The crypto sector remains under pressure … on-chain metrics suggest we’re nowhere near the latest peak … how to add diversification to your altcoin portfolio … it’s 1998 again
Well, that was a brutal weekend for crypto investors…
Bitcoin hit an all-time high back on November 5. Since then, it’s been sliding south. And this past weekend, prices went over a cliff.
On Saturday, Bitcoin dropped 17%, falling all the way down to $44,000.
Many are attributing the overall weakness capped by this weekend’s plunge to speculative positions that had to be sold once positive momentum turned.
These speculative trades usually involve tons of leverage. So, when momentum sours, these traders have to bail out of their positions fast or else suffer major losses.
Selling leads to lower prices, which hurts other crypto traders who then have to sell, which leads to even lower prices, which hurts other crypto traders who have to sell, and yada yada yada, rinse and repeat.
When the smoke clears, you’re usually left with the long-term crypto investors who aren’t shaken out of their positions by volatility. You might have heard the term “strong hands” versus “weak hands.” We just saw a ton of “weak hand” traders get flushed out of the market.
As I write Monday morning, Bitcoin trades at roughly $48,800. That’s about 35% below its all-time high, set one month ago.
While these current depressed prices are nothing unusual for the sector, they fray the nerves nonetheless.
We can’t do anything to jumpstart a rally, but we can remind you of the blue skies ahead.
This shift in perspective is critical.
Too much focus on short-term pricing pressures cracks the door open to fear and second-guessing. And all too often, that results in emotion-based decisions that derail long-term investment goals.
With that in mind, let’s jump to our crypto specialist, Luke Lango, editor of Ultimate Crypto:
There are those ready to jump back on the “this is the end” bandwagon.
There are plenty of stories about Bitcoin entering bear market territory. Maybe for now, but that’s not the end of the story.
It’s not even close to that. It’s just another pullback – or buying opportunity for smart investors – on the way to many more all-time highs for both Bitcoin and altcoins.
***But what is this optimism based on?
For one, data.
Back to Luke:
Key crypto data also remains very bullish even during the pullback, which you may not be hearing as much about.
The data is called on-chain metrics, and one metric is the MVRV (Market Value-to-Realized Value) Z-Score, which can tell us when Bitcoin is overvalued or undervalued.
Right now, it’s showing that Bitcoin has not made a top and that there is plenty more room to run to the upside.
This indicator has a good track record, identifying the local top in 2013 before the cycle top in 2014, as well as another cycle top in January 2018.
Luke explains that this metric compares bitcoin’s market value to realized value. When market value is significantly higher than realized value, it indicates Bitcoin is overvalued and historically signals market tops (shown in the red zone on the chart below).
The opposite scenario, when market value is less than realized value, has indicated market bottoms (green zone).
Here’s Luke’s takeaway:
When Bitcoin hit a then all-time high in April of this year, the MVRV Z-score clocked in at around eight (in the red zone).
But here’s the key: When Bitcoin hit a new all-time high three weeks ago, the reading only rose as high as four before falling to around three.
This is a strong indication that we are not at even a short-term market top.
The point Luke just made focuses on bitcoin’s technicals. And in this context, it’s a shorter- and medium-term indicator.
For the long-term, keep in mind the laundry list of crypto adoption stories we’ve been bringing you in the Digest all year. In short, huge momentum continues building.
***Switching gears, does your altcoin portfolio have wide diversification?
In Luke’s issue, he provides what I consider to be an invaluable piece of advice to crypto investors. It involves diversifying your altcoins across different sub-sectors.
Now, this might be a new concept for some people. After all, to date, the crypto market has largely been highly-correlated. But as this new industry develops, this will change. In fact, it’s already starting to change.
Here’s Luke with more:
We believe it is important to invest in different categories of cryptocurrencies, or what we call “diversification” in stock portfolios.
True diversification is a little harder to come by with altcoins because the asset class is still highly correlated – cryptos often move in unison…
While the crypto markets are still highly correlated to each other and to Bitcoin, we have seen correlations between sectors start to loosen a little over the past year. The difference is still small, but it’s real.
