Ethereum Breaks Above $500. Are We on the Cusp of an Altcoin Season? #44
Market Meditations | November 23, 2020
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In our Wednesday edition, I wrote that ETH/BTC showing strength was the main signal to look out for in terms of altcoin strength and that’s exactly what started happening two days later. For those who want to be ahead of the game, with regular and exclusive insights into the altcoins I am watching, be sure to also subscribe for the Wednesday and Friday newsletters.
Patience at the right times can pay off immensely in this market… Ethereum has now broken above $500 convincingly making new yearly highs in the process. Are we at the beginning of a new altcoin cycle or is this just a short window of opportunity while bitcoin consolidates? Let’s find out what’s driving these altcoin returns and what to expect going forward.
Green Light for Altcoins: ETH/BTC finally reverses
Ethereum’s strength relative to bitcoin was in a downtrend since early September. Lots of traders positioned themselves pre-maturely in altcoins and were underexposed to bitcoin once again. Even with bitcoin trading close to all-time highs, euphoria was nowhere to be found because many were left holding the wrong bag(s). Ethereum’s USD value was being dragged up by bitcoin’s strong performance and then on Friday, it finally broke yearly highs and started trading above $500, gathering enough momentum for the ETH/BTC chart to reverse as well.
With Ethereum’s strength considered a benchmark for altcoin momentum, we saw 20-50% bounces across the board over the weekend allowing many altcoins to break out of their accumulation zones. Even the popular 2017 altcoins finally had their moment which Tyler Reynolds summarized perfectly: “Retail is here.”
What about ETH 2.0?
Eth2, Ethereum’s transition from a proof-of-work consensus mechanism to a proof-of-stake mechanism making Ethereum blockchain more scalable, more secure, and more sustainable, was one of the most anticipated events this year. After multiple delays, the Ethereum 2.0 staking deposit contract was finally launched in early November. Details are beyond the scope of this article but with ~60% of the needed amount deposited a day before the deadline, Tuesday (23/11) 12 UTC, there’s still a good chance that Eth2 phase 0 launch can happen on December 1, which is brought forward as the earliest possible date. Deposits have increased rapidly over the last few days but it remains to be seen whether the target will hit or whether the process will be delayed until the target is reached at a later time.
The launch of Eth2 can’t come soon enough for supporters of the ecosystem. The ability to stake and earn yield on your Ethereum is expected to take a considerable amount of supply off the market over time, which could lead to further price movement upwards if demand can keep up. Overall, this is considered fundamentally bullish news as Eth2 will allow ecosystems like the recent decentralized finance innovations to thrive and scale up to millions of users without network congestion and high fees. As we wrote above, Ethereum’s strength is good for altcoins in general and this is yet another step in the right direction.
What About Bitcoin?
Just like we’re seeing right now, altcoins tend to do well when bitcoin consolidates and perform poorly when BTC is volatile on either side. Although one should be careful with ‘Bitcoin does X so altcoins do Y’ statements as correlations tend to change and are heavily influenced by momentum, I think we can expect altcoins to keep performing extremely well as long as Bitcoin consolidates around these levels. If we were to see that 20-30% correction that many are still expecting or BTC manages to break upwards towards new all-time highs, altcoins would likely suffer and see some violent corrections across the board. As a reminder, altcoins are higher beta assets and thus sometimes considered as leveraged bitcoin positions. Don’t forget that volatility works both ways and altcoins can drop 30-40% extremely quickly.
Overall, expect something similar to 2017, where we see multiple short ‘alt seasons’ until BTC starts leading the market again sucking up the liquidity from most altcoins. Regularly remind yourself to not overexpose yourself to altcoins as these high returns inevitably come with high risk as well. Take advantage of these extremely favorable trading environments as long as they last but never forget to manage your risk as well. Capital preservation remains the most important rule for a trader, even in a bull market.
As I’ve written before, with so much new capital entering the market these last few months, some portion inevitably flows into altcoins as well as investors and traders seek outsized returns. Because so much less capital is required to move an average altcoin compared to bitcoin or ethereum, changes in momentum are violent with upwards price moments of +100% in a single week.
Stay flexible with your definition of what an alt season means and take advantage as these opportunities present themselves. That said, always keep your eye on the ball. Not sticking to your rules when everything is going great is a recipe for disaster for when the market inevitably turns and corrects. We’re in a bull market and dips are for buying. Make sure that the first big correction doesn’t liquidate your positions and look at it as an opportunity to enter some new positions.
There is a lot going on and a lot of good trading opportunities here. I will continue to keep traders uptodate and informed on altcoins via the newsletter.
Chainanalysis Reportedly Set to Raise $100m at Unicorn Valuation. Forbes reported on Friday that blockchain analytics firm Chainanalysis is close to raising $100 million at a $1 billion valuation, which would give the startup a unicorn status. Venture firm Addition is said to be leading the Series C funding round with participation from previous investors like Accel, Benchmark, and Ribbit. Co-founder Gronager said that Chainanalysis’s revenue increased by about 96% over the past year, with revenue expected to double next year and again in 2022. The startup raised a Series B just four months ago. Read more.
