Hello readers,

We’ve been watching key support areas for BTC with the intent to either exit the market (in anticipation of a further leg down) or redeploy some cash further out on the risk curve in anticipation of a potential blow-off top/”altseason” later this year.

In this week’s report, we cover how we’re now thinking about managing risk given the improved outlook related to tariffs and market sentiment.

Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment advice.

Let’s go.

Macro

Tariffs

Our initial view was that the Trump administration would take a hard stance on China while negotiating with others. As Trump increased the tariffs all the way to 145%, this view seemed correct. Of course, that effectively created an unsustainable trade embargo between the two largest economies in the world.

So, now we have the 90-day pause with tariffs on China capped at 30%. The market loved this news. But it’s important to understand that the effective global tariff rate is still 17.8%.

It was 2.5% when Trump came into office.

Looking Forward

We have no way of predicting what happens in the short term with tariffs. It’s a fool’s game even to try. That said, traders who have bought when Trump said to “buy” and sold when he said to “sell” have probably done quite well over the last few months.

Long-term readers know that this is not how we invest. And for what it’s worth, we can’t wait to get back to more long-term thinking. At the same time, shorter-term views are warranted at this latter stage of the cycle.

With a longer-term perspective in mind, we’re doing our best to anchor to the big picture:

Tariff rates are not going back to 2.5%.
The tariffs are mostly about rebalancing trade with China (power struggle) while appealing to Trump’s populist base (bring manufacturing back to the US). Two birds, one stone.

Recession

Prior to the 90-day pause with China, soft data (surveys) indicated that the chances of a recession were rising:

ISM Manufacturing dipped in April to 48.7 (contraction in the business cycle), although services rose to 51.7 (expansion).
University of Michigan Consumer Sentiment came in at 52.2 in April, well below the long-term average of 85 (it was 71 during peak Covid scare).
1-year inflation expectations rose to 6.5% in April (same U. Mich survey).
Announced job layoffs rose to levels last seen in the Great Recession, per the March Challenger report. They came down in April but are still 63% higher than last year.
Data from the LA Ports indicated a 30% reduction in shipping from China, which was anticipated to hit shelves in May/June.

Add it all up, and Polymarket had the odds of recession at 66% on May 1st (it’s now 40%).

Data: Polymarket

Our view was that the soft data would ultimately show up in the hard (actual) data — which continues to indicate that the economy is still strong.

Now. With the 90-day pause on China tariffs, we think recession concerns have abated in the near term.

The question turns to how long the wall of worry will be climbed before another round of negative news tempers expectations.

It could happen tomorrow. Nobody knows, which makes this more of a traders’ market.

Having said that, it seems we may have a little pocket for a risk-on regime in which capital allocators may have to chase the market.

Crypto Markets

The move to risk-on can be observed most acutely in the crypto markets, the most sensitive asset class as it pertains to liquidity conditions.

It appears that the crypto markets are sniffing out the fact that:

Fiscal spending is not dropping, as the US gov’t is still spending in excess of 7% of GDP.
A wall of refinancings across government & corporate debts is coming in Q3-Q4 ($3.5-$4 trillion).
Tax cuts, deregulation, and changes to the supplemental leverage ratio (SLR) may be coming later this year (which could increase leverage/liquidity from the banking sector).
Inflation is dropping (CPI & PPI reports showed slowing inflation this week), which could give the Fed the green light to cut.

This points to favorable liquidity conditions as one has to imagine that the Fed will need to buy some of the forthcoming refinancings and new debt issuance.

Add it all up, and you get rising chances for “altseason,” even with the Fed currently sitting on its hands.

For the first time since Q4 of last year, we’re observing sustained rallies across altcoins and memecoins. Meanwhile, it appears that BTC dominance may have peaked:

Data: Glassnode, The DeFi Report

Altseason

If we are truly entering “altseason,” the above chart has a long way to fall. That means (select) altcoins will outperform.

But what are the factors that we look for to confirm “altseason?”

Last year of the cycle.
BTC dominance is in the 65-70% range at the start.
Shift from QT to QE.
Rising ETH/BTC ratio.
Renewed retail interest & animal spirits.

To be clear, we are early in this process right now. ETH/BTC is still at .024 with ETH trading 46% off its all-time high in USD terms. The Fed is still doing QT.

With that said, the 35% move that ETH made last week was eerily reminiscent of the 68% move it made from 1/1/21 - 1/7/21 (from $729 to $1,224).

At the time, the ETH/BTC ratio was .03. It went to .07 just four months later, with ETH/USD rising 370%.

This kicked off a frenzy across altcoins, NFTs, “metaverse” tokens, and alt. L1s. There were very few pullbacks from January ‘21 through May ‘21. We then saw a steep sell-off through mid-July (ETH dropped from $4k to $1.8k), before rallying to all-time highs in November.

