Altseason 2.0: The New Crypto-Boom — What is it and will it last?
Previous readers of my stories may and followers on twitter definitely will remember that, when it comes to crypto, I support uses of the blockchain and even the “movement” to a degree, but I am always sceptical and highly critical of the scammy nature of the industry. You may also have come across my article on why we were in a bubble from Nov 2017. If not, you can always have a look at my archive.
Crypto has always had a place in my heart and I continue to be an active follower as investing in general is one of my passions. It has now been proven that most of what I wrote in the bubble piece was close to the truth. Altcoins have lost 90–95% of their value and the “majors” have recovered reasonably quickly from the bursting bubble of 2017. ICOs (unless they offer true ownership in the underlying company) remain a scam, as are any and all token with a pre-mine, an airdrop and a “usecase” that could easily be assumed by the US Dollar or even bitcoin.
However, I am now seeing signs that crypto could be in the middle of a new bubble forming. I do not believe this one is at its end right now and I have not been as positive about the entire space since mid 2017. So I decided to put my thoughts to “paper”. As always — all of this is personal opinion. None of it is advice.
Altseason 2.0 — DeFi and its friends
Over the past two months or so, it is undeniable that a new movement has taken foot in the crypto space. It is broadly summarized by “DeFi” (decentralized finance), a term that is misused by many who would like to benefit from it’s shine (cough…Binance buys CoinMarketCap, then puts itself atop of list of “DeFi Rankings”…cough), further underlining how scammy the industry and its top participants still are.
I will not go into much detail in terms of what DeFi means, but broadly speaking the idea is to decentralize services that are being offered by financial intermediaries (banks), such as loans in a “trustless” way. In order to give out loans, you need people that lock up the asset so it can be lent, which is why you see metrics of “total value locked up”. In essence this could be compared to a bank’s balance sheet that it can leverage to then generate a return. The returns on this DeFi lending are higher than with banks, because (a) there is no government insurance, (b) the asset you are invested in is much, much more volatile than any main fiat asset and (c) the contract you are locking your assets up in could potentially have a security issue and may be hacked (again, without any insurance to cover you in that case). Taking this a step further is “yield farming”, which basically means you try to create more yield from employing the IOU you got for locking up your assets in some other DeFi scheme.
If this rings “pyramid scheme”, that is probably not entirely untrue. It may not be a pyramid scheme in the classic sense (and there is no central scammer), but it is easy to imagine how quickly the air will go out of that balloon if one of the locked up assets that is used to be locked up elsewhere (and so on) fails in some way. It would be similar to the Greek debt crisis where it was not the small amount (relatively speaking) of debt that Greece could have defaulted on which would have wiped out the banks, but rather the total sum of all derivative products that were outstanding on that same debt (approximately 15x its size). Lehman is another good comparison. So before we go any further: in my opionion, investing in DeFi means playing with fire. Plain and simple.
Yet — high risk, potentially high return. Not necessarily because I think that this form of DeFi is going to put traditional banks out of business any time soon (think about it: who would really be using these loans or giving these loans? Probably those that cannot get a cheaper loan on the one hand and quite possibly people that are reaching for any kind of yield on the other hand), but because I am seeing signs that a new bubble is being inflated in crypto. As you will remember, I think there is nothing wrong with riding such a bubble as long as you do not risk your last penny and take profits along the way as the inevitable blow up is, well, inevitable.
The DeFi Bubble is a Central Bank Bubble
The current bubble, which I shall simply call “Altseason 2.0” (despite it really being altseason 3213.0) has not disappointed. Similar to the .com bubble, the winners of the first bubble are not necessarily the winners of the next. If you look closely you will see that stars of the 2000s like letsbuyit.com, yahoo or AOL don’t really feature much anymore. Instead, the next move of the Nasdaq was driven by the stalwarts of today’s economy (Amazon, Ebay, Google, Apple, Microsoft and later Facebook and Netflix). In other words: the promises of the .com era were delivered by other companies that came later. Could DeFi be the same wave for crypto, ie token that actually have a use case and that actually use the blockchain for its advantages and not just for its potential to scam investors? Maybe. Time will tell.
For the purposes of this article, the financial ramifications are more interesting. In order to understand this, we need to take a step back and look at central banks. Faced with yet another economic crisis (this time triggered by Covid-19), central banks around the world turned to what worked in the past: massive monetary stimulus. On a side note: this is NOT bad. This is what you do when you have learned the hard way in the Great Depression that you will cause misery on a massive scale if you do not engage in monetary easing. Let no crypto OG tell you otherwise. If you don’t believe it, read this.
