Portfolio allocation update
Jan 2022 was an ugly month for crypto, with BTC and ETH down 20% and 29% respectively. While many saw the danger ahead in 2022, most were caught off guard by the speed and magnitude of the drawdown, with little to no retrace.
In Seeking Alpha Issue 9, I described my plans to overhaul my entire crypto portfolio, selling out of BTC and ETH entirely to rotate into higher risk-reward plays. A day later, I followed with Issue 10, telling you that I exited 75% of my bags into cash, given the poor risk/reward of HODLing out to H2 2022. In hindsight, this was a good decision that better positioned me to buy dips.
I’m at 58% cash today, having redeployed 16% cash into mostly new projects and losing 1% from being liquidated on Friktion’s USDC put selling vaults (avoid options in a choppy market kids). Looking back, I could’ve been more patient with my entries. Doing nothing (and knowing that doing nothing is a decision) is a skill I’m still working on.
Anywho, here’s my revised portfolio allocation:
Cash: call option to BTFD. I like to keep cash >50% to 1) survive and 2) buy on obvious capitulation candles. Will recalibrate my views based on macro updates
BTC: As the non-sovereign SoV asset, I actually think there’s a decent chance that BTC bucks the trend and goes for a run on its own (ie BTC.D up), but I don’t have the conviction to rotate meaningfully into BTC yet. Let’s see
Smart contract L1: took starter positions in $NEAR/$FTM/$ATOM and leveraged ecosystem bets on $OCT/$JUNO. Just play money left in $ETH and $SOL
Infrastructure: nothing survives a brutal bear market but if one wants to stay in the game, I choose pick-and-shovel projects. These are projects that provide a basic but essential service. My picks: $POKT, $SHDW, $RNDR
Defi: here are the segments of defi that I want exposure to: derivatives, stablecoin growth, veToken/curve war. Here are my picks to express that view: $GMX, $DPX, $LUNA, $FXS, $TRIBE, $SUNNY (call option on $SBR)
Meta: I want to get exposure to gaming, but like Cobie, I’m also skeptical on “metaverse” projects and believe most will go to zero. My largest position is $JEWEL, which sits at the intersection of gaming/defi/multichain
NFT: wanting to liquidate your positions is the quickest way to discover that liquidity is lacking in NFTs. Especially if your NFTs are fractionalized. I have moved my $DOG/$ABC123/$PUNK bags into the HODL category.
Meme: my investment in $KLIMA is down so bad (can devs do something?), I consider it a donation to the planet at this point. I like $SAMO here as the prima donna memecoin on Solana, but perhaps I’m foolish in believing that memecoins still has value at this point of the cycle. Buuuut, I have said before that not all investing needs to be from the head, and 1% allocation won’t break the bank. There will be another hype cycle, even if it is far away.
Overall, I think the key lesson for this month is that prices can always go lower than you think. I have a tendency to ape out of FOMO, soon as I discover a new project. But often, it pays to be patient with entries. Something to work on moving forward.
Here’s what I’m thinking through in Jan 2022. The macro update continues to be the most important section. Feel free to skip around:
Macro update
BTC
ETH
Infrastructure: POKT, SHDW, RNDR
Defi: GMX, DPX, TRIBE, FXS, LUNA, UXP, SUNNY/SBR
Meta: JEWEL
Your funds are Sifu
NFT
Other
1 Macro update
Here’s what I’m seeing right now:
CPI in YoY terms likely to peak in Q1 2022, but will remain elevated for rest of 2022 (3-5%)
Slower economic growth into H2 2022
bond market has priced in 4-5 hikes, taking Fed fund rates from 0.25% (now) to 1.25-1.50% by Feb 2023
neutral to bearish bias / choppy price actions for risk assets, particularly crypto
PvP environment with any bullish price action being meta or news driven (eg. Fantom ecosystem pump from Solidity, El Salvador bond oversubscription)
priority is to survive.
Overall, I largely align with Arthur Hayes’ views dating Dec 2021:
For those who are deciding whether to allocate more fiat into crypto, it pays to wait. I don’t see money getting any free-er or easier. Therefore, it pays to sit on the sidelines until the dust settles after a March 2022 or June 2022 Fed rate hike. Watch out for a puke fest in risk asset prices should the Fed hike, followed by a quick resumption of zero interest rate policy and aggressive bond purchases. When the Fed signals a return to business as usual, then it’s time to back up the truck.
