Where Are We In The Cycle?
And is this time really different?
I tend to think the wisdom of the crowds is mostly a farce.
Sure it matters for some things, but there are too many examples of humans acting irrationally (especially when it comes to money), or not understanding the cognitive biases they experience.
More specifically, I mean this in the context of smaller crowds full of people predisposed to overconfidence/irrationality.
Financial market participants, for example.
Just after the FTX collapse in November 2022 — and with the QQQ’s ~30% off the ATHs — I was curious what people thought about the potential for a proverbial “soft landing”. Needless to say, only 1 in 5 was fairly confident we would get one1.
A year later, with BTC having already doubled (to ~$35k) and in an undeniable uptrend, I was once again curious how people were feeling. Generally I use polls like this to gauge positioning. It’s only one data point but I find most respond with what they want to happen — especially on twitter. So it wasn’t super surprising to see only half the crowd thought a ~30% move higher was more likely than a 20% pullback.
Even fewer were expecting prices to keep pushing higher.
In the moment I felt very confident both $45k and $60k were coming first for a lot of reasons. I feel less confident about shorter-term price action now, and to some extent less confident about what will happen over the next ~6 months. But a ton of people have been asking “where are we in the cycle?”. It’s a bit of a loaded question and already implies some things that I’m not sure are necessarily true. But alas, I will share how I’m feeling so that whenever I inevitably get this question next, I can just point them to this piece.
The consensus view seems to be we’re in the middle of the cycle. Anecdotally the most common response I hear is the 5th or 6th inning. Even if this is true, it’s a bit of a cop-out answer to me. This is what you say when you don’t have an opinion and want to hedge. It could be true, but I also wouldn’t be writing this piece if I thought that.
So where are we in the cycle, what inning are we in, is it over or are we so back.
Let me start with one more tweet from November 2022.
I bring this up to illustrate that price and time are two very different things in the context of “this cycle”. If we look at these separately, we’re somewhere around week 70 of the bull market purely from a time perspective. I would argue this is actually overstating the true length of this run because I can count on two hands the number of people who were actually bullish back in November & December 2022. If I were extremely generous I’d say ~most~ people began to realize what was going on sometime around late Q1/early Q2 last year. So let’s say it’s been a bit over 12 months2.
From a price perspective, we’re roughly 3x off the bottom on BTC and 2.5x off the bottom on ETH3.
My sense is those who’ve been around crypto for multiple cycles feel we’re closer to the end than the beginning. Much of this is because the playbook they are accustomed to hasn’t panned out this time around.
We wrote something related to this dynamic in our annual letter…
Prior crypto cycles have seen a logical flow of BTC → ETH → long-tail of crypto assets (where venture and token investments are made) as capital moves out on the risk and speculation curve, and market participants believe in new narratives. Narratives are often around fundamental shifts of what crypto enables, creating a new wave of believers that either are converted for life, or churn out as prices come back down once speculation subsides.
This cycle has been quite different (thus far) and something many of those with prior heuristics have been slow or unwilling to adapt to. To put it bluntly, that unwillingness leads to cope. We are all human and so we can’t help but look around and judge ourselves (read: our bags) on a relative basis — it’s not enough that we own assets that go up 3-5x when things we don’t own pump 10-20x. This is especially true if the things pumping 10-20x are things we don’t align with like. In my view, this is the crux of why a lot of people feel we’re either in the middle or latter half of the cycle. They watched from the sidelines as assets like Solana went from sub-$10 to over $200. They saw an explosion of memecoins doing 100-1000x’s and screamed internally about it.
“This isn’t the right order!”
“Why haven’t [my bags] pumped like this?!”
“This isn’t supposed to happen yet!”
It’s simply not playing out the way they want it to. So it’s not that they could be wrong, but instead that the market is acting irrationally.
Or that cycles are compressing.
Or that financial nihilism is being pushed to the extreme.
I’m not ruling all of these things out, but there appears to be very little introspection going on4.
To add some context, I know of many cases where junior people at other funds pitched SOL at sub $30 prices. But they were repeatedly rebuffed and dismissed5. Fast forward a few months and it’s laughable how many people were trampling over each other to buy locked FTX coins at much steeper prices.
This is all to say that how people collectively experience the market as it’s going up will influence what stage they believe we’re in. Coming into this cycle, ~most~ were overexposed to the Ethereum ecosystem6 and underexposed to everything else7. This positioning has warped the overall perception of crypto this cycle and distracted many from evaluating where we actually are.
So let’s weigh the arguments for either end of the barbell: are we closer to the early or late stages of this cycle?
