On Models and Memes
I've always wanted to walk a runway
Be Smart Enough To Surround Yourself With Smarter People
I try not to bring up crypto in my personal life, and the only Gigabrains I talk about anything finance-related come from Tradfi backgrounds. Plus Crypto Youtube is mostly either memes or quant dudes who sound smart by building inflation/DCF/Revenue models.
The constant need for valuation models comes from a mostly trad mindset, especially since there are basically zero studies or experts on how web3 prices move. (PA is also too immature for proper modelling)
Left to Right: Twitter, Amazon P/E Ratios
My first introduction to stock valuations was P/E ratios, a simple method of checking if a stock is over/undervalued based on stock price and profits.
It immediately occurred to me that the stock market was a meme, especially when entire economies were rushing to get rid of cash amid a perennial bull market.
Hedge Fund Returns 2021 (Not including bottom 3 funds)
The meme was reinforced when seeing “hedge” funds performance in the up-only. Putting aside the outlying few that got rekt on GME, most still underperformed S&P. Those with the highest return also have a relatively low AUM.
It’s also likely Big Man Buffett may outperform all of them while managing almost a trillion dollars.
Just by buying low and selling high.
Since discovering the meme, I’ve been on the hunt for a valuation model that clicks, mostly for confirmation bias. But after speaking more to my tradfi friend, I came to a quick conclusion.
The faster you accept that valuations are a meme, the richer you will get.
While this is only somewhat true in equities due to the general long-term time horizon of many investors, the immature crypto markets are flush with memes.
Of course, there is a base level where valuations are important (BNB is the strongest alt L1, GMT price surging). However, most token were way too overvalued in the short term for this.
So how do we quantify where prices are going?
The easiest three step process I’ve come to is
Make an assumption based on market sentiment
See how price reacts
Bet BIGLY on whichever direction that is (including flat)
So now what?
Up Up Down Down LR LR
If we take a look at the market as just a game, going from equities from crypto is like smurfing in bronze.
It’s supposed to be easy, but everyone is so dumb that it becomes hard.
Right now most participants are long-biased, even when shorting is pretty much a 100% WR over any time frame. Easy leverage and shilling will do that to a generation.
7-day funding, Green = bullish, Red = Bearish
Over the last 24 hours, long/short liquidations are roughly 5:1, despite macro and market conditions.
This figure gets even more tiring, as we can see participants trying to force a rebound. With excess cash to long, but not bid, we probably have a long way to go till we find a bottom.
Right now I speculate that the majority of traders are retail participants in the depths of despair, with their donations to Biden’s campaign inversely related to BTC price. (I am probably wrong here, pls feel free to correct me)
I cannot for the life of me find information on equity liquidations, but speculate that the ratio of liquidations: Mcap is infinitely lower, given that most stock holders are just that - holders.
Buy The Dip BABY
This is likely the first full market cycle for most, including myself.
During the covid-19 downturn, we were bailed out by big PP (professional printer) jpow, and everything went straight back up. Creating a bias of mean reversion, retail was left buying the dip at every point.
Knife catching is a dangerous sport. Some will succeed, most will have to leave for awhile, all will get hurt.
Solana to $3 was a meme earlier this year, but seems likelier with every system outage. But every single retail investor knows that they should buy the dip at some point.
The problem is, unlike equities, 99.999999999999999999999999999% of crypto is trash. While everyone knows BTC and ETH will bounce back, we are greedy. Buying $10,000 in 4 years for $1,500 now is, after all, not generational wealth.
It is simply life changing money.
Plus, everyone knows the play by now.
So, when do you buy SoAvaxFOAN?
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Many crypto participants point to history for confirmation. BTC/ETH never below previous market cycles, halvings creating bull cycles, etc etc.
Su (Someone I regard HIGHLY), was someone who did not respect this, calling for a supercycle. This time is different, 3 Billy is dust, let’s buy vesting tokens, Luna recession hedge!
Tough
Remembering Dragonchain
If you respect history, though, buying the dip becomes hard.
What stays in the top 100 every cycle? BTC, ETH, DOGE, ADA, LTC, XRP, XMR, LINK. If we Believe in history, we should be bidding this limited list of beautiful tokens.
But NEAR AURORA IS INTEROPERABILITTIITITITITITIITIT
While I personally would like to believe that SoAvaxFOAN is the future, the large majority of particpants there will likely leave in the bear. VCs will come back in 2024 with huge amounts of cash for shinier funding rounds, which we have to bid in fomo.
Am I calling these Alt-L1s boomerfied? Absolutely. Gigabrains thought that Defi tokens were going to be the majority of top 100s, but a new trend emerged that destroyed all expectations.
Furthermore, we can look at issuance/revenue/profit models all the way, but volume is dropping to absolute nothing right now. Without that, every single cryptocurrency inflates worse than the dollar.
Even Uh-Vox, with all the Crabada in the world, is going through a shitstorm. No Amount of Tokenomics Will Prevent This.
So do we simply bid BTC/ETH with the rest in cash?
This is how I see it
Left Curve: Buy ADA, DOGE, XRP, ETH throughout the bear, 5x next bull, bid stupid new shit coins and 150x
Mid Curve: Yield-farm ecosystems, earning 15% APR while your token drops 80%. Be late to next bull, become some form of maximalist
Right Curve: Short everything to the ground, sit largely in cash, Long everything when reversion confirmed.
While number 3 sounds hard, it really isn’t. Shorting on low lev is genuinely >90% WR right now, at least till Hayes’ targets are reached. This is such a prime economic environment to press sell.
The reason 99% of people will not make it is that the right curve take is simple and boring. It takes a large amount of conviction and patience to pull off compared to simple DCA.
The left curve take is monumentally easier, but requires such a thick skin that many will not follow it. It is likely a safe 2x with strong upside, a respectable return for a 2-4 year timeframe.
Ironically, I realized I was doing exactly the mid curve method while writing this article, and have gone to press the red button on every exchange and yield farm I can find. (Which probably means it has become the left curve take but wtv I’m not rly that smart)
Yeah and That’s About It
Crypto rewards the nimble. Being a stubborn person, it is IMMENSELY, and I mean, IMMENSELY hard to change my POV, and I was late to many trends early on.
But we have long lives and there will be like 801902938942843 life-changing opportunities eventually. The only ways to lose are quitting or being a flake. And you know what they do to flakes.
While I am currently eternally bearish on anything outside BTC/ETH, there is no doubt in my mind that I am not a maximalist of either. The moment I see signs of some new cool ShibaGMTDogeLUNA, I will be bidding the absolute shit out of it.
Valuation models will only be useful once we hit a pure supercycle and crypto has UI/UX that generates revenue without the end users knowing.
Till then, remember to press sell and stay swell!