/OTHERS (~70-80% p-weigh)

Under i) – this needs to be explained in more nuance (which I seek to do below): in contrast to popular trains of thought, I believe that the outcome of BTC is both macro-agnostic and politically-agnostic: these 2 buckets are being far-more weighed than they should be as participants seek to retroactively precursor the future, and I will break open these preconceptions

Under ii), and supporting the punchline of what I believe: OTHERS – especially targeted ones with low liquidity, short-build up, unsavory tokenomics and correspondingly low resting OI – should receive a significant demand shock creating a market signal for a full-shift in the risk-reward spectrum. This will be done without a gearing narrative, and flow according to capital efficiency.

To me, the question we should all be asking is:

Where can one find the most efficient outcome from inserting $1 of flows relative to EV of wealth creation re: market cap. expansion?

With the subsequent question being:

Is this asset still BTC (best performing single asset YTD)? Why or why not?

Macro & The Ethereum Trade

This is a very long thread and intends to capture my iterative development around ETH from ~$3200. This is not suggesting you long or short ETH in any capacity, but rather my view on market forces & fundamental analysis underpinning flows

Today's conviction in ETH is borrowed. Most traders who are long ETH are either over-exposed and "need" it to do well given their blended cost basis or are simply taking a directional view from GCR

In June, I wrote about how I believe equities would top in Q3, with the subtlety that the ETH ETF could rally into it. You can find this in my highlights

I pivoted early July, becoming incredibly bearish on Ethereum and the ETH ETF, supported by a contrarian thesis around positioning, flows & game theory. I have shared the below with a small group, whilst iterating & refining

The last 3 weeks have been incredibly difficult to hold conviction, especially given my less than ideal management of the trade. At one point, I actually pivoted long for 8 hours on the day of the ETF launch, hoping to scalp an artificially-manufactured inflow # to push up before sustained flows bringing the trade down. That did not happen and so re-assumed short positioning after

What you must believe:
1) Germany exposed the fragility in crypto reflexivity (unprepared for significant downside move even if nominal - Germany $3B sold vs BTC $1.2T asset)

2) Massive ETH supply glut that have not organically participated in the cycle in actually determining FMV bc of interventionist protocols (LST/LRTs and then the ETH ETF bubble)

3) New money will not come in to backstop ETH to the degree it is being projected / priced in Executive Summary (7/15)

Not calling a top, think prices can still be ~10% higher but the hotter this local rally is, the more convinced I am that it's correct to be HTF bearish

The way I see the tape of events is that election flows are now being front-run - which I expected to happen later in the quarter - given the white swan of Trump effectively confirming his house victory via the shooting (and the subsequent nod to a pro-crypto VP)

The bull case for ETH to me was/is:
1) $ETH manifests as an institutional yield bet
2) $BTC and $COIN flows push toward $ETH
3) Net-negative positioning is caught off-side on major announcements (eg. 19b4, S1)

To address each one:

1) The lack of appetite to support the mid-range for $ETH & lack of ability to de-correlate strongly from BTC has shown that it's still being viewed uniformly. Given the disconnected move in equities (NDX/S&P have retraced open) the "bet" at this point for $ETH if you are layering a long, is that appetite out the gate outperforms consensus estimates. I don't think that will be the case

2) There is not enough money to prop up equities, BTC and ETH. As equities unravel, I think crypto basis $$ becomes "first-out" and think we have categorically under-estimated just how much of this $$ supporting BTC is propped up on this trade (which I believe has confluence with why BTC.D has been so dominant this cycle & why the market has been so hot)

3) ETH OI is up 200M units from the lows (+20%) vs the original 19b4 move (+25%). The playbook is the same: underperformers have no option to but to allocate to ETH / stay in the trade but to endure the volatility, a lot of the money is being recycled/borrowed

The lack of reaction around the S1 announcement is quite telling IMO (40 bps). Funds aren't eager to bid ETH because they are either:
a) holding down from the first move (average $3400 entry where they are B/E) and/or
b) didn't deploy at the lows and want to see confirmation around trading flows to justify a bid.

