The crypto bull market is topping
Back in the days when I went bar-hopping and clubbing a lot in NYC, the last 1-2 hours of the night were always a blurry mess. The cool crowd and hot girls would have gone home by then, the music would start sucking, and the only people left were the ones trying to hook up, along with their respective wingmen. Half of my friend crew would be in the blackout zone where they wouldn’t be able to recall anything you said to them the next day. Those who remained in the establishment were just chasing the night, despite the best part already being in the rear-view mirror.
It wasn’t until my mid-30s (hey, better late than never) when I learned to recognize when the night had peaked and was about to go downhill. I’d make a graceful exit and salvage whatever sleep and sobriety I had left to save for the next day. I sidestepped a lot of shots after 2 am, saved my health, and probably avoided a lot of trading losses, because trading tired and hungover results in bad decisions.
This pretty much sums up how I feel about the crypto bull market today. We’ve seen some great times - the launch of bitcoin ETFs, Trump’s all-in support of crypto, and Michael Saylor’s purchases of ungodly amounts of bitcoin. I’ve been publicly trading bitcoin from the long side in this blog from 23k, and captured almost every zig and zag until I last exited at 119k last month. Each time I went long, I asked myself what would keep this cycle going, and whether there was anyone left to buy our bags. Each time the answer was yes - until now.
Treasury Secretary Bessent has stated multiple times that the government will not be buying bitcoin for their strategic reserve. Microstrategy’s mNAV is rapidly shrinking towards 1.0, and their purchases have slowed down to a trickle. The only inflows going into crypto are coming from ETH treasury companies, and their narrowing premiums to NAV suggest that this party is nearing an end. Meanwhile, every week I read about mysterious whale wallets cashing in on the holdings of BTC or ETH that they acquired eons ago. Interestingly enough, the duration of the current bull market has matched the average duration of the previous two cycles. I projected a time target of July-October 2025 in this post from December 2024.
I use two ways to measure time targets - the average duration from low to high from the previous two cycles (2018 and 2021), and the average high-to-high from the previous two cycles. The average high to high from the previous two cycles was 207 weeks, while the average low to high was 137 weeks. If we project the duration from low to high from previous cycles, it projects the high of this cycle will occur in July 2025.
What would cause this cycle to roll over, and if I’m right, what would a bear market look like? Often, the fuel driving the bull market ends up being the anchor that drags it down during the bear. First, the mNAVs of treasury companies will compress towards 1 - something we are already seeing with MSTR, Metaplanet, SBET, and BMNR. Inflows into spot from treasury companies will dry up, removing one of the few pillars of demand for the crypto market. As both treasury companies and spot start rolling over under the weight of a growing supply/demand imbalance, longs will become even more desperate to sell and treasury company premiums will flip into discounts.
There is no rule in financial markets that says a stock’s market cap needs to trade above the value of the assets on the balance sheet. Deep NAV discounts can be found in closed end funds, holding companies, and even with Grayscale’s BTC trust before it converted into an ETF. When investors want liquidity, they have been known to sell assets at a large discount to NAV.
As treasury companies start trading at discounts to NAV, the conversations between management and investors will start to get uncomfortable. Investors will want the discount to close, but the only way to close it would be to liquidate the crypto on the balance sheet, which pushes down crypto prices further and also defeats the purpose of existing as a crypto treasury company. Some treasury companies might run out of money to meet their liabilities and have no choice but to liquidate. As the bear market deepens, market participants will go on death watch betting on the next treasury company that unwinds.
I’ve heard the argument that long boom and bust crypto cycles are now a thing of the past now that institutions have taken over the market as the adults in the room. Unfortunately, institutional investors and traders are capable of greed and fear, just like the average crypto degen. The difference is that tradfi greed manifests on a larger scale, with the blessing of regulators and performed in plain sight. A crypto treasury company is just spot crypto in another wrapper, just like how NFTs are jpeg art in a crypto wrapper, yet we are made to believe that they are somehow worth more.
Unlike most insiders in the crypto industry, I have no emotional long bias or a reason to hold back bearish opinions. I have subscribers in both tradfi and crypto, and I assume they read my newsletter because they want my unvarnished opinion on the markets, backed with real trades and personal capital. This is my third crypto cycle - I rode the 2017 cycle to the top and sold everything in Jan 2018, and in mid-2021 I got out of all but my most illiquid holdings by the time Terra/Luna collapsed. This crypto bull market has treated me well, and turning bearish is not something I take lightly. It’s time to take profits and move on.
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