State of the Crypto Market
I spend a lot of time chatting with friends about where we’re each investing. Investing is a way to express a belief about the future, so conversations about investing are inherently conversations about where we think the world is headed. And what’s more fun than trying to predict the future?
One of the main topics that’s come up recently is crypto assets. More specifically, whether folks are deploying (their personal) dollars to digital assets and what the future of most tokens looks like. The most commonly shared sentiments have been along the lines of:
“There are really only 5-10 investable tokens.”
“I hold some BTC and HYPE, but sold most of my positions in other majors. The amounts I do still hold are with a ‘set and forget’ mindset.”
“I’m just waiting for BTC to hit $50k before I buy.”
The recurring concern is: if you have the entire universe of assets available for investment, why would someone choose to buy a digital asset over an AI-related stock (where revenue might be compounding at a lightning pace)? What belief does holding a crypto asset allow you to express that you feel more strongly about than, say, demand for inference 10x’ing over the foreseeable future?
The result is that a lot of my friends’ personal portfolios – including the most ardent crypto enthusiasts – have shifted away from digital assets. People have exposure that they’re happy with, are waiting for lower prices, and/or just feel the opportunity cost of deploying dollars elsewhere is too high.
I thought it’d be worth unpacking the implicit beliefs behind each of these. If they hold true for individual investors – where the investable universe is unconstrained, and each asset has to win portfolio share on its absolute merits – they’re likely just as true for institutions and funds with broad mandates. And so the question behind the sentiment is: where does the marginal dollar into crypto assets come from (and on what time horizon can we expect that to occur)?
Here’s how and why the above beliefs could change over the next year. (With the caveat that all three are of course related).
#1: Exposure investors are happy with. My read on this is that many folks still believe in a future in which digital assets (including digital stores of value) matter more than they do today, but that it’s hard to identify near-term catalysts. Market participants don’t want to miss out on the scenario where crypto prices spike, so thus maintain some exposure (even if they don’t feel strong conviction in prices recovering anytime soon).
In short: the long-term belief about the category growing remains intact, but it is not the area they’re spending the marginal unit of their time or capital. What could change this is either an observable catalyst that reinvigorates excitement and/or rotation from other segments within one’s portfolio.
#2: Waiting for lower prices. One way to view this is about near-term market timing – folks are underwriting that there’s still more selling to occur, and are thus trying to time a better entry. But timing the market is hard. A BTC entry at $60k vs. $50k doesn’t make a dramatic difference if you believe the asset will hit $200k. So more acutely, I view the “waiting for lower prices” rationale as reflecting beliefs about the size and upside of the market for crypto assets.
There are a number of factors that could change this. For one, market timing. Many people seem to believe in the 4-year cycle, which would place a BTC bottom sometime in late Q3 / early Q4. If we pass that mark without a major crash, we could see more folks start to reallocate capital to crypto (i.e. to avoid fear of missing any recovery). Similarly, if prices crash, maybe there’s a rebound as people feel they have rounded the bottom. Second, maybe an event occurs that changes how people size the upside. For instance, if we saw sovereigns start to allocate capital into digital assets, that would be exciting! Maybe there’s a change in monetary policy that reignites interest in digital assets. And so on. Finally, reflexivity may play a big factor. Even a little bit of price appreciation could cause folks to capitulate (and buy back in) to avoid the risk of being sidelined.
#3: Opportunity cost of deployment. The question isn’t just “will this asset appreciate?” It’s “will this appreciate relative to the growth I can underwrite in the rest of my opportunity set?” When it seems like all things levered to AI – memory stocks, photonics, neoclouds, chips… you name it – are on an “up only” trajectory, it becomes harder to justify putting the marginal dollar into anything that doesn’t also have the potential to exhibit hypergrowth (assuming growth is what you’re optimizing for). The challenge is that if the AI productivity train slows down, there’s a non-zero chance the rest of the market also sells off. But again, maybe that marks a bottom (and a beginning of a reallocation of flows).
Closing Thoughts
The thoughts above reflect recurring sentiments I’ve heard shared in disparate private discussions among smart folks I deeply respect, and so this piece is intended to be a snapshot of current thinking about the markets.
All-in-all, my guess is that we’re closer to a market bottom for digital assets than a market top. But more than anything, I simply enjoy hypothesizing about the psychology of market participants and thinking about what beliefs might be expressed via asset prices.
Thank you to Jay Drain Jr, Jesse Walden, Hootie Rashidifard, Julian Fernandez, and many others for conversations and feedback that inspired this piece.
All information contained herein is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. None of the opinions or positions provided herein are intended to be treated as legal advice or to create an attorney-client relationship.