Inflation
Inflation is becoming a big problem. How hard and fast Fed responds depends on how persistent and high CPI prints remain throughout 2022.
https://twitter.com/biancoresearch/status/1478861170857713665?s=20&t=fVx5RyHRDgGs43cokE3QuQ
It increasingly looks like headline consumer price inflation will peak in year-over-year terms sometime within or around late Q1 2022.
https://twitter.com/LynAldenContact/status/1481286347465936896?s=20
Inflation is a global issue, due to quantitative easing and supply side issues.
Economic growth
US is a consumer driven market. With spending and sentiment rolling over, the Fed is playing with fire by trying to tighten into economic deceleration. The elephant in the room is of course the 40-year high inflation, which can no longer be ignored. As investors, the question we have to to ask ourselves is, “if push comes to shove between fighting inflation and collapsing asset prices, what path will the Fed choose?”
https://twitter.com/LynAldenContact/status/1486468745895759879?s=20&t=gpv5o-qsaQO4wcjEK2If4Q
The copper-to-gold ratio is getting pretty close to a monthly momentum shift, meaning that copper’s positive momentum is giving way in favor of gold.
While a copper-to-gold momentum shift was not a perfect top indicator, it has consistently presaged a more volatile, choppy, or outright negative period in the broad stock market over the following year or two from that point, after a period of considerable upward momentum.
That said, analysts like Raoul Pal have argued that because we are nowhere near yield curve inverting, there’s room for crypto assets to continue to perform in 2022. But timing is now the greatest unknown since ironically, the most bullish catalyst for crypto may be yield curve inversion, signaling recession and forcing the Fed to reverse course.
https://twitter.com/biancoresearch/status/1483885821207982087?s=20&t=JN_Ej8UbUpaYB7LhTMGDUQ
This is because the Fed consistently raises interest rates during the white (non recession) periods. Then, right when a recession is showing signs of coming (right before or during a grey recessionary period), the Fed reduces interest rates.
Rate hike expectation
Looking at Feb 2023 Fed fund futures, the market is currently pricing in 4-5 rate hikes looking out 12 months.
Playing on hard mode
Investing in 2021 = easy mode. Investing in 2022 = hard mode.
https://twitter.com/Arthur_0x/status/1485630760472047618?s=20&t=JN_Ej8UbUpaYB7LhTMGDUQ
People have no fucking clue where BTC price is headed next:
https://twitter.com/cobie/status/1484758392174518274?s=20&t=JN_Ej8UbUpaYB7LhTMGDUQ
43% of Cobie followers suffered >50% drawdown on their portfolio from ATH:
https://twitter.com/cobie/status/1485008114231480323?s=20&t=JN_Ej8UbUpaYB7LhTMGDUQ
Pentoshi is a trader, but his advice is worth keeping in mind:
https://twitter.com/Pentosh1/status/1483157503152164864?s=20&t=OLPxy9f3SS7hz26NURThkA
Show me the money
For numbers to go up, new players need to enter the game. With:
cash on the sidelines nearing historical low,
US household equity ownership at historical high,
Fed looking to suck liquidity into the bond market,
Where is the marginal dollar gonna come from to pump our bags?
https://twitter.com/LynAldenContact/status/1481832006434574336?s=20
Arthur Hayes update
https://twitter.com/CryptoHayes/status/1486128592253767680?s=20&t=9CuiP-7zK7Cb3S0k6d43tQ
Resistance Levels
$28,500 BTC/USD
$1,700 ETH/USD
I don’t believe in a bottom until these levels are retested. If the level holds, amazing. This prong has been met. If it doesn’t, then I believe a mega liquidation candle will happen in the $20,000 to $28,500 range for BTC and the $1,300 to $1,700 range for Ether.
If either of Bitcoin’s 2017 and Ether’s 2018 previous ATH ($20,000 and $1,400 respectively) are breached on a daily candle, then I don’t even want to think about it.
This past weekend (Jan 21), while brutal, has not broken the soul of the bulls.
The correlation one moment is upon us, but is not here yet.
Sell the rips, and dodge the dips.
Since Maelstrom, Arthur gave us another way to peek into the future: the corporate bond yield.