Take the last month, for example, when everything related to the metaverse broke out to new all-time highs. At the same time, most of the rest of the crypto market started to roll over, led by Bitcoin.
Luke also points toward last year when the overall market was trading sideways, yet decentralized finance (“DeFi”) projects were breaking out.
***With this in mind, what are the sub-sectors that should be represented in your altcoin portfolio?
In his issue, Luke walks through each one.
There’s Decentralized Finance:
DeFi is a blockchain-based financial system that does not rely on central financial intermediaries like banks, brokerages, or exchanges. Instead, DeFi relies on smart contracts and data feeds called oracles.
DeFi is going to become the status quo as we all migrate our finances onto the blockchain. Decentralized applications – or “dApps” – are going to become ubiquitous as Netflix, Facebook, Spotify and more all move onto the blockchain.
Oracles are services that connect smart contracts with data not on the blockchain, called off-chain data. They are the data feeds that smart contracts need in order to execute based on the coded rules of the contract. They can be first party or third party.
The next evolution of the world wide web. It’s next-generation internet that enables true peer-to-peer transaction without a middleman. This “disintermediation” is a hallmark of blockchain and altcoins, which are basically the software that run on the blockchain.
Web 3.0 is decentralized, so there is little to no reliance on big tech companies, which are centralized.
The name says it all. Privacy coins provide private and anonymous blockchain transactions by obscuring the transaction’s origin and destination.
Smart Contract Platforms:
Also referred to as “layer-1s” or “base layers,” these platforms provide the foundation for decentralized applications and smart contracts to run on. Layer-1s primary derive their value from their network usage.
There are a lot of different ideas of what the metaverse is, which makes sense because it’s very early and still being built out. It is evolving practically every day. Current concepts include online 3D virtual environments, and virtual and augmented reality. Non-fungible tokens (NFTs) are a big part of the metaverse.
Luke’s Ultimate Crypto portfolio currently holds 17 altcoins with exposure to all these sectors. If you’re looking to balance and optimize your portfolio as the industry grows, make sure you have altcoins representing each subsector.
***One final piece of encouragement
When prices are down, it can be hard to see the big picture.
But the reality is the crypto sector is still in its early days. And its growth curve is tracking that of the internet back in its early days – actually, faster.
Cryptos are being adopted faster than the internet was at the same point in its lifecycle.
From 1990-1998, the internet grew to about 200 million users, according to data from the World Bank. Through the first half of 2021, there were about 220 million crypto users, according to Crypto.com.
As I’ve noted before, the number of crypto users around the world doubled in just the first half of 2021, so cryptos started the year with about 110 million users.
Luke provides a fascinating chart that compares crypto adoption with internet adoption, adjusted for their own timelines (based on years since inception).
As you can see below, the two are virtually indistinguishable.
We’ll end today with Luke making the wealth-generation comparison between “then” and “now.” I’ll let him take us out:
Imagine it’s 1998. Imagine that you have the opportunity to invest in early-stage internet stocks when lots of naysayers are saying the world wide web is “just a fad.”
Imagine that you come across this tiny company called Amazon.com, whose quirky founder Jeff Bezos said they’re going to disrupt Border’s and Barnes & Noble by selling books online…
You plop $1,000 down into Amazon.com stock. Just $1,000 because you’re still a bit skeptical of this whole internet thing, but believe it could work out.
Fast forward 23 years. That $1,000 would be worth about $900,000. You would have made nearly a million dollars off a one thousand-dollar bet.
Well, that’s exactly the position you find yourself in today. Except, it’s not 1998 – it’s 2021. And it’s not the internet – it’s cryptos…
Yes, that means there will be busts. Yes, that means a lot of the cryptos in the market today will end up being worthless.
But it also means that the next Amazon… the next Microsoft… the next Google… the next Netflix… the next millionaire-maker investment opportunities… they’re out there in the crypto markets.
Have a good evening,