May 2021: Amid the Carnage, can we still be bullish?

Wow.

What a week.

If you're like me, you are still processing the cataclysmic surges and drops in crypto this past week.

My hope is that this edition of DeFi Puma weekly thoughts will bring clarity, salience, and perspective to the whole situation.

Let's get to it.

Surveying the Carnage

This week was one of the bloodiest, most volatile weeks in DeFi history.

And that is saying something.

Bitcoin nosedived from around its price of around $56,000 on May 10 to $29,000 on some exchanges on Tuesday. Bitcoin also experienced it's first $10,000 price-change in a single day. And it did so twice in that day and in both directions.

ETH plunged from roughly $3,500 late last week to briefly under $2,000.

And what about other cryptocurrencies? Not much better. Overall, the market cap of DeFi dropped about 25%. That's a roughly $500 billion correction from the ecosystem.

Sell-offs were so rapid that Coinbase, a publicly traded company with Apple's number one downloaded app on the app store, became inoperable. Users couldn't login to trade and were given error messages when they tried to access their portfolios.

Price analysts noted that the automated liquidations coupled with massive panic-selling caused a dramatic liquidity crisis. There literally weren't enough long-term bulls able to login and access the exchanges to buy the dip. And so prices plunged.

It was stomach-churning.

If you think your portfolio took a dip, just imagine being a whale like Michael Saylor. His company, Microstrategy, owns more than 90,000 BTC. This means that the value of those assets plunged by about $1 billion.

Max pain.

That said, he bought the dip...lol.

Why did that happen?

Like most massive price corrections in crypto, it is difficult to pinpoint a singular reason for the timing or size of the dip.

However, some of the possible explanations given included:
- The market was overly leveraged (now greatly cleaned up)
- Reuters published an article insinuating China banned crypto. in reality, nothing really changed...ban is in place for specifically financial institutions and enforcement is unclear since 50% of BTC mining is happening and profiting many in China. Sounds like the Chinese Communist Party wants to have their cake and eat it too.
- New Office of the Comptroller of the Currency Michael Hsu released cautionary statements about cryptocurrency
- And, probably more than anything else, massive price increases simply pullback as enthusiasm gives way to profit-taking

Last week, I wrote that ETH's bull run was entering a new phase in terms of profit-taking pressure on investors. Market Value to Realized Value (MVRV) and Net Unrealized Profit/Loss ratios were hitting multi-year highs.

Unfortunately, that article was all too prophetic. Yet, I admit it: in regards to my own portfolio, I thought Elon's tweeting had forced the correction. I was clearly wrong -- there was much more correcting to be done. And I felt the pain along with the huddled masses.

Can we still be bullish?

For most investors, the question is now this: did we just experience a massive price correction or the start of a bear market?

Or, in other words, where do we go from here?

As always, I will refrain from specific price predictions. But, my bearishness vs bullishness outlook depends on the time horizon.

• Short-term (6 to 9mo) = bullish
• Medium-term (9mo to 2yrs) = relatively flat or slightly bearish (i.e. this isn't the super cycle, another bear market will come)
• Long-term = extremely bullish

What's behind these outlooks? Let me explain.

Short-term = bullish

In the short-term, this market correction was certainly a brutal hit that will scare away a lot of retail investors. For this reason, I don't know if we will see BTC reach $65K again or ETH reach $4.5K again in the near-term. However, here are a few reasons to remain bullish in the near-term:

• Price Analysis: on-chain price analysis of both BTC and ETH reveals that these two major cryptoassets are ready to rumble. They've flushed out an enormous amount of leverage and the profit-taking pressure is in a much better place. As of today, ETH's MVRV ratio dropped from over 3.75 last week to 2.25 and its Net Unrealized Profit/Loss ratio is at around 0.65 rather than the euphoric .79 last week.

• Macroeconomic Environment: the US federal government and governments around the world seem dead set on following the scourge of so-called Modern Monetary Theory and just continuing to print money. This resulted in a higher-than-expected Consumer Price Index (CPI) inflation rate for April of over 4% in annualized terms (and likely much more). Although Janet Yellen seemed surprised by this, we should not be. Inflation is definitely a thing and the store-of-value narrative for BTC and the "ultra-sound money" narrative for ETH are positioned well for these kinds of political environments.
• Upcoming Developments in Crypto: there are actual, tangible improvements and events on the calendar right now for the next 6 to 9 months. These include:
• May 24 - Consensus: this 4-day conference is CoinDesk's largest event of the year.  It features more than 10,000 attendees and hundreds of speakers. There will surely be bullish announcements made by big crypto players at this event.
• July 2021 (tentative) - Ethereum & ETH 2.0: this is a comprehensive upgrade to the entire