For reference, Mar 2020 offers us a glimpse into what a breakdown in corporate junk bonds looks like, down 22% in a jiffy:
All bad news priced in?
There is a case to be made that all bad news have been priced in at this point, so we can look forward to some bullish price actions in the short term.
https://twitter.com/LynAldenContact/status/1488533175001391108?s=20&t=gpv5o-qsaQO4wcjEK2If4Q
But should we play with fire? I’d sell key resistance levels at this point if my goal is to rotate more into cash.
https://twitter.com/Pentosh1/status/1488554278549692419?s=20&t=gpv5o-qsaQO4wcjEK2If4Q
2 BTC
It’s not all doom and gloom. Willy’s chart below compares BTC price vs fundamentals of HODLers. Price has commanded a premium since October 2020 but we are entering a zone where this premium has fully reset. We do not enter this zone often.
You can be patient with pressing the Buy button and wait for the reversal signal for confirmation. But this is not a bad place to DCA into Bitcoin if that’s your thing.
https://twitter.com/WClementeIII/status/1480913730078654477?s=20
Lyn Alden likewise notes the tight supply this cycle and recommends DCA:
Demand for bitcoin peaked along with Ark stocks back in Q1 2021. Since then, bitcoin has been in a bear market in terms of demand. However, the supply side has been so tight (low new coin issuance, miners holding a big share of their own production, coins migrating to addresses with a low propensity to sell, a cultural trend of dollar-cost averaging, etc) that the price has remained somewhat elevated…
The tight supply side of bitcoin is currently like dry kindling, with no demand spark. Whenever that demand spark comes, I expect a big leg up in price.
I expect a lot of choppy price action for a while.
It’s a traders’ market for bitcoin, and suitable for dollar-cost averaging.
https://twitter.com/LynAldenContact/status/1483970779268136962?s=20
https://twitter.com/WClementeIII/status/1488199547885359104?s=20&t=gpv5o-qsaQO4wcjEK2If4Q
BTC correlation to equity
..remains elevated. Ever since March 2020, there has been persistent positive correlation.
Bitcoin correlation to S&P
Correlation is even higher with NASDAQ.
https://twitter.com/WClementeIII/status/1484550040051929094?s=20&t=JN_Ej8UbUpaYB7LhTMGDUQ
Lightning network launching in Brazil
https://twitter.com/LynAldenContact/status/1481108523606020098?s=20
Russian [bans] BTC
Russia central bank called for complete ban of crypto while Putin said Russia could benefit from bitcoin mining, citing a complete ban could hurt Russia’s ability to compete in tech sector.
India [embraces] crypto
While India has pivoted its stance on crypto countless times, the latest news point to regulatory embrace.
https://twitter.com/RaoulGMI/status/1488496465408401411?s=20&t=gpv5o-qsaQO4wcjEK2If4Q
BTC security
BTC is currently at ~1% of ETH in terms of fees people pay to use the network. This design trade-off driven by diminishing block rewards post halving will have to be addressed. When not if.
https://twitter.com/cburniske/status/1488346430271934467?s=20&t=gpv5o-qsaQO4wcjEK2If4Q
3 ETH
Q4 2021 vs Q4 2020
“Ultrasound money”
I have never bought into ETH’s “ultrasound $” meme. Lyn’s takes on the topic:
https://twitter.com/LynAldenContact/status/1487946369105121280?s=20&t=gpv5o-qsaQO4wcjEK2If4Q
4 Infrastructure
Pocket Network ($POKT)
$POKT is my largest position in “sell the shovels” segment. I stake my $POKT with Poktpool.
https://twitter.com/analyticalali/status/1478652771687493632?s=20&t=OLPxy9f3SS7hz26NURThkA
GenesysGo ($SHDW)
Genesys is the go-to relay infrastructure on Solana (think Infura / POKT), currently handling >50% of all RPC traffic. In addition, it is focused on launching additional backbone infrastructure for IDO and decentralized storage (think Arweave / IPFS). The Super Shadow Coder DAO NFT enabled a successful fair launch for the community and given its utility (stake SSC Dao NFT for $SHDW emission over time), it is now the top NFT project on Solana by market cap. Frank from GenesysGo does a fantastic job in communicating the value of $SHDW on Medium. Worth a read if you’re interested.
