Adding long ETH/USD to the portfolio
My core view for crypto is that we are near the bottom of what will be a multi-year trading range. The ingredients needed for a crypto bull market like what we saw in 2017 and 2021 - bullish animal spirits, negative real yields, and rapidly growing adoption, will not return for a long time. However, it’s still possible for BTC and ETH to deliver triple digit returns within the context of the sideways market, like what BTC did during the mid-2019 bear market rally.
During mid-2019, BTC rallied from 3000 to 14000 - a 335% return and a 61.8% Fibonacci retracement of the bull market high to low.
There are some parallels between the 2019 bear market rally and today:
In 2018, we were finishing a rate hiking cycle where tightening liquidity resulted in most assets delivering negative returns. BTC suffered a 84% drop from the highs.
During the four months prior to the 2019 rally, BTC traded in a tight range near the lows, as shorts pressed their advantage while strong hands accumulated.
The 2019 rally coincided with a Goldilocks environment of slowing growth and inflation, which caused the Fed to take its foot off the tightening pedal.
I’ve also been impressed with how BTC and ETH have been trading since the collapse of FTX. ETH couldn’t break the Jun 2022 low of 900 and both BTC and ETH didn’t continue their downward momentum despite more runs on crypto exchanges, major crypto lenders going insolvent, and regulators cracking down on Digital Currency Group’s crypto empire. This price action is evidence of strong hands accumulating despite many people throwing in the towel on their holdings and others going short.
The Economist also declared “Crypto’s Downfall” on Nov 19. The contrarian signal from Economist magazine covers should not be underestimated.
Source: Brent Donnelly
Brent Donnelly did some empirical work on the magazine cover indicator, and it actually has a good track record!
I’m going long ETH/USD here at 1555 with a stop at 1320. If ETH was to make a 61.8% retracement from the bull market high (like what BTC did in 2019) the target would be 3400 - a nice 219% return and 7.9x of what I am risking on the trade.
Why buy ETH instead of BTC? I believe the potential of ETH to outperform BTC due to the Merge has not been fully realized due to the bear market. I also believe web 3 and defi will continue to be the greatest source of growth and innovation in the crypto ecosystem, and the majority of web 3 and defi uses ETH as the base layer. BTC will remain the low-beta safe-haven currency relative to ETH.
My updated trading book:
Like the optimism and do agree on a number of considerations including the long term prospects for the space. I am still however concerned about the correlation btw crypto & tradfi/macro. To this extent, should we see meaningful risk off turn, I suspect crypto may also decline together with other asset classes. In that scenario BTC may actually do relatively better (or less worse) than ETH precisely because of its lower beta.
Another two reasons why BTC may overall be a more resilient bet are:
- At some point Gold's strong trend (and decoupling from real rates) may rub off BTC as well as the analogy of use case (SoV).
- Any regulatory clampdown is more likely to affect ETH disproportionately vs BTC especially when it comes to the DeFi space.