The Cycle Turns

Let me begin with saying that we don't publish here very often, for one specific reason. While other firms will flood their marketing channels with all kinds of content to stay top of mind with potential investors, we choose to speak only when we have something we feel is important to say, whether that's a piece of strategy research we want to share, an important paradigm shift we're seeing, or a big event in the market . We believe, and have a lot of evidence internally based on our relationships with our partners to back this up, that this has served us well in terms of the attention we're given when we do choose to speak.

The price action from the last two days (BTC is up 13%, ETH is up 22%), but really more-so the last month, gives us a high degree of confidence that the cycle for digital assets has bottomed. Do we have a 100% degree of confidence, no, that's not how a firm that runs a quant driven book operates. Does the fact that we closed the entire short side of our book last month speak loudly to the level of our conviction, we think so.

Let me lay out a laundry list of stuff we're seeing, some of which is purely quantitative and connected to the trend/momentum models we run, and some of which is purely qualitative.

• After a peak to trough drawdown of 54% and 70% for BTC and ETH respectively, both are back above their 200 day moving averages for the first time since the end of the last cycle. Every single time BTC has done this it has marked the end of the cycle.

• BTC found support right at the VWAP from the FTX low (the end of that bear market cycle), hardly a coincidence as long term holders defended their average purchase price on the way up.

• Our intermediate term models have flipped strongly with BTC and ETH experiencing a high volume breakout after holding a flat 50 day moving average, now also back above the YTD VWAP.

• We are roughly 315 days into the bear market cycle, just shy of the average from previous cycles where the range has been shockingly tight. We're not huge believers here in the astrology of BTC cycles, but it's hard to deny that once again there's been significant reflexivity there regardless of the underlying reason for the cycle length itself.

• This was the quietest tape since 2019 in terms of spot volume and volatility, until Wednesday. While the 2022 bear market did end with a bang (FTX), but for that one event the market had basically bottomed via a capitulation over time, we've seen the same thing here. This market was just completely dead quiet. There's a saying, never short a dull market.

• Miners have fully capitulated, just totally given up, sold their coins and become neo-cloud servicing businesses. There are still a few public miners with some coins but they are largely out of the way.

• Saylor sold the bottom, enough said, we don't need to get into the whole thing here.

• The SEC and CFTC are jumping ahead of congress and writing extremely positive rules to open up US digital asset markets (Monday).

• The US Treasury is buying bonds at the long end of the curve (Tuesday). No this isn't QE. Yes it is important to the view that this administration is going to do whatever they have to to keep yields in check. At the end of the day there's a strong argument to be made that BTC is still a story about liquidity first and foremost.

• These two stories were the match that lit the impending rally to cause the turn. Again, never short a dull market, especially at the bottom of the cycle.

There are a myriad of other variables we could cite, but in the end they are superfluous in the face of the core data on the table here.

So where do we go from here? A few thoughts.

• Relative to previous cycles, BTC is not the massive center of gravity it once was, there are very different pools of capital and market participants playing in different crypto assets now, and we expect the correlation between BTC and other assets will continue to fall with high dispersion across the board. The people buying BTC are simply not the same people gambling on PumpFun or trading perps on Hyperliquid, these are very segregated pools. That said, while the adoption of decentralized blockchains is absolutely booming in so many ways, the animal spirits of this asset class that really drive the casino are still dependent on the primary trend of BTC, we don't make the rules.

• We do not expect garbage crypto native assets (too many to name) to come back as they did in previous cycles. Sure they might get short term bids, but they will not be the higher beta tools investors use to try and juice returns relative to BTC and they will fade quickly when the momentum ends. We're not just talking about memes, most existing crypto native assets are worthless garbage, we believe that investors, having witnessed the complete devastation of 99% of these this cycle, won't be as stupid as they have were before the fat protocol thesis was obliterated. There are going to be really great opportunities to short garbage assets during this bullish cycle.

• We have already seen a ton of quantitative evidence pointing towards this thesis with the dispersion in performance between real revenue generation protocols/apps with tokenomics that return value to holders significantly exceeding those which don't. Don't be fooled, this is very new for the asset class. Look at names like HYPE, LIT, PUMP, VVV and DRV just to highlight a few (Starkiller may own these names for disclosure).

• It would not surprise us to see the market take a break somewhere right below BTC 80K, which is roughly the VWAP from the ATH. We are still dealing with a declining 200 day moving average which likely needs to be tested from the upside and some geo-political issues heading towards the US midterm elections. There is still a lot of group think around the market truly taking off sometime in late October/early November, partially why the short liquidations this week have been so extreme and the momentum may last for longer than expected, traders simply were not ready for the cycle to turn.

While it's understandable that the vast majority of market participants have been extremely poopy-pants (that's a technical term) over the price action in the asset class, I can't tell you how excited we've been for the underlying developments that are going to pave the way for the incredible opportunities to trade and invest in this space. We won, decentralized blockchains won, it's all happening, stablecoins are on a tear, everything is getting tokenized, prediction markets are on fire, the regulatory agencies are making imbuing coins with real equity value legal, on-chain perp-dexes are the future of financial leverage. And yes that all means that most of our silly little crypto native assets we used as beta for the general concept of this whole thing are, in fact, worthless.

Great, let's start the new cycle fresh, we can't wait for the all the new assets with real value. We've never been more bullish on both our long/short liquid token and market neutral DeFi yield books.