Render Network ($RNDR)
$RNDR was covered in Issue 7 but here’s a refresher. It is a pick-and-shovel bet on decentralized compute riding on NFT and metaverse waves.
https://twitter.com/ArbVision/status/1460774216136024071?s=20
5 Defi
Here’s a summary of defi projects by category. It provides a great thematic overview.
https://twitter.com/Darrenlautf/status/1482003465627144195?s=20&t=OLPxy9f3SS7hz26NURThkA
GMX (GMX)
I fully exited GMX at a profit but bought back in because it feels wrong to have zero allocation to defi derivatives. Defi perps has a huge TAM. I like GMX because it is doing the highest volume vs competitors (excl. dYdX), offers zero slippage trades via its GLP liquidity model, and has the potential to become core defi money lego unlike dYdX. For a primer on defi derivatives, you can revisit Seeking Alpha Issue 4.
https://twitter.com/rektdiomedes/status/1482153804011229185?s=20&t=OLPxy9f3SS7hz26NURThkA
Dopex (DPX)
Took a starter position in DPX.
Options is a huge market in tradfi, but have seen lackluster adoption in defi due to complexity and lack of sophisticated capital entering the space. What caught my attention with Dopex is the single-sided options vaults (SSOV).
SSOV abstracts away the complexity and presents users with a simple interface to stake their assets for rewards, an experience that defi users are well accustomed to. There appears to be product market fit as Tetranode flagged that 50 defi projects are wanting to onboard onto Dopex’s SSOV platform. With Tetranode/DefiGod acting as tokenomic/market making advisers and veDPX on the roadmap, I drank the kool-aid. DPX is also Tetranode’s highest conviction bet.
The biggest unknown is timing of options adoption in defi. Similar to GMX, I see huge potential but just unsure when the space will take off. Institutions are coming right? Right?
https://twitter.com/santiagoroel/status/1482656202152681475?s=20&t=OLPxy9f3SS7hz26NURThkA
https://twitter.com/Tetranode/status/1482170173477904384?s=20&t=OLPxy9f3SS7hz26NURThkA
Tribe ($TRIBE)
Took starter position in $TRIBE.
https://twitter.com/mrjasonchoi/status/1487287251633467393?s=20&t=gpv5o-qsaQO4wcjEK2If4Q
https://twitter.com/Tetranode/status/1482169515874025475?s=20&t=gpv5o-qsaQO4wcjEK2If4Q
Frax Finance ($FXS)
Justin Bram introduced me to Frax in Mar 2021 but I didn’t take any meaningful position given I was worried about regulatory crackdown at the time. With how the stablecoin market has evolved, I’ve become more bullish on crypto native decentralized stablecoins and less concerned about de-pegging risk. Took a starter position in FXS and staked FXS in Convex for cvxFXS / FPI airdrop.
https://twitter.com/Tetranode/status/1482183781733732359?s=20&t=OLPxy9f3SS7hz26NURThkA
Terra ($LUNA)
I’m late to Terra and trust most of you already know the project. The Generalist has a great deep dive on LUNA to help you get started. Been accumulating in $40-60 range / farming UST on Anchor. This month, there has been a lot of concerns on CT relating to the sustainability of UST yield on Anchor, but I’m comfortable with the risk based on my research.
UXD Protocol ($UXP)
A stablecoin that generates yield from delta neutral hedges makes intuitive sense so I’m testing out UXD mainnet beta. The downside is that UXD raised its last round at $1.9b FDV and still trading at ~$900m FDV today.
https://twitter.com/UXDProtocol/status/1483173999790022657?s=20&t=OLPxy9f3SS7hz26NURThkA
Saber ($SBR) / Sunny Aggregator ($SUNNY)
Saber is Curve on Solana. Sunny is Convex on Solana. Early days, speculative, but I’m a fan and a user. Gauge wars have already begun.
https://twitter.com/crypto_notte/status/1482756886290124800?s=20&t=OLPxy9f3SS7hz26NURThkA
https://twitter.com/dcfgod/status/1482804014798368768?s=20&t=OLPxy9f3SS7hz26NURThkA
6 Meta
DeFi Kingdoms ($JEWEL)
Ansem’s latest substack introduced me to $JEWEL. I also saw a few other influencers like Tascha promoting it. I wanted a project that gave me exposure to multichain/defi/gaming thesis and $JEWEL was my pick. Reading through some of the analyses written by Samichpunch, I get the feeling that much effort has been devoted to making DeFi Kingdoms a fun-2-play game first and foremost, which is important. I picked up some discounted locked $JEWEL as a medium term position.