Therefore, they are bidding alts in the interim to catch some of the lagging reflexivity

I acquit there is a lot of noise because it's difficult to discern how systematic weakness really is given there was such a massive crypto-specific selling event recently eg. (Germany). A lot of the selling has also been happening during Asian hours as well (GOX selling) so there is the chance that we are discounting prior "bearish" events that, if understated, have the potential to create more mean recursion

But I think a lot of the add'l "catalysts" that people are trying to sell you on are extremely overstated (eg. FTX claims - the bulk of these claims are going to distressed buyers who are not crypto-inclined; rate cuts are bullish, etc)

The lynchpin behind this view, to be clear, is that equities have topped at least over the next 6-12M creating widespread defensive positioning. This thesis is completely invalidated if that does not persist to be the case

Essay: Making the Case for Ethereum

This essay is the culmination of pts 1-3 I have published, where I opine around:

Pt. 1: Timing of flows
Pt. 2: The merge of TradFi participants into CryptoFi
Pt. 3: Re-imagining "yield"

Punchline: I believe ETH is greatly misunderstood and mispriced, creating an opportunity to create a cheap risk-adjusted position relative to the pool of ALL publicly available-assets today

This mispricing exists because of:
i. Structural inefficiencies with public/private institutional-grade assets
ii. Pricing heuristics

Herein I seek to create the "what you must believe" to mechanically answer how an investment in ETH solves to be a superior alternative product consumable by a $130T fixed income market+

To begin with a keynote:

Marc Rowan from Apollo addresses back in 2023 the philosophy of creating a spectrum of products enabling "excess returns at every point along the risk-reward spectrum"



Private-public opportunities are emulsifying (the notion of "private = scary" is being debunked), and similarly, what is considered an acceptable returns threshold, and the HOW TO of creating said return is ALSO broadening

In pace with this - this slow, but eager, pool of capital available to deploy into a 8-12% asset is the DEMAND upon which there needs to be a custodian to SUPPLY: ideally not by a new proctor (eg. Celsius/FTX) but something trustworthy: a BlackRock or Fidelity

Why now:
The catalyst to remove this mispricing has happened via the ETH ETF as a policy signal likely directing the flow of permanent capital rather than the temporary debt-like capital that underpins crypto today

Extrapolating how this can magnify: we seek to increase our understanding of something by measuring it against other precedents

E.g.
"New memecoin" <- How does this compare to WIF?
"Bitcoin ETF" <- How did this compared to the gold ETF?
"Ethereum ETF" <- How did this compare to the Bitcoin ETF?

The search for symmetry - even where there may be none - is where opportunities are derived - this heuristic is lazy, but usually quite efficient

However, with ETH, I believe we are entering an unprecedented outcome where prior precedents are a poor retrofit given the separation in classification: BTC is observe as a fiat-hedge whereas ETH has the potential to be a retrograde self-sustaining yield product, able to displace significant commodities & bonds flow as a superior conduit

The pool of capital and window of opportunity, can be condensed very finely via the following:

1. Fast money moved to erase pricing inefficiencies (borne out of the perceived move seen prior with BTC ETFs)
2. Slow money - without any guardrails set in place today - will soon be able to buy ETH, and therefore participate in the value accrual of the underlying network, without actually using it
3. Toxic flows at open are materially lower than that, and the discount, associated with GBTC

ETH therefore represents an instrument borne of yield - opening up the book & risk appetite as an asset that fits in the alternatives playbook, helping bridge today's gap of "premium" assets (land, AGI, tech) that has already been bid up - meanwhile ETHBTC and ETH performance in general appears to be an unpriced & plausible local bottom

Thus, while global liquidity is at a crossroads - and private markets suffer from lagging, or even fraudulent mark-to-markets (office/industrial REITs), dislocation continues to exist amongst the typical debt-equity spectrum.

