The Crypto Casino is in Full Swing
A Normie's Guide to Understanding Crypto Cycles
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The crypto casino is in full swing in a way we haven’t seen in quite a while.
Bitcoin is currently in full-on price discovery mode after breaking out of a 7-month range. It’s now up around 35% from its previous highs.
The real hero of this cycle, until today, has been MicroStrategy MSTR 0.00%↑ which broke out 178% beyond its previous all-time highs.
For those of you who don’t know, MSTR 0.00%↑ is a software company that borrows against its software business to long bitcoin. The software business isn’t worth much, but somehow its CEO Michael Saylor has managed to turn it into a massive horde of $31bn in bitcoin, with the company valued at over $100bn (before today’s crash)!
For a while, it seemed like Saylor had found a perpetual motion machine of value creation because for every $1bn in bitcoin he added to his company’s balance sheet, MSTR's market cap went up $3bn!
As long as MSTR’s stock price increased faster than the price of the bitcoin it added to its balance sheet, the party could continue.
And that is the phenomenon the rising BTC yield reflects—that MicroStrategy has succeeded wildly at selling stock for irrationally high prices and using the proceeds to buy more bitcoin, which also keeps soaring, but not by as much as MicroStrategy’s stock has.
- Yahoo Finance
Alas, today Citron Research, of GME 0.00%↑ short squeeze fame, announced that they had shorted MicroStrategy, sending shares tumbling.
The correction was overdue as the MicroStrategy premium reached outrageous levels above 300%.
Still, even the collapse of the MSTR premium hasn’t been enough to slow Bitcoin so far.
Bitcoin Dominance
In previous cycles, Bitcoin led other coins like Ethereum, Solana, and the various meme coins early in the cycle. That trend has been even more dramatic this time, with Bitcoin dominance reaching around 60% of the total crypto market cap this week.
The chart below is a bit confusing, but it shows how, since Ethereum came onto the scene, BTC dominance has tended to rise before a bull market, peak in the high 60s, and then begin to fall about 30-50% of the way through the bull run.
We have to be careful about using historical analogs, but I think they can be broadly instructive about a pattern we see play out regularly:
BTC holds up better in the bear market than other alts or majors, causing bitcoin dominance to grow in these periods.
In the early stages of a bull market money flows into BTC, causing it to outperform disproportionately.
Euphoria about the Bitcoin price eventually spills over into the other majors, then down into the next tier of alt coins (ICOs in 2018, ETH/Mems/NFTs in 2021), driving BTC dominance down.
Ethereum The Red Headed Step Child
As we might expect, Ethereum has underperformed this cycle. The striking thing, however, is the degree to which Solana has kept up with Bitcoin the entire way.
I don’t know exactly what to make of that, other than the fact that Solana is apparently a #GudCoin. Certainly, Solana’s outperformance has been driven by the rise of memecoins this cycle, which brings me to…
The Memecoin Casino
Memecoins are tokens with funny names, cute symbols, etc. that have no utility or function but exist to accrue value based on their virality and community. The more attention these coins get, the more compelling the meme, the more money flows in, making them valuable and, in the case of the “major” memes, keeping the coin alive.
This gambling disproportionately happens on the Solana blockchain, which drives colossal transaction volumes and generates immense fees.
In this cycle, sites like Pump.Fun and apps like MoonShot have done away with all pretenses. On these sites you sort through memes to find ones you like, trying to buy them early to get the next Doge or DogWifHat.
Chill Guy (which I missed) is one of the big winners of this cycle so far.
It took off on these sites and has garnered a $400m market cap in just a few days.
The Rotation
As Bitcoin rapidly approaches the $100k mark, MSTR premium falls back to sane-ish levels, Bitcoin dominance rises into the high $60ks, and Ethereum finally catches a meaningful bid today, we look to be completing the first “innings” of the cycle and entering the rotation phase.
In this phase, Bitcoin’s price appreciation slows, people get bored, and they start to rotate out the risk curve into things like Solana and Ethereum and memes, trying to chase the returns they got earlier in the cycle.
It feels to me like we are very close to that process starting if it hasn’t already.
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