7 Your funds are Sifu
TLDR:
Justin offered some balanced views on what to make of the Wonderland/Sifu saga:
A character that is arguably more fascinating than the man of the hour is Gerard Cotten, who co-founded Quadriga with Sifu way back when. Gerard died under mysterious circumstances in 2018, losing $215m of customer deposits kept in cold wallets. Exit Scam is a 8-part podcast series dedicated to the mystery that is Gerard Cotten and the missing $215m. It pains a vivid picture of the life of a serial scam artist.
8 NFT
NFT gives no fucks about crypto bear market.
Potential addressable market of NFTs is probably larger than anyone thinks. Invest wisely and HODL.
https://twitter.com/Rewkang/status/1488542338603536394?s=20&t=gpv5o-qsaQO4wcjEK2If4Q
It seems that wash trading $ETH to earn/stake $LOOKS for fees might be the game theoretical optimal play? I don’t love the NFT trading game enough to try but perhaps you do.
https://twitter.com/gametheorizing/status/1488499352465195009?s=20&t=fVx5RyHRDgGs43cokE3QuQ
9 Other
As always, listen to Cobie:
On influencers: You should just imagine that they’re pumping their own bags, even if they’re not.
Instead of trying to outsmart everyone, just look. Ask, what is happening?
On the “value” of memecoin vs a reputable DEX: do you think there’s really a huge difference between a tier 3 L1 tokn vs kittycoin? If kittycoin drives most of volume to a “legitimate” DEX built on a tier 3 L1. Arguably, kittycoin has more value than the DEX, becuase without it, the DEX would be useless.
We used to think BTC was the only crypto with real value, but played hype cycles and bull markets to stack more BTC. I still feel this way today. True value is limited. I can count it on one hand.
Base case for future of defi (though not one Cobie prefers): Defi without governance tokens running on government KYC’d chains operating on CBDCs.
When entering a trade, consider sizing to your target portfolio allocation. when exiting a trade, let narrative / winners run and don’t rotate winners into losers.
Can the Fed put a damper on the level of interest/activity in crypto in 2022?
https://twitter.com/Travis_Kling/status/1488614762342760454?s=20&t=3UcPM4BXZ60jZthmd_CVIA
What about private capital flowing into the space? Higher or lower in 2022?
https://twitter.com/dantwany/status/1481706432269410307?s=20&t=OLPxy9f3SS7hz26NURThkA
Not every project needs a governance token and not all are fit to govern.
https://twitter.com/0xElm0/status/1415339806708600837?s=20&t=gpv5o-qsaQO4wcjEK2If4Q
Airdrop user overlap
There are 6.6m ETH addresses holding >0.1 ETH. Among these users, there isn’t huge overlap in airdrops. For example, UNI and SOS holders don’t really overlap @ 18k addresses, or ~6% of total SOS claimers. Suggesting most are new to ETH / NFT.
Airdrop token price performance
https://twitter.com/cptn3m0x/status/1480803452754096130?s=20&t=OLPxy9f3SS7hz26NURThkA
That’s all for now. Lay off the sugar and leverage kids. Thank you
@cobie @Pentosh1 @CryptoHayes @zhusu @hasufl @Arthur_0x @pythianism @KyleSamani @mrjasonchoi @woonomic @jdorman81 @Rewkang @LynAldenContact @RaoulGMI @DegenSpartan @100trillionUSD @RyanSAdams @twobitidiot @richwgalvin @finematics @santiagoroel @nic_carter @grapeprotocol @SolanaGrapevine @panicselling @EPBResearch @SBF_FTX @aeyakovenko
About Kai: Bought the 2017 top, fell down the crypto rabbit hole in 2020, full-time Magical Internet Money HODLer & Power User since. Prior: a decade in TradFi (renewables/investment banking/capital markets).
Disclaimer: This memo is presented for informational and entertainment purposes only and does not constitute financial advice. Individuals have unique circumstances, goals and risk tolerances, so please do your own research before making investment decisions.