BTC ETF approved for trading just 100 days ago
ETH ETF yet to be approved (likely end of 2024 / early 2025)
I have spoken, written and tweeted quite a bit about crypto market structure and why it’s a boring concept that actually has significant implications. This is a bit hyperbolic but I view it as somewhat analogous to tectonic plates — gigantic, slow-moving pieces of the market’s crust. In the moment it’s difficult to appreciate how seismic those shifts will be and what kind of impact the aftershocks will have. But imagine being in crypto for 8, 9, 10+ years and reaching this seminal moment…
BTC ETF’s are approved.
Massive new pools of institutional capital now have legitimate access to this asset class.
Initial inflows are dramatically stronger than consensus expectations.
…And you call top ~100 days later.
But markets are forward-looking Smac! The ETF is now approved and the flows are priced in!
Markets are forward-looking, yes. But they are not omnipotent. They were literally JUST WRONG about ETF inflows. The people who understand crypto, have no clue how traditional market structure works and the people who understand traditional market structure have very little time for crypto. The ETH ETF is inevitable and in my view, the time gap between BTC’s approval and the ETH approval is actually very healthy. It allows some time for digestion, education and post-election clarity. The structural change to crypto markets cannot be overstated.
BTC just printed 7 consecutive green monthlies
BTC gave no opportunities for entry: 16 of 21 weeks green from mid-Oct to early-March
BTC has effectively gone up only for the better part of a year and a half. Prior to April, 12 of the last 15 months were green and there was a stretch from mid-October last year through early-March this year where 16 of 21 weeks were green. That is truly relentless. To be fair though, very few were positioned for what we saw in the first half of 2023. Would it be shocking if we chopped around for a bit? No I don’t think so. But markets trend and it feels like there’s still some PTSD from last cycle’s washout.
I also increasingly feel as if I’m having the same conversations I was having back in late 2022 / early 2023, it’s just that BTC is now ~$60k rather than $18k. They’re not completely the same of course, but the skepticism is mostly around the idea we’ve already gone up a lot, there are no new narratives to push us higher8 and that memecoins have gone ballistic already.
But none of these are real reasons to expect we should go down in my opinion.
Access to BTC ETF hasn’t even reached wirehouses yet
13Fs rolling in
Ok now we’re getting into some nerdy banking stuff. When I say access to the ETF hasn’t even reached wirehouses9 yet, I mean there’s no incentive yet for advisors to begin recommending this product to clients.
When advisors recommend trades, they are categorized as “solicited” and “unsolicited”. Solicited trades are those recommended to clients by their broker (“You should buy ABC”), whereas unsolicited trades are ones the client brings to their broker (“I want to buy XYZ”). The main distinction here is that commissions are paid only on solicited trades.
As it stands today, none of the wirehouses have allowed solicit inclusion in client portfolios for the BTC ETFs. The TLDR of this is that there is literally zero incentive for any of these advisors to recommend these products to their clients. This is just a matter of time though — all of these houses are in a holding pattern of sorts and when one goes, the rest will quickly follow.
The 13F’s continue to roll in too. An important point Eric Balchunas noted a week or two ago was that IBIT had ~60 holders reported (as more report they’ll be added) but they only accounted for ~0.4% of total shares outstanding10. The implication being “most of the bites are nibbles but there a LOT of fish”. The high water mark so far belongs to an advisor in Kansas who put in $20M to Fidelity’s BTC ETF, accounting for ~5% of its portfolio. I mean look at this.
Last halving that has material impact on supply (94% circulating now)
Unprecedented new token supply hit the market
These two tropes feel like we repeat them every cycle to be honest. But they deserve to be noted regardless — Bitcoin now has ~94% of its supply in circulation and the most recent halving may very well have been the last meaningful one. On the flip side, the market continues to be waterboarded with new token supply — new L2’s, Solana ecosystem, bridges, LRTs, SocialFi, carry trade arbs. The list goes on and the aggregate FDV of these projects is both astounding and imaginary. As with every cycle, most tokens will trend toward zero as insiders unlock and dump. Enough has been written and discussed about this though11.
Halving just occurred
Google trend data
Coinbase app store ranking (#270 currently)
The halving literally just happened. Reduced supply. Simple as.
Personally I don’t find these last two super compelling on their own, but that they diverge from where people suggest we are is interesting. If we look at admittedly rudimentary google trend data for things like bitcoin, BTC, ethereum, ETH, solana, NFT, SOL — there is a common theme.
We are nowhere near the heights we’ve seen in the past during true bull markets.
The same is true for the Coinbase app store ranking (currently #270). I’ll come to the controversial question of retail participation soon, but suffice it to say that there is plenty of room for growth when it comes to crypto-native app usage12.
