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Markets Outlook
Why Market Drawdown is the Best Time to Accumulate Hard Assets | Markets Outlook
00:17:27
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- [00:00]
A
At this point, when you have this magnitude of seller exhaustion, it's kind of incredible it's handled this amount of volume. Also from a mechanical standpoint, you're basically faced with all right, how much more am I buying of an asset that's only got about 19 million in total investable circulation? So I look at this as a phenomenal backdrop to accumulate hard assets and Bitcoin's apex predator of all assets.
- [00:30]
B
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- [01:28]
C
Welcome to Coindesk. This is Markets Outlook. I'm Andy Baer from Coindesk Indices and with me is my friend Chris Sullivan, portfolio manager and co founder at Hyperion Decimus. Chris, it's great to talk to you. In the pre warm up session we were talking about how energetic we feel when markets are like this. Tell me how you're feeling and what your sleep counter looks like this week.
- [01:53]
A
Yeah, it's not one of fear. Let me tell you that we have a saying at our firm to always feast on fear and I highly recommend all investors do that. It seems in my 20 year tenure the quantity of what we call sharks or smart money has just depleted over time. Everybody's living in this consensus reality which is plainly and very simply for the sheep. So blood's flowing, juices flowing. This is how asymmetry materializes. And especially when you get a backdrop of primarily a mechanical outcome with a rising fundamental outcome and a still fundamentally constructive macro environment, you have only one choice. And it's a beautiful thing when these Things occur.
- [02:37]
C
It really is, I think watching the way Bitcoin and other digital assets have tend to chop around in sideways choppy markets and in macro corrections like earlier in the year. What's happened over the last seven, eight weeks feels a little different, right? It feels like a trend down, maybe that's punishing dip buyers, but it really feels as if we've had a solid seven weeks of drawdown, which is kind of remarkable, right? In a situation where markets are supposed to find their new level immediately. What does that say to you about what's different about this drawdown and how trend has been helpful in trying to navigate it?
- [03:19]
A
Yeah, great question. I think we've got a couple statistical references to cite and then we have a couple historical so on statistical, the Z score here is now blown out in terms of its standard deviation from the mean. So there's about four other instances where this has even ever occurred, all of which resulted in a vicious V, so to speak. One of them was a continuation of a longer term bear market. And then from a pattern recognition standpoint, if you zero in on the structure, this looks a lot like 2019 and then looks a lot like March 2020. Let's examine the different backdrop. March 2020. Essentially everybody thought it's the end of the world, right? Oh, some sort of man made concoction get spread around through the spraying from planes put in the water supply, et cetera. And everybody finds out later it was all a scam. I think that environment is a really good comparative because it was all about for selling at that time and fear. In fact, we literally hit the same exact sentiment number from March 23, 2020 over the last, I believe 12 hours. So at this point when you have this magnitude of seller exhaustion, it's kind of incredible. It's handled this amount of volume. Also from a mechanical standpoint, you're basically faced with all right, how much more am I buying of an asset that's only got about 19 million in total investable circulation? So I look at this as a phenomenal backdrop to accumulate hard assets. And Bitcoin's the apex predator of all assets.
- [04:55]
C
Focusing in on Bitcoin, I think the market was spooked, I guess the summer before last, thinking that governments were going to unload what they had seized this year. It was about the either broadcast or not broadcasted reallocation of OGs reallocating. Maybe their psychological number was 100,000. I was thinking on the way to work this morning, hey, if somebody sold at 100,000 or 110,000. Even if it's a lot, don't they, don't they want to buy it back 20, 25% cheaper?
- [05:24]
A
Yeah, if you look at the stats for wallets greater than 1,000, it's gone vertical, especially in the last like four or five days. There's also a nice boost in new wallets and then new wallet activity. So historically that, that can be a bullish catalyst. But when all the sellers are gone, prices go up. And I think unlike other cycles or bearish events in digital assets, you didn't have this sort of, you know, daisy chain leverage not just across defi and offshore exchanges, but across these quasi equity treasury codes. Right. Which also were for sellers here. So I think that's why you're not seeing a lot of subdivision in the action. It's just kind of knifing down at that, at that 0 degree kind of slope. And that's where these vicious V's that we've talked about throughout all of finance, that's how those materialize essentially when you're just straight down and then all the selling's done in it kind of retraces it. And from a trend perspective, and especially on how we're running funds like we were able to get out of the way entirely in one fund about 42 days ago and have now prepared everything to grab the turn. And then in our other fund we have waited to rebalance on the long side until basically this morning.
- [06:43]
C
That's phenomenal. And I think it supports the idea that in this kind of market, which can be especially tricky for tactical players, this is a time when trend can really be a good backstop. Switching to the options markets, seeing things that feel a lot more equity, like when you think about how implied have been bid people are hedging Bitcoin people are hedging digital assets. Skew is downward sloping. Now, I'm not saying that's never happened, but it feels like there is more of an install base for Bitcoin that feels like it wants to tactically hedge sign of maturity. Or is that just kind of, you know, an artifact of this market condition?
- [07:24]
A
I wouldn't call it artifact. I think it, it is a sign of maturity just by nature of, of having a pattern itself in derivatives that are robust enough and having a volume behind it to create that skew. I think it's also another thing in terms of data points. When put SKU blows out, that's typically around some sort of capitulation event. So I think in all ways it looks and feels like it's a much more mature market than certainly even a year ago and if and way more mature than five years ago. And as you know, we've been in the space almost 10 professionally, so we've got a lot of backdrop to make that judgment. Call.
