2017 vs 2020 Bitcoin Bull Run. Will We Reach New Highs? #43
Market Meditations | November 20, 2020
Today, I provide an exclusive edition that answers a crucial question: can we use the past to trade the future? From 2017 crypto bull run to 2020 and from 2008 financial crisis to 2020 recession. What are the similarities, what are the differences and how can you create the best possible trading strategy?
It finally seems that there’s light at the end of the tunnel. Positive vaccine news keeps coming out and bitcoin is consolidating at $18,000. Although many of us have already gone through a crypto bull run, I thought it could be helpful to use the previous market cycle as a reference to have an idea of where we stand now. Will this cycle play out the same way? Probably not. Can we use 2017 to properly position ourselves? Absolutely. Let’s take a look at some useful data points and draw some similarities and differences
Crypto: 2017 vs. 2020
Arguably, the last bull market only really started when the previous bitcoin all-time high ($1150) was broken. After bitcoin went into price discovery in March 2017, bitcoin rallied another +1500% towards its ATH at $20,000 and the altcoin market saw an even bigger return once bitcoin had topped.
Given the size of the cryptocurrency market, each cycle sees diminishing returns in terms of percentages and I don’t expect this cycle to be different. Although it is likely that bitcoin once again goes through another strong run upwards if it manages to break through $20,000, expecting another ~1500% increase seems rather unreasonable. If money flows into less liquid assets like altcoins, we could see those kinds of returns again, given that a lot less capital is required to meaningfully move the market.
Although we seem to be getting closer to a local top, we’re still early in the cycle judging by the 2017 chart. Anecdotal evidence, like reports coming out about big players still accumulating their positions and media attention almost non-existent further confirms that hypothesis. Google Trends indicates that we’re nowhere near levels of interest compared to 2017. If anything, we seem closer to 2016 with mainstream attention yet to come.
A big difference between the 2017 mania and the current bull run is the participation of both retail and institutional investors. Although some institutional players definitely participated in 2017, the majority couldn’t legally buy or speculate on the cryptocurrency markets. With infrastructure tremendously improved over the last 3 years, this has certainly changed a lot.
While the 2017 bubble was filled with retail speculation, bigger and more sophisticated investors have joined this market over the last few years that, on average, have a larger time horizon than the average retail speculator. Bitcoins bought by institutional investors and corporations to diversify their treasury are bought with multi-year time horizons that are unlikely to hit the market again in the foreseeable future.
Keep in mind, possibilities to short the market have also increased tremendously. Shorting bitcoin was possible on unregulated exchanges, but certainly not to the extent that it is available right now. On top of that, there’s now a possibility to short a wide range of altcoins, something that was simply not the case in 2017. Crypto markets have always had the tendency to overextend because of the market inefficiencies, something that will likely happen to a lesser extent as the market continues to mature.
The huge increase in different derivatives allows bigger players to properly position and hedge themselves, which could also be one of the reasons why volatility has decreased considerably. As a market gets more liquid, volatility decreases and it’s a trend that will likely continue in the foreseeable future.
That said, traders should realize that opportunities to exploit market inefficiencies have improved a lot so the market won’t exactly play out as we saw in 2017. Bitcoin and other large caps will likely remain less volatile compared to the last bull run which isn’t necessarily a bad thing either. Simultaneously, less liquid altcoins remain the wild west of crypto and a market segment that bigger players will likely not touch. Expect extremely volatile trading conditions as new and inexperienced players enter the market in the next couple of months.
Legacy markets: 2008 vs. V-shaped
In terms of the legacy markets, a comparison between the global financial crisis and the coronavirus is more of a strenuous link. The key indicator here is the speed and shape of the crisis. The GFC was brewing before 2008 and the economic rebound was partly delayed to 2010, at least 2 years later. This created a “U-shaped” recovery. In contrast, the authorities’ reaction to the coronavirus was much quicker. This sharper but shorter “V-shaped” shock should allow real GDP to return close to its previous trend. For this reason, traders ought to look for other evidence to reinforce trading strategies. This might include selective involvement in stocks and industries that have fared well from the coronavirus: healthcare and technology. The FX markets are a bit more difficult to reap benefits from now. Most things have already been priced in: the U.S. election result, vaccines, Brexit etc. so it seems unlikely that there will be more major events this year to move the markets. I have written about all these events in my newsletters so hopefully Market Mediators were able to enjoy profits from each.
Looking into the past to have ideas about the future can be a good idea for an investor that is able to stay flexible with his/her expectations. This crypto bull run won’t be an exact replica of the one we saw in 2017, but there are data points that are useful to keep an eye on to have an idea of where we are in the cycle. Human psychology does not change so, if we are indeed at the start of a new bull market, market-wide euphoria and risk-seeking behaviour will once again be signals to look out for near the top of the cycle.