DeFi Protocol Pickle Finance Token Loses Almost Half Its Value After $19.7M Hack. Yet another hack in the decentralized finance (DeFi) ecosystem this weekend. The DAI smart contract of popular DeFi protocol Pickle Finance was hacked for $19.7 million. In a tweet, the anonymous team responded and said that “there are reports that our DAI PickleJar strategy has been exploited. We are actively looking into this matter and will provide further updates.” The price of PICKLE, the native token of the platform, fell +50% towards after the hack and has since rebounded slightly. Read more.
Global Stocks Rally With Oil on Vaccine Progress. Global stocks, equity futures and oil rose on optimism over a Covid-19 vaccine, with AstraZeneca Plc saying its shot prevented illness in most people and the U.S. moving closer to mass immunizations. Vaccine successes have added to the risk-on mood in markets and investors are snapping up assets that will benefit from the end of lockdowns and travel restrictions. Oil futures in New York rose above $43 a barrel after capping their third straight weekly gain. Treasuries fell and the dollar slipped against its major peers. Read more.
OKEx Just Tested Withdrawals as the Service Reopens by Friday. Crypto exchange OKEx has successfully tested a withdrawal transaction, indicating that the withdrawal service could indeed resume by November 27, as previously announced. Blockchain analytics firm CryptoQuant first reported a transaction out of an OKEx wallet today. OKEx reopening brings some uncertainty in the market this week as users could rush to liquidate their locked assets. OKEx first suspended withdrawals more than a month ago, after losing contact with one of its private key holders that was assisting a police investigation in China. Read more.
Bitcoin Shortage is Real, and PayPal is the Cause, Pantera Capital Claims. In a newly published report, crypto investment firm Pantera Capital says a Bitcoin shortage is at the heart of the recent price surge and that the majority of newly minted BTC is being scooped up by PayPal. PayPal’s new crypto service is “already having a huge impact,” Pantera claims, adding that the payment merchant is snatching up roughly 70% of all the new BTC in circulation. Read more.
Tuesday, Nov 24.
Venus (XVS) Main Network Launch:
Mainnet launches are considered to be a bullish catalyst, especially in the current environment. Tokens generally act bullish leading into the event with a small sell-off shortly after. Buy the rumor, sell the news.
Biden Makes First Cabinet Picks:
Biden will announce Cabinet picks on Tuesday. Biden also said last week that he’s decided whom he will nominate for Treasury Secretary and make the announcement around Thanksgiving.
Wednesday, Nov 25.
YF Link (YFL) LinkSwap launch:
LinkSwap is a widely anticipated release for the project’s automated market maker (AMM), protecting users from impermanent loss.
US Data Release:
Wednesday will be telling of the shape of the U.S. economy. October new home sales, Q3 GDP and FOMC minutes. GDP indicates the rate at which the economy is growing or decreasing.
Thursday, Nov 26.
U.S. legacy markets will be closed Thursday and from 1pm on Friday.
Friday, Nov 27.
STMX staking goes live:
STMX holders will soon be able to stake their STMX.
How Not to Take Trading Loss Personally
A trader just lost money on a BTC short. He/She blames the market. How could BTC do this to me? The trader comes up with a plan: to aggressively short all other coins in the portfolio with huge positions. Our trader loses all his/her money and calls it quits. What this story illustrates is the disadvantage of taking things personally in trading.
We already mentioned the possibility of violent movements or corrections, be sure you are able to cope with them.
Frankly, the market does not care who you are, what you do, or how many hours it took you to come up with your trading strategy. Today, I want to ensure you learn not to take things personally when trading.
What the trader in this example was missing was the vigor, or ability to function properly in the face of psychological stress. Instead of moving on from a losing trade, the trader decided to take on risky trades in an attempt to regain losses. This response was based on emotions. Trades executed based on emotion usually end up down the drain.
As I always say to the Market Meditators, trading requires you keep your balance, even when you’re under emotional stress. When you lack vigor in trading, you treat each loss as a personal failure. In reality, individual outcomes matter very little in the grand scheme of things. A great way to react to losses is to analyze the results, review the trade setup, and figure out where you went wrong. Of course, a trader who lacks vigor or resilience would be far too frustrated to take this constructive approach.
To build your vigor you will need to allow for time and experience. The more familiar a trading loss becomes, the easier it is to cope, and the stronger you become. For example, a trader who has experienced repeated losses will have something to draw upon when he/she experiences a large drawdown. The trader will know these are merely small setbacks, and that eventually the highs will resume.
Consider every setback a chance to build vigor. One good habit is to imagine the worst possible result before each trade and then visualise how a person with vigor will feel and react in that event. Because you ‘rehearsed’ the reaction in your head, it will be easier to respond if you actually experience a loss.
The vigorous trader will stay level-headed even after a loss. This is no mean feat but it’s what you want to become. Vigor will allow you not to take losses personally and therefore come out as a better trader.
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.