- [08:30]
B
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- [09:44]
C
One of the things that we pointed out over the last week is despite our benchmark index, the CoinDesk 20 losing a bunch of its performance or its return from the year. What it has consistently done from the beginning of the year through now in pretty much a straight line has outperformed smaller names, right? That there's been a reduction in distractions. When we look at our CoinDesk 80 index in CoinDesk 20 terms, the ratio that's down about 50% on the year and it's been a pretty straight line down our meme Coin index is similar. How do you think about the fact that the asset class is is is converging kind of on top names getting rid of distractions and what do you think that that will mean for the breadth and the liquidity of this kind of narrower part of the asset class?
- [10:37]
A
Yeah, great question. Mechanically it's hard to even Keep track n number of percent of dilution across. Call it committed capital to the digital asset space + or -4 trillion at its peak. Right. Upwards of millions of tokens diluting what in 2017 cycle only has like a handful, right? Like less than a dozen. And then you had all of Wall Street's, you know, security shenanigans with these digital asset treasuries and then other structures. That was, that was not only hey, I'm going to borrow to buy, but then I'm going to dilute the shareholder to do it. And that's just never going to turn out well. So when you get back to basics, concentrate on the blue chips that have network revenue that are building applications. And then Bitcoin's a totally different asset than basically every other crypto. Something that is only getting more scarce and will only have its inflation hedge and its P and L attributes increase over time.
- [11:37]
C
We should disclose that CoinDesk works with Hyperion Decimus on a fund which is anchored to the CoinDesk 20 index. But, but with that disclosure in place, how does this help your business? When you think about institutional investors who are now seeing a volatility event navigated expertly in a very familiar way to this less familiar asset class. Is this the kind of market condition that can help, you know, create a couple of good slides in a deck and so you can go out and raise money?
- [12:08]
A
Yeah, I mean on the rolling 12 and unit 8 there's pretty substantial outperformance. I don't want to have bad karma and, and speak with a lot of hubris, but the reality of what's occurring real time is we're having the highest amount of institutional allocations in, in history. Partly due to the outperformance and partly due to the explanation of that, the, the simplicity of the outcome driven trending strategy where you can put up capital here. Exactly. Now that's already out of harm's way that we can describe the exact sequence of, and logic where it's going to go to work on, on the turn giving, you know, at least from here to the all time high, probably about 70, 80% of that capture if that event occurs. So that gives investors, hey, I'm not, I'm not throwing it in a bunch of tokens. I don't even know. I'm not locking it into an illiquid venture that I don't know when I'm going to have a liquidity event. I can get into a fund that's going to be diversified, well run and have counterparty diversification as well. And that's I think why our tenure, in addition to the performance is giving investors like hey, this is great. Every time these events have occurred you have giant asymmetric returns on a rolling 12 month basis. This is the time to deploy and you've got a much more mature investor base, much more diverse global investor base than just sort of the, the OGs plus degens.
- [13:27]
C
That's great to hear with I guess the progress and the evidence of building around stablecoins, tokenization, things like this, which will favor layer one blockchains. You know, I'm sure that you have a very good gut sense of how Bitcoin is going to respond as more data comes out, as the Fed action becomes more clearer in the future, is there a sense that there's going to be some, I guess you know that the spring is compressed tight for other names, other growthier digital asset names to take off when sentiment changes. So in other words, when this V shape occurs, what, what shape do you expect it to have? Is it going to be another Bitcoin lead and everything, you know, attached with a rubber band or are we going to see more diversification or different levels of velocity?
- [14:14]
A
Yeah, great question. I think we're already seeing when you're looking at others, for example, or total three, you actually already have evidence of what we call positive divergences. So for the first time really since 22, because I would argue from a pure TA CMT style analysis, there's been a secular bear market in alts and this is very similar to 17 to 19 in alts. Very very similar structure here you see a lot of positive divergences and I think mechanically zcash actually really is a good example to point this out. The fully diluted names with tangible use cases that are well known and well vetted are going to lead. And I think you've got not only privacy, which everybody should be concerned about because all of our powers that should not be want to know. I don't know why they they're such sick psychopaths know everything about what we do and when we do it, but privacy. Dein defi fully diluted names are, are naturally going to have effectively potential upside crashes because there's just no liquidity on the sell side of these order books. So if I'm diving into individual names, that's what I'm looking for to sort of lead what what to deploy into first.
- [15:27]
C
I got one more question. You know the other thing that's characterized, I guess the last year or 18 months is liquidity has spread. There's 12 or 13 or 15 ways to buy Bitcoin now. Right. There is options activity on new exchanges like our parent company Bullish, which launched an options feature, but also a lot of options activity moving into etf. Options leverage similarly. Right. Leverage that might, that might have been called into question after the October 10th event gets spread. Is this kind of diversification of market structure going to be healthy? Is it happening too fast, too slow? How do you think the quality of the market is going to be if as a hedge fund you're really focused on trading native tokens and using sort of native spot and derivative instruments?
- [16:16]
A
Yeah. You have to have an awareness of the derivative tail wagging the dog. Right. So absolutely options expiries have an impact and absolutely. Gamma, specifically short gamma, has impact very similar to equities. That's why the structure, if you look from inception really into through 21, the structure of these assets is very commodity like and since then it looks a lot like equities. To your point, health, I'd want to know what. Because my definition of health is purity of price discovery. Right. So to me, while there is discombobulated signaling coming from different hours of trading, different derivs and who's exposed or not, I think destruction being a key feature of capitalism and price discovery, the speed with which this does that, I think is hyper efficient and extremely healthy.
- [17:09]
C
Fantastic. Good luck navigating the turn and we hope to see the other side of the fee soon. Thank you so much Chris Sullivan from Hyperion Decimus and thanks for joining us on CoinDesk Market Outlook. I'm Andy Baer.