CME Bitcoin Futures Cross $1 Billion in Open Interest. CME Group cash-settled bitcoin futures have hit an all-time high with an open interest above $1 billion. The surge in open interest (OI), which is the value of outstanding derivative contracts that are not yet settled, suggest that more money is flowing into the market and traders expect a near-term rise in bitcoin’s volatility. CME launched its bitcoin futures product in December 2017, and it is currently the only regulated cash-settled offering in the U.S. allowing institutional investors to take positions in the nascent cryptocurrency market. Read more.
Tesla Shatters Records in Climb to Nasdaq’s Top Performing Spot. Tesla Inc. is wrapping up its biggest week in three months as news that Elon Musk’s electric-vehicle maker will enter the S&P 500 Index next month sparked a global buying frenzy throughout the electric vehicle sector. The rally propelled Tesla shares to a new intraday high of $508.61 on Thursday, and made it the best performing stock this week in the Nasdaq-100 Index. The week’s 21% advance marked the company’s strongest performance since Aug. 21, and pushed its market value to $470 billion. Read more.
Deutsche Bank Says Investors Increasingly Prefer Bitcoin Over Gold as Inflation Hedge. Bitcoin’s narrative as a store of value is strengthening according to an analyst at Germany-based investment bank Deutsche Bank. Jim Reid, managing director and head of global fundamental credit strategy said that “there seems to be an increasing demand to use bitcoin where gold used to be used to hedge dollar risk, inflation, and other things. Bitcoin is up ~150% this year, with gold up 22% YTD. Both assets managed to benefit from the monetary and fiscal policies by central banks and governments around the globe. Read more
Top Japanese Banks and Companies to Test Private Digital Currency Next Year. More than 30 major Japanese firms including banks are set to trial a private, digital currency next year to improve payments. Members of the initiative include the top three Japanese banks — MUFG, Sumitomo Mitsui, and Mizuho — as well as several other financial and retail companies. The initiative involves testing a “two-layered digital currency” model featuring the core functionality of blockchain-based digital currency and an area which implements business logic and smart contracts. Read more.
Teddy Cleps: Trading, Building Businesses and Traveling the World with Crypto
Teddy (@TeddyCleps) is a cryptocurrency trader and investor, digital nomad and co-founder of educational hub and marketing agency Yellowblock. He left an 8-figure business he was running with his sister to pursue crypto full-time and used that knowledge to build his brand in crypto as well.
In this episode, we talk about how Teddy thinks about building businesses and communities in crypto. We explore trading and how he transitioned from being a scalper to more of a swing-trader. We further discuss Teddy’s digital nomad lifestyle, the toll both trading and travelling the world takes on your health, discovering good food and why people should pursue things they want over monetary gains.
Things I learned:
You should pursue things that you like, regardless of the monetary rewards: ‘I would rather earn 1/10 by doing what I love as opposed to a job I hate’. Being able to help people can be a lot more valuable than making big money through trade.
The moment that you leave something that is safe and within your comfort zone and you jump into the unknown, that’s when you challenge yourself.
In cryptocurrency, the community is still the epicentre of news and trends and it’s a lot easier for a ‘retail’ trader to be aware of the market.
Stay away from markets you don’t have an edge in.
Trading full-time can have a huge impact on your health and social life. It’s important to find a balance and maintain your healthy lifestyle.
Surround yourself with people who are also hungry for success.
Nothing goes up forever. Keep your emotion in place and have a plan for what you’re doing. Every time you fail, ask yourself what has gone wrong. Learning from your mistakes is necessary if you want to become successful.
If you have half a year to travel, you should just go for it. The opportunities are great and it opens up your mind in so many ways. Whenever you visit cities, avoid the big squares and tourist hotspots.
The cryptocurrency space admires hustling more than any other industry. If you can show projects you can add value, you can easily find a job.
How to Get Your Brain to Focus
We have covered the 2017 vs. 2020 bull market comparison today. This was a resource rich article that required the full attention of the reader. The latest research is clear: the state of our attention determines the state of our lives. You cannot be a trader if you are not attentive. You need to be able to devise a clear and coherent trading strategy and you need to be able to focus on multiple things at once. So how do we harness our attention to focus deeper, get distracted less, and even become more creative? In a TEDx Talk, Chris Bailey, author of the book Hyperfocus, talks about how our ability to focus is the key to productivity, creativity, and living a meaningful life.
In summary, Bailey challenges us to take a phone-detox. This is what he did and he noticed three things: more ideas, more plans and a greater attention span. This is not isolated to Bailey’s experience. There is a multitude of research around the impact of technology on attention span. Technology delivers distractions, something our brain craves; it provides stimulation which releases ‘good feeling’ hormones in the brain.
It takes 8 days for the brain to adjust to less simulation. When we are constantly distracted, we are less likely to come up with good ideas. Ideas come when we are relaxed and our full attention is not captured. Distraction is not the enemy of focus, according to Bailey, over-stimulation is the real cause. You can achieve this focused state of mind by spending less time on the phone and allowing your brain to disconnect.
I invite Market Meditators to incorporate this into their lifestyles. Not only will you be a better trader for it but you will also have a better lifestyle and state of mind.
Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.