Some altcoins (such as Terra Luna) continued to rally well past the peak for BTC & ETH, before the house of cards ultimately came down.

That’s what happened in the last cycle.

So, how are we playing the current setup?

Portfolio Management

We were happy to lock in profits from long-term holdings back in December/January. Since that time, we’ve been monitoring the markets for a signal that we would either break down and enter a bear market or rebound into another blow-off top.

We’re now leaning toward the latter.

But that doesn’t mean we’re all-in.

As many of you know, our style is to wait for “fat pitches.” We do not consider the setup today a “fat pitch.” But we also think there is some risk to the upside here.

So here’s how we’re playing it:

We’re not interested in BTC at these levels.
Instead, we’re recycling a small % of profits further out on the risk curve.
Historically, the things that perform well at the end of cycles are the things that outperformed earlier in the cycle + new/shiny things. We think assets such as SUI/TIA//HYPE/VIRTUALS will do well. Tokens with a strong community/narrative and a low float could see the biggest moves.
DeFi projects with strong fundamentals could also do well. Examples include Pendle, Aerodrome, Maple, and Raydium.
We also expect to see outperformance from the top “blue-chip” memes. We like SPX6900, GIGA, BONK, and PEPE. These are the assets we are focused on.

Here’s an example of how we analyze memes, through the lens of Bonk:

Beta to the L1 Asset

Data: The DeFi Report, Dune

As we can see here, if you had a constructive view of Solana back in ‘23, arguably the best way to express that was through Bonk, the culture coin of the ecosystem.

Since mid-2023 through today, BONK’s 1-week Beta to SOL is 1.53. The 1-month beta is 4.94. The 3-month beta is 17.65.

What does that mean? BONK is very sensitive to SOL’s price action. Said another way, it has a very high risk/reward vs SOL when held for longer periods of time.

90-Day Simple Moving Average

Data: The DeFi Report, Dune

In terms of momentum, BONK recently reclaimed its 90-day moving average, which it traded below for the last 4 months.

14-Day RSI

Data: The DeFi Report, Dune

We prefer to buy assets when the RSI is close to 30 (oversold). BONK is currently at overbought levels, which point to a potential pullback coming after the recent rally.

Market Value to Realized Value

Data: The DeFi Report, Dune

Used as a proxy for the “cost basis” of tokenholders holding the asset. For BONK, it’s currently 1.02. That means that holders are, on average, at break-even on their holdings of BONK right now. As we can see above, we reached a level of nearly 6x in Q4 of ‘23, and nearly 3x in Q4 of last year.

Holder Growth & Cohorts

Data: The DeFi Report, Dune

As we can see, BONK has nearly 1 million unique wallets holding the token. The team has run several “airdops,” which is why there are so many tokenholders (and why such a large % have less than $1k in holdings).

With that said, we like to look at Whale Retention by analyzing wallets that have ever had over $100k of holdings that still have greater than 50% of their peak holdings in units (this strips out any noise from price action).

BONK’s whale retention is 28.5%. This is consistently one of the highest levels observed.

[For long-form views on memecoins, we shared a deep dive last year.]

Risks

I want to be clear that we are not all in right now. We simply want to be positioned to capture some upside if the markets come roaring back.

With that said, there are many risks to consider:

BTC needs to break out to all-time highs. Our view is likely irrelevant if this does not happen.
The summer months tend to be periods of chop/consolidation. Sentiment feels a little extreme here, so we may see another leg down, similar to last year.
The bond market. We think long-term yields are ultimately going higher. Equities (and crypto) can rise during these periods. But valuations are ultimately a product of the DCF calculation, and so equities (and crypto) will eventually correct if this plays out.
Stablecoin legislation failed to pass through the Senate last week (the Democrats are still obstructing crypto). This is a big deal, and the crypto markets may be sleeping on it. If this legislation does not make it through, the larger crypto bill will also likely be blocked, creating a headwind for the asset class.

Closing Thoughts

“Altseason” refers to periods in which more than 50% of each new dollar coming into the crypto sector goes to non-BTC assets. It does not mean that all altcoins will outperform.

Asset selection and timing are key.

Please understand that there are many risks circulating, in addition to market risk. Yesterday, we learned that Coinbase user data was recently exploited. Hacks, hidden leverage, and social engineering scams present additional risks to crypto investors as prices rise.

We believe there will be a time to buy BTC and other blue-chip assets at discounted prices in the not-too-distant future.

But we also want to have some fun and try to capture any upside that may be left in the current cycle.

Take a Report.

And Stay Curious.

Disclaimer: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.

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Are we heading for an "altseason" melt-up?

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