So when the virus hit markets, money fled into the safest of assets — money market funds. Assets in these funds grew to a size almost twice that of 2008 (which is when banks did not trust each other to hold their money, so for that to be outdone is quite a feat). Then the Fed printed. They decided to add $75bn of liquidity to markets DAILY at the peak. That means the Fed bought US treasuries and later even corporate debt ETFs directly for that enormous amount. To this day, it is still buying for approximately $30bn per DAY. Central banks globally have largely engaged in similar programs and it would appear a matter of time before they buy equity ETFs.
With so much demand from a buyer with unlimited pockets, you can no longer really earn any interest on safe assets. That means all this money “parked” in money market funds had (and still has) to be re-allocated to higher risk assets in order to earn a return. That return is practically zero on treasuries, 10 year bonds and even high quality corporate debt. Logically, the marginal buyer moving from treasuries into corporate debt causes the marginal buyer of corporate debt to become the marginal buyer of equities and quite frankly the marginal buyer of equities to become the marginal buyer of crypto. Within crypto, the marginal buyer of bitcoin becomes the marginal buyer of ethereum, while that guy becomes the marginal buyer of altcoins. Et voila! A bubble is born.
I should probably note that this “game” will not be unsustainable for the Fed (or the ECB), until either their currencies cease to be reserve currencies (ie the US Dollar collapses) or they cause massive inflation. Pretty much nothing else can stop it (and I find it debatable whether it should be stopped, but that is another discussion).
So in my view, DeFi COULD be the Amazon/Google/Apple of crypto, but I think it is just as likely it is just the current narrative used to lure people into crypto and into giving the main scammers (them who shall not be named) all your money. In a sense, maybe the theme was just in the right place at the right time.
Where are we in this bubble?
It is hard to tell where we are in the current central bank cycle, but I would not be writing this article if I thought we were close to the end already. I may be wrong, but central banks have (rightfully) learned their lesson too well about the Great Depression to stop any time soon and the US Dollar seems to not be on the verge of collapse yet either.
I found this chart on coindesk and although I note, the current figure for the red line is somewhere around 3.5bn (see https://defipulse.com/ for up to date figures), I found the comparison to the ICO bubble very useful. If this is a good indicator, we probably have another 80–100% in value locked growth ahead of us the rest of this year. I would think the potential is a bit higher this time around due to more quantitative easing as well.
Altcoins have had a spectacular run, but many of them have stayed at their -95% levels from the 2017 tops (and I do not think the majority of them will recover at all, see the analogy to letsbuyit.com previously) and even some that have increased tenfold are still at -85% or so. DeFi coins to a large degree (newer protocols) did not exist in 2017, so these will have truly amazing %return figures, but if you look at their total market cap, you have quite a bit of room till you could say they have become another Ripple, Tron or Cardano (all of which you know my opinion about…). Also, protocols such as Ethereum remain the backbone of the crypto infrastructure, so the “majors” very well could benefit from showing this “usecase” as well. Finally, bitcoin (which is not digital gold) is certainly one of the beneficiaries of a weakening Dollar with no real fiat alternative available that is not being devalued.
Look at the chart above (courtesy of topdowncharts and Callum Thomas, a great twitter account to follow), which shows the money parked in (zero yielding) money market funds as of July 13th. Can you even imagine what happens to asset prices when this money comes back searching for yield?
So if I had to guess, given the extremely high likelihood that central banks keep their foot on the gas for quite some time now and the fact that DeFi almost looks like a viable usecase (again, I won’t be the one to judge that; time will tell), I think this could very well run for a good amount of time yet. After all, this time around there is a better balance of outright moneygrabbing scams (still the majority) and token with an actual usecase. No matter how sustainable that usecase is, I was almost shocked to see the first (in my view) non-premined, non-ICO, non-airdrop token WITH a usecase that is actually being used and WITHOUT any security characteristics see the light of day in Yearn Finance’s governance token YFI. This was the message from the founders to the market:
Assuming this does not turn out to be another elaborate scam, lies and no security issue in the contract kills it, I absolutely think that this is a giant step in the right direction. Whether it ends up having financial value or not shall not be the debate of this article.
If I were invested in any of these DeFi protocols (or bitcoin for that matter), I would watch any steps by the Fed like a hawk (no pun intended). I firmly believe that the asset price inflation due to quantitative easing is what is fueling crypto (and all other assets) at the moment. Given it won’t likely abate for some time AND we are seeing real (?) usecase non-scam protocols being released on the blockchain, I have not been this positive on crypto and bitcoin since mid 2017. I should probably add that perfect market timing is impossible, tether remains a significant systemic risk and this is observation, not advice.
Thank you for reading. If you enjoyed this, please clap and have a look if you’d like to follow me on twitter. My other works can be found here:
Lastly, the all important disclaimer: this is my personal opinion, not my professional advice. Most of all this is not investment advice in any way. Crypto assets can fluctuate widely in value and all of your capital can be lost. I have a 50/50 chance of being right. Any negative views expressed, if any, are solely aimed at the token in question, never at the development teams behind them for which I have utmost respect (if they are sincere).