The average investor is "tapped out", with the age-old "60/40 portfolio" having been defunct for many years now: ETH very well may be the sovereign answer & I under-write that inflows will be priced accordingly as soon as the 1st domino dropsapollo.com/insights-news/… Pt. 1

https://x.com/lazyvillager1/status/1800637534122168621

Crypto Valleys is a play-to-earn game that has caught the attention of CT by storm, with 20K+ and 5K+ Followers and Active Users on Twitter & Discord, respectively.

I believe there is an emerging opportunity here, and opine around 1 way on "how to win."

See my printout here Background:

I am an investor full-time working at a Top 15 AUM shop.

Separately, I have played many of these gamified yield platforms in the past and have also papered threads around the economic theory underpinning "noding" which is the starter mechanism behind most of these games

https://twitter.com/lazyvillager1/status/1475432666908352520

1/ Some observations on $AVAX

This is not a trade because a trade requires timing

Note for the bookmarkers - this tilts bearish

Which pains me since I have very fond memories of $AVAX from the previous cycle

Hopefully someone can point out where I’m missing something 2/ We often hear the notion that price precedes narrative.

$AVAX is near the price it was in December going into the Bitcoin ETF, so one must ask Sisyphus - why are you pushing the rock?

Is $AVAX going to reclaim former heights? $100 incoming?

1/ An essay:
- Digesting risk as it pertains to your own life
- Parallels between investing & poker (or other zero-sum games)
- My big bet (hint: AI x Crypto)

Some theory by a former banker and current investor 2/ First - a diatribe. I find that many of us are quite competent when evaluating career risk. We are able to easily contrast the value of our time when we can qualify it via an hourly rate or what someone else is being paid.

We are much worse when it comes to assessing...

(1/x)

gm this is my exit from stealth post; my last long-form essay was ~2 years ago

during this time I have continued to work in TradFi; I currently work in an UMM/MF tac opps strategy in NY

i pen some thoughts here on where I see institutional flows novel to crypto (2/x)

as a reminder, i use CT as a journal, specifically wrt the lens of how i see the world

eg.

vs nodes:

vs bad mgrs:

vs late pivots t-backeds:

vs snowdog (@satsdart's rug):

https://twitter.com/lazyvillager1/status/1475432666908352520

https://twitter.com/lazyvillager1/status/1494826677456625666

https://twitter.com/lazyvillager1/status/1483289855652241408

https://twitter.com/lazyvillager1/status/1462444736568987649

Good thread but think it's more simple than this (can't believe it's me the one saying this of all people)

BTC > ETH is being selected as BTC is more dogmatically positioned as being as a virtual reserve currency

@terra_money is attempting to create a 2022 Silk Road

https://twitter.com/adamscochran/status/1510368365805772803

@stablekwon understands that a currency's inherent value is driven by a) immutability and b) divisibility

BTC contextualizes UST as contemporary USD akin to vaulted gold (digital in this case) per the previous world order

1/ My thoughts on $APE as a response to @DegenSpartan's prompt on why this is gaining so much momentum

I took a long position twice - today at ~$8.50 (exited at $11.20 on a stop) and re-entered just now at $12.50 2/ To contextualize - in less exotic M&A markets, multiples help drive valuation - but we often see an incorrect application of them in the metaverse/Web3

Ex. "market cap of a token trades at x and b token trades at x/y so this can be a y profit multiple" opp - we see this often

1/ @danielesesta announced today that $TIME is exiting the (3,3) space and pivoting toward the SPAC model

As a former investment banker, I've worked on SPAC transactions & pitches, and have friends who work in business dev. at such co's post de-SPAC

Herein lies my thoughts: 2/ The key questions that I think people want answered are (and what I will attempt to do) are:

- What is a SPAC?
- What are risks involved w/ this move?
- Will this move be healthy for the protocol?
- Are t-backed coins actually dying / was this necessary?

