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Hello readers,
All year we’ve been calling for the market to climb a “wall of worry,” anticipating a blow-off top sometime in ‘25. Well. Look around. How many people are “worried” about the markets right now? Feels like we’re scaling that wall, doesn’t it?
But that doesn’t mean it’s time to take a victory lap (it never is). It’s time to lock in. Focus. And re-assess how the cycle plays out from here.
So strap in. Grab yourself a coffee, some tea, or your favorite adult beverage.
Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment, legal, tax, business, or any other advice.
Let’s go.
The economy continues to operate within somewhat of a “Goldilocks” state — neither too hot nor too cold. Growth is moderate but picking up steam. The economy grew 2.8% in Q3, surpassing expectations. Inflation is under control (for now). And the labor market remains strong (4.1% unemployment in October).
Now. I could bore you with a big section on macro here. But the reality is not much has changed in the data since our late August note. Rather, I’ll share a few quick hitters and then we can jump into some crypto data.
Treasury Spending: The YTD budget deficit is $1.8 trillion through September, already exceeding last year’s deficit. With that said, we did have a small surplus in September. The story of 2024 has been fiscal dominance, which has helped to buoy markets despite the Fed holding rates higher for longer than most had anticipated.
M2 & Global Liquidity: On the rise with the Fed, ECB, and China easing. Our global liquidity data is largely sourced from Cross Border Capital. Their view is that we’re approximately 1/3 of the way through the global liquidity cycle. I think it’s closer to halfway.
Inflation: Currently 2.73% per truflation — up from 1.06% two months ago. The largest drivers were household & daily items + clothing. The Fed’s focus is on PCE, which came in at 2.1% in September, down from 2.3% in August.
Treasury Yields: The rise in the 10-year (currently at 4.3%, up from 3.6% two months ago) indicates investors are expecting a stronger economy and potentially inflationary pressures — likely in response to Trump’s election win — which signals import tariffs and expansive fiscal policy including tax cuts and infrastructure spending.
The Dollar: The DXY rose from 100 in late September all the way up to 106 today (back to where it was in June). We believe this move is largely due to strong consumer spending & labor markets coupled with lower expectations for Fed cuts moving forward. A rising dollar is typically not good for risk assets.
Credit Markets: The % of banks tightening lending standards continues to drop. Credit spreads remain at historically low levels.
Labor Market: Unemployment remains low at 4.1%. Meanwhile, unemployment claims came in lower than expected for 4 weeks straight (pending revisions).
The VIX: the “fear gauge” currently comes in at 14.02, a relatively low reading signaling a “risk on” environment.
Fed Forward Guidance: Powell cut 25 basis points last week and was fairly dovish in his remarks, making it clear that he still believes the Fed is restrictive. One could infer that this means we are still above the targeted neutral rate. The CME Futures is currently pricing a 25 bps cut at a roughly 60% chance for the December 18 FOMC meeting.
In summary, we do not see any major storm clouds on the horizon besides the strengthening dollar. What could change our view? The biggest risk is inflation rearing its ugly head again. This could force the Fed to hike rates, which would be bad for risk assets such as crypto. We’ll share more views on inflation expectations later in the Trump section of the report.
As I write this, Bitcoin is up about 25% over the last few weeks. It was up 10% on November 11th — which is incredibly impressive given it’s now a $1.7 trillion dollar asset (recently flipped Silver’s market cap).
In this section, we’ll review some key onchain indicators to assess where we’re at in the cycle.
The latest reading for long-term holders is 3.5 — an indication that Bitcoin’s “smart money” is sitting on 250% gains. We saw profit taking in earlier this year from the same cohort when the MVRV got to 4.0. In the last cycle, we saw the MVRV for long-term holders peak at 11.4.
The current reading for short-term holders? 1.3 — an indication that even short-term holders are in profit (up 30%). Of course, when Bitcoin reaches all-time highs, every holder is in profit. This reading peaked at 1.8 in the last cycle.
Keep in mind that short-term holders are a much smaller % of the network (currently 14%) while long-term holders represent 71% of the circulating supply (the 15% difference represents coins held on exchanges not included in the data).
The combined MVRV is currently at 2.6. It peaked at 3.95 in the last cycle.
Key takeaway: MVRV is telling us the market is getting overheated and may be due for a pullback.
Long-term holders took profits back in March, re-accumulated in Q2 and Q3, and now have started to sell again. With that said, 71% of the supply is still held by long-term holders. When the market peaked last cycle, the figure had dropped to 58%.
We expect long-term holder supply to continue to drop as the market melts up.
After selling BTC for almost a year straight, we saw BTC miners become net buyers/holders briefly in Q3. In the last two cycles, we can see that miners aggressively sold into parabolic price action (early ‘21, throughout most of ‘17).
We should expect to see similar action this cycle. Right now it looks like the miners may be waiting for $100k+ BTC.
As Warren Buffett would say: “be greedy when others are fearful, and fearful when others are greedy.” Well. Others are greedy right now. The last time we reached this level of greed was last March.
It’s worth noting that on 11/13 Coinbase hit #1 in terms of finance apps and #8 overall. It got as high as 58 back in March and was the #1 overall app at the peak of the last cycle.
Funding rates, which we use to measure leverage in the system, are still quite low given the sentiment. The 11/12 reading for all exchanges was .01235% (the amount longs pay shorts to keep positions open, typically paid every 8 hours).
Funding rates hit .068% in late February of this year and peaked at .153% in the last cycle.
Please note that open interest is at all-time highs (similar levels we saw in March) — an indication that hedge funds are running the carry trade in which they buy spot BTC and sell futures contracts, pocketing the spread — a price natural trade that works well when the futures/spot markets are in contango.
