The flood is coming. When you hear it, something almost feels right about that line.
The DeFi Degens, the leverage, the Doge coin owners, even worse, those Shiba Inu holders. Dozens of OHM forks, hundreds of inflationary tokens with no intrinsic value, digital art and the nerve to change scripture from crypto to Web3.
If you feel it for crypto, you probably feel it for the stock market too. The Fed, quantitative easing, the U.S. national debt size, the U.S. Dollar, government handouts. It's the endgame and you can foresee the future.
It probably doesn't stop there. We could go on about politics (the corruption!), religion (the infidels!), culture wars (the right wing or the left wing!) and many others. The flood is coming, seemingly everywhere. It feels right because it's an old, old story that resonates with our instincts. Many of us have heard of Noah's Ark, but the story is much older.
Via Time:
The story of Noah may be part of the Abrahamic canon, but the legend of the Great Flood almost certainly has prebiblical origins, rooted in the ancient civilizations of Mesopotamia. The Sumerian Epic of Gilgamesh dates back nearly 5,000 years and is thought to be perhaps the oldest written tale on the planet. In it, there is an account of the great sage Utnapishtim, who is warned of an imminent flood to be unleashed by wrathful gods. He builds a vast circular-shaped boat, reinforced with tar and pitch, that carries his relatives, grains and animals. After enduring days of storms, Utnapishtim, like Noah in Genesis, releases a bird in search of dry land.
The story exists in many variations across different cultures because it probably speaks to some core truth. We should always be vigilant, otherwise something may come and wipe us out. Humans learned a long time ago that watching out for predators and other dangers paid dividends.
The recent price action in crypto is ringing some alarm bells. Many assets are down substantially. Is this just another storm or should Satoshi be building an Ark for the flood? The news media seems to think the latter.
Let's turn on the weather channel, examine the skies and look for some digital raindrops.
If this is the flood, it likely implies:
Everyone is running for cover
The strong do well and the weak get washed; and
The subsequent time period has limited to no resources
Running for Cover
As a proxy, Bitcoin price at $35,000 means that it has gone nowhere in the last twelve months. It was at $35,800 on January 20, 2021. For some token prices, the diagnosis is much worse. Before reviewing price, it's best to look under the hood first. Is the activity in the space running away?
Total Locked Value (TVL) across many blockchains on January 1, 2021 had totaled $19.07 Billion as measured by Defi Llama. Today, it's at $221 billion, a 10x net increase. The metropolis is still bustling.
In the world of non-fungible tokens (NFTs), both digital art and gaming is going at full speed. There are some serious funds flowing into the space.
When looking at the number of active addresses across different blockchains, the numbers have also climbed steadily. Overall, prices are down, but activity remains.
The strong do well and the weak get washed
If the flood is happening right now, the weak should be getting washed away. The general consensus is that Bitcoin, the oldest and largest cryptocurrency, is the bellwether. On the other side (and with somewhat comparable liquidity), we have goofy, meme coin Doge.
When we look the price action of Doge coin versus Bitcoin, Doge has actually been outperforming in 2022 year-to-date. At the time of writing, Doge has also fared out better in the last three days of extreme downside volatility.
If crypto winter is coming, it would be quite surprising to see this type of dynamic.
Daily chart of Doge/Bitcoin from January 1 to January 23, 2022
While we’ll omit most of the charts, for the past few months, the relative price action in Comos, Fantom, Near and Rose have also been tremendously positive against Bitcoin. These are smaller scale but real projects in the space. Markets anticipate, so the relative strength is noteworthy and counterintuitive for a crypto winter scenario.
Daily chart of Fantom/Bitcoin from December 2021 to January 2022
The subsequent time period has limited to no resources
The last “crypto winter” denotes the time period after the ICO craze in 2018 until late 2020. There are some heroic stories of people building what are now bluechip projects with a team of two and $50,000. No resources were to be found and only the true believers stuck it through.
“They don’t know know a crypto winter is like” is a common phrase used. “Wait until the bear market” is another. It is as if today’s crypto winter would feel like 2018.
If we start with the data shared above, it’s obvious that 2018 was a different era. Back then, the number of active users, total locked value in the ecosystem, NFTs, and the number of blockchain options were relatively lower by more than 95% on all accounts.
We didn’t even discuss VC investments.
The amount of money that has flowed into crypto in the last 12 months is staggering. If this is the flood, on average, there seems to be more than enough resources to weather the storm. It would take some time for all that money to burn out.
Satoshi’s Ark
In traditional finance, there’s a saying that the market is constantly climbing a “wall of worry”. In the last 10 years, do you remember the US credit downgrade, the Greek debt default, the US fiscal cliff, Detroit bankruptcy, ISIS, Brexit, North Korean missile test and Ebola?
It might be that we’re now climbing crypto’s wall of worry.
MSCI World Total Return Index from 2009-2018
While the activity is robust, some meme coins are outperforming and the money spigot is still flowing, it is true that anything could happen. Nobody has a crystal ball. Reserving a seat on Satoshi’s Ark could still be a prudent decision. We can still be prepared for the flood, if it happens.
In the spirit of seat reservation, there are a number of actions that we can take today:
Assess the liquidity of positions in our portfolio
Explore delta neutral strategies
Adjust the leverage of the portfolio to healthy levels where it minimizes the chance of any margin calls
Ensure we have access to liquidity. This could mean having cash on hand and access to credit
Evaluate buying opportunities and have a plan. When chaos strikes, that’s usually the best time to buy valuable assets
It’s all a game of probabilities and crypto prices can move a lot and fast. Net net though, if Bitcoin, blockchain, NFTs and Web3 are going to change how we interact in the long term, summer > winter in the long term.
All opinions are my own. This is not investment advice.