1/ If you're running institutional capital and you whaled the (very successful) @Battleboobas launch, let me help you out with your Q4 2021 Quarterly Report to LP's 2/ "Holding "NFT: Booba's" at cost. We anticipate NFT volume on AVAX marketplace to grow ~25-30% quarter over quarter, which Booba's, given branding and art targeted to surging demographic (male, aged 18-35), should capture....

1/ To start the year in 2022, wanted to share a few musings on:

- the psychology of crypto and de-coupling performance from identity
- getting addicted to being over-active
- why copy-trading isn't a winning strategy

This is a follow-up to a request that a follower made 2/ Not a standard l/s thread.

A caveat: I am not a full-time daytrader or someone w/ godly PnL. Like most of you, I work a 9-5 (or in my profession, more like a 9-9+) and view crypto as an add'l source of income

1/ BIG THREAD 3 - I am about to kill all node projects.

I don't normally ask for RTs but if you like this, please share/comment/etc so we can STOP THE CAP.

Have been tweeting against nodes for ~ a month now and I'm getting increasingly frustrated by seeing CT $$ burned to zero 2/ I usually provide a financial model - but this time, none is needed. 2 reasons:

1) I want to make this palatable and as easy as possible to digest. No analogies, no projections and no ranges.

2) Imprecision w/ projections due to high variation in reward payout ratio, etc.

Really impressed by the @firatinsayfasi NFT drop. Saw @el33th4xor (AVAX founder) had one & had to cop (my PFP). Convinced some friends to buy some and think we now own ~250 combined.

No Twitter, Disc or TG. No advertising.

5,000 mints sold out <12 hours on a Christmas launch! @firatinsayfasi @el33th4xor Great volume to back it up as well. Anticipate this being the highest volume NFT for at least another week or so.

Source: avaxnftstats.com

1/ UPDATE:

Today marks the 1-month anniversary since I made my first tweet - very grateful for my audience and the opportunity to publish thoughts & research.

I also wanted to share thoughts on my brand (and perhaps this may be useful for others who want to start writing too) 2/ As I think about my positioning (what do I do different? how do I add value?) amongst others on CT, I think my platform is centered around:

- merging traditional finance theory w/ a rapidly changing DeFi landscape
- digesting macro themes and iterating/refining in prose

1/ An analogy:

There are 50 lemonade sellers in your area. They all offer you the opportunity to cut you a % on subsequent capital raised until/if you break-even; thereafter, you get some % of lifetime royalties. Assuming you want to be in lemonade, which one do you invest in? 2/ Well, you might compare traffic - which lemonade stand is on a block that generates the most traffic?

You could also evaluate the lemonnomics and calculate which stand's proposition gives higher basis points

1/ GM. As we enter the next week, I wanted to share some thoughts on:

- Preserving capital via early/partial exits w/ the re-intent to invest later
- What I've seen this week, and how I've adapted
- The notion of passive income, and why I feel like it is being over-embellished 2/ As per custom, some financial analysis attached first.

docs.google.com/spreadsheets/d…

1/ Hi all - I am making a new thread discussing @SnowdogDAO, @SnowbankDAO's acclaimed driver of millennial attention to yield, investment and crypto in a fun and engaging way. Similar to my 1st thread, model and financial analysis attached first

docs.google.com/spreadsheets/d… 2/ And actually - if you hadn't seen my previous post where I opined on the current landscape of t-backed coins - I would recommend doing so, even if you were an #OG reader. I have since added 12 new tweets on potential governance & innovation -

https://twitter.com/lazyvillager1/status/1461779826080198659

1/ Hi all - w/ the rapidly rising popularity of t-backed coins (re: OHM forks), I attempt to model out near-term price action and long-term longevity looking at $OHM, $TIME, $IN, $SB and $SDOG (in my view the 5 most popular / highly traded) to find value

docs.google.com/spreadsheets/d… 2/ My background is in finance/economics; formerly an investment banker in NY. Currently on the buy-side full-time. My thesis is that there is value in taking contemporary concepts (EM hypothesis, etc) and applying them when possible to the rapidly growing field that is crypto