AI narrative saved market
Unemployment can only go up
Tradfi market breadth is weakening
I’m open to the idea that the AI narrative saved tradfi markets back in Q4-22 and Q1-23. Had ChatGPT not been released at that time, maybe traditional markets would have rolled over rather than find solace in a new innovation paradigm13. But you can’t prove a counterfactual and so we deal with the landscape as it stands today14. It’s certainly true that we’ve seen incredible strength in the labor market and unemployment can only go up. It’s also true that traditional markets are seeing a decline in overall breadth…
My belief is we’ve still yet to see the face-melting rallies that come with new ATH breaks. I was vocally bullish for a long-time while people tried to convince me all the reasons it would take a long time to repair the 2022 damage. Most of those same people are now trying to tell me all the reasons we can’t go up more. It doesn’t mean they’re wrong this time, but my read of the evidence today is that we have much higher to go.
I also view the ETH ETF delay as net beneficial for the extension of this cycle, both from a time and price perspective. This is another counterfactual but I think had it been approved in May15, it would have been too close to the Bitcoin approval. Market participants have short attention spans, and jamming these approvals and the subsequent trading of these products together would lead to cannibalization. To what degree, who can say. But giving some space for BTC flows to continue rolling in as the only crypto ETF in town is important. It’s the gateway drug. ETH ETF’s will have their time to shine and in fact, BTC’s performance will act as the best marketing campaign for them. Boomer managers are being forced to confront Bitcoin as an asset class. They can’t dismiss it any longer, and if they underperform competitors who do have exposure to it, they will need answers. Calling it a scam is no longer a legitimate view.
This is what a healthy market looks like. An asset gets oversold and then slowly walks up as more and more people realize they aren’t going to be able to buy the thing lower. There’s a period of consolidation as the market digests, and then the asset continues it’s ascent. Blow-off tops are not the type of thing you want to see if you’re expecting bullish continuation.
This Time Is Different
A terrifying combination of words. Sure you can mumble this to yourself once in a while, or confide in a close friend that you’ve been dreaming about what if. Suggesting it in public though? Prepare to be scorched.
We’ve all been there before. Someone mutters these words and we get to sound smart and snarky by parroting tHiS tImE iS dIfFeReNt in their face. Dunk on them on twitter. Call them foolish. Suggest it must be their first cycle, as if that matters.
Except if you’re here, you kind of do implicitly believe one of these times it will be different.
If you say it and are wrong, everyone makes fun of you and calls you an idiot for thinking it would be different.
Big whoop. Almost none of these people form independent views anyway, so why expect them to react any differently?
But if you see enough evidence suggesting it might be different, and do nothing…then who’s the real fool?
The Flows Grow But Where Do They Go
The biggest outstanding question in my mind is the extent to which some of these passive flows end up moving on-chain. The less interesting version of crypto is BTC16 acting as a new asset class that institutional capital holds as some small percentage of their portfolio, and everything else is a niche internet subculture. But it’s admittedly difficult to determine today what share of ETF inflows will find their way on-chain — either directly or indirectly. You may be thinking — Smac how dumb are you, nobody buying IBIT is doing anything with their bitcoin on-chain. Sure that’s true today, but also it’s not the point. We all know the wealth effect is real in crypto, and the ETF will be a gateway drug for some17. The question is just a matter of scale, and one we probably won’t have a great answer to in the near-to-medium term in my opinion. But we can try to find directional hints…
If we look at stablecoin activity, there’s some telling data. Below you can see that this past November was the first time in ~18 months that stablecoin supply flipped positive. The continued net capital inflows through stables suggests we’re much earlier in the cycle than people appreciate. It’s especially telling given how dramatic the inflows were during the previous cycle18.
We can also observe the aggregate supply of stables on exchanges, which more than halved from peak to trough but are now noticeably beginning to trend higher.
The most difficult translation to find is if and how this activity moves on-chain. Take these with a grain of salt but below is looking at the aggregate active addresses19 (blue line) and stables on exchanges. There are probably a number of conclusions you can draw from this depending on your own sentiment, but my read of it is this:
We saw a huge run up in new active addresses during the last bull run, a massive drop-off as people rage-quit and then a mostly stable floor of activity since Q3 ‘21. We’ve yet to see a new wave of activity, which in my view is a sign retail activity is not close to being back yet20.
It’s also worth acknowledging here that the retail activity could very well be coming through Solana. It’s clear the activity there has significantly increased over the past 6-9 months and my personal expectation is for that to continue.
What about more off-chain data though…from last week’s Coinbase 10-Q we actually see a y/o/y decline in Monthly Transacting Users (MTUs) from 8.4 million to 8.0 million. But trading volume more than doubled both on the retail and institutional side. And interestingly, while Bitcoin’s share of trading volume remained unchanged, Ethereum’s shrunk quite extensively, potentially suggesting appetite for a broader set of crypto assets in the future (i.e. alts). This is also extremely healthy over the long-term as wider distribution within crypto assets is an ideal end-state. The haters and losers will say everything in crypto is vapor and people are just jumping to the end state of hyper-gambling. I would say it’s an indication there are a lot more interesting early-stage projects/protocols worth exploring.
How does this compare to what we’ve seen over the past few years from Coinbase users? For one, we’re still more than 40% off the highs of MTUs from 2021 (11.4 million) and below the levels at YE 2022. For all the talk of memecoins and retail degeneracy, I just don’t see a credible argument that this is happening at scale. Is it happening in small pockets for very crypto-native users? Sure. But this is again an indication to me that people are stuck inside crypto echo bubbles and are missing the broader picture. If you’re logging onto crypto twitter and taking whatever the discourse is there as Gospel, you’re gonna have a bad time.
The last point I’d make here is around alts outside of BTC & ETH. As an early-stage crypto investor, we obviously have strong belief this space will continue to grow beyond just the majors. The smoothest-brain way to measure that activity is with TOTAL3 which tracks the top 150 alts outside of BTC & ETH. I think it’s instructive to look at the zoomed-out, peak-to-trough cycles we’ve seen before. Looking at the 2017 cycle and the most recent cycle, it’s clear that relative growth is compressing (though still astronomical) which we would expect as the space expands. The base is larger so hyper-growth is intuitively more difficult. But even leaving plenty of room for further compression, I don’t think enough people appreciate how much more room to grow this space has. TOTAL3 is just $640 billion, which may sound like a big number, but is so inconsequential in the grand scheme of financial markets. If we believe this is a $10T space over the next 24 months and BTC is 40-50% of that, there’s still an incredible amount of value to be created.
I personally don’t believe that is going to be dominated by memecoins. Some people I find sharp disagree, that’s fine. I think memecoins have their place and will continue to be a relevant part of crypto (and tradfi tbh) but I’m also optimistic we’re seeing a new wave of sophisticated founders. They are thinking deeply about trying to solve real problems and care about decade-long outcomes. These are the types of founders we are interested in working with21.
OK YOU’VE WRITTEN 3,000+ WORDS, JUST TELL ME WHERE WE ARE IN THE CYCLE ALREADY!
If you couldn’t tell I think we’re in the early stages of this cycle still. My guess is we’re about 1/3 of the way through. Despite a lot of cynicism that everything has exclusively been about memecoins, there are other things going on and being built. SocialFi is beginning to see more creativity, ERC-404 is under-explored still, DePIN acceptance outside of crypto circles is growing, RWAs are slowly seeping on-chain, and we’re seeing much more exploration into how distributed systems can impact the “real” world. We continue to add new theses to our public database and are always excited to speak with builders who are experimenting at some intersection of weird, novel and ambitious.
I continue to be turbo optimistic about this space despite its many warts.
If you’re building something novel or weird across any of the areas I mentioned, my dm’s are always open on twitter and you can also reach me at smac[at]compound[dot]vc.
albeit a small sample size
albeit ETH bottomed a few months earlier
i think it’s worth noting that price ultimately drives narrative. the easiest way to see this explicitly is that VC thought-pieces on memecoins didn’t start rolling out until all of the memes had pumped exponentially. our brains need to find some way to rationalize what happened, or to build a narrative so we can justify things in our own head. this happened with NFTs last cycle. it will happen with something else again in the future.
this is fine by the way. one of the perks of running the fund is you have final say and live with those decisions.
there are some parallels here to participants being overexposed to BTC during previous cycles, and underexposed to Ethereum
i think this is still true
debatable imo
some examples of wirehouses for those unfamiliar include Wells Fargo, Bank of America’s Merrill Lynch, Morgan Stanley, UBS
we are once again asking for more long-term alignment between founders and investors. stop the low circulation / high FDV games please
incidentally i think Phantom is potentially the better app to track going forward for this
i’m still very much of the belief that crypto markets will be dragged lower by any weakness in traditional ones
i am assuming it doesn’t get approved obv
and ETH to a lesser extent
it will also continue to legitimize the space more broadly. it’s much more socially acceptable for developers and builders to choose to experiment in crypto than it was 5 years ago. this will only continue, and is an overlooked building block for new innovation
albeit on a smaller aggregate base
30d average to smooth it
the pessimistic view is that there’s nothing new for retail to do and/or they were so burned last cycle they are not coming back for a while. (also i know everyone on CT is retail)
there will be some CT people who flame me for thinking it’s not just a giant casino and that i “don’t get it” — i don’t really care what they think tho….i will listen because i do think this group has a unique perspective and does a great job calling out high-brow things that serve no purpose/solve no problem
Smac cooking
Like the way you think and write, good work!