The Pi-Cycle top indicator has historically been an accurate tool in identifying market peaks in BTC. It’s composed of the 111-day moving average and a 2x multiple on the 350-day moving average. When the market becomes overheated, the shorter 111-day moving average crosses over the longer 350-day moving average.
We can see above that there is still a healthy gap between the two moving averages.
It’s difficult to convey just how important having a pro-crypto President could be at this stage for the crypto industry. Every single person in Trump’s inner circle is pro-crypto. Every. Single. One.
Furthermore, 247 pro-crypto candidates were elected to the House, and 15 were elected to the Senate.
Finally, it looks like the Republicans will control both the House and Senate for the next two years (the Senate is secured, 12 races in the House are still uncalled with Republicans needing 2 seats to secure a majority).
Here’s how I think this impacts the crypto markets on the regulation side:
Gary Gensler is out as Chairman of the SEC. The SEC’s use of lawfare and regulation by enforcement toward the crypto industry is over. It’s possible that we see investigations into corruption at the SEC these past few years.
The SEC starts to go after the real criminals and scammers in our industry, rather than the largest and most important companies such as Coinbase, Consensys, Kraken, and Uniswap.
The odds of Congress passing sensible stablecoin legislation have gone up dramatically. An explosion of innovation could emerge within fintech if (when) this happens.
Congress will likely pass legislation allowing the banks to custody crypto (there is already bi-partisan support for this — however, Biden vetoed the repeal of SAB121 in June).
We are much more likely to see sensible widespread regulation of the entire industry. This could include new rules to delineate the responsibilities between the CFTC and the SEC. Users, developers, service providers, entrepreneurs, and investors should get a clear rule set to operate under. A new wave of capital could enter the industry as a result.
Individual states as well as the Federal government are likely to take a hard look at mining Bitcoin and/or establishing Strategic Bitcoin Reserve Funds.
Tail risk for firms such as Circle, Coinbase, and Robinhood have been removed.
America becomes a crypto innovation hub, with jobs that left the country returning.
In summary, the crypto industry will no longer be censored. Free markets are back. And the government & regulators will (hopefully) revert back to playing the role of protecting consumers and creating the necessary rules to enable capital formation, innovation, and job creation.
Is all of this priced in? In my opinion, no. The market is catching up now, but I think we still have a ways to go.
As far as Trump’s policies and their impact on the markets. Below are the main themes from my perspective:
Trump wants to onshore jobs back to America and he plans to use Tariffs to do so. In isolation, this is an inflationary policy.
He also wants to keep taxes low and clean up excessive federal spending. It’s hard to do both of these things at the same time. My guess is that taxes stay low, but spending continues (there are just too many incentives from policymakers to fight back on this). Don’t forget that at the end of the day, Trump is a dealmaker.
Oil. Trump wants to open up the taps of oil production in America. This is disinflationary.
Innovation and deregulation. Innovation is fundamentally disinflationary.
New Fed President? Powell was clear in his press conference last week that he will not step down with Trump coming in. His term runs through May 15, 2026. My sense is that Trump is going to pressure him to keep rates low in the face of rising inflation (in Trump’s defense, this is needed to inflate away the debt).
In summary, it seems to me that the market view is that Trump’s policies are inflationary. I think it’s more of a mixed bag. At the end of the day, I believe Trump will apply pressure on the Fed to keep rates low, run the economy hot, and reset the debt while also inflating some of it away.
Generally speaking, this should be good for the markets.
I’m still waiting for ETH/BTC to break out. It’s only a matter of time in my opinion. Why? Lots of people are looking at BTC and feeling like they missed it. ETH has the ETF (which recently flipped to net inflows). It just feels like nobody owns ETH right now.
To throw a few numbers around:
ETH got to .08 BTC twice last cycle. If it were at .08 with BTC at $90k, that puts ETH at $7.2k. At .06 it puts ETH at $5.6k. So it looks like it has some catching up to do.
BTC dominance is currently at almost 61%. I expect it to be closer to 40% when the cycle peaks out.
When do we break $100k? It’s always difficult to project things in the near term. The dollar is strengthening right now — which is not good for BTC. My instinct tells me we’ll have a pullback and some consolidation before breaking out again in ‘25. Who knows.
BTC typically sucks the energy out of the market in the early stages of a frenzied bull market. I believe that’s the phase we are in right now.
Alt season comes next. Some people have been asking me about DeFi blue chips, which seemed to get a quick re-rating after the election. It appears that the market is anticipating regulation and the ability for projects like Uniswap, Aave, Maker, Lido, etc. to distribute value back to tokenholders.
But I’m not so sure this is bullish for DeFi valuations. Why? As soon as analysts can run discount cash flow analysis with regulatory clarity, it puts a lid on where token prices can go. This is one of the reasons I like memes. Nobody knows how to value them — which means the valuations can go much higher than people think.
Solana
Solana has the prettiest chart in crypto right now. A classic cup & handle. While I bought some ETH a few weeks ago (sentiment was just way too offside in my opinion), I still think Solana outperforms from here.
Which means Solana DeFi outperforms. Solana memes outperform. Solana DePIN outperforms. You get the point.
Here’s SOL vs BTC. Looks poised for a breakout.
I still think SUI or TIA could outperform SOL when it’s all said and done. And blue-chip + emerging memes are going to have no coiners crying in the streets before this cycle is over.
$10 trillion is still the target for total crypto market cap.
As far as cycle length? A classic cycle would take us into Q4 of ‘25. But we don’t have to make that call just yet. I will be providing updates in the coming months as market conditions evolve.
Expect some volatility. Stay away from leverage. And enjoy the ride.
As always, thanks for reading, and please don’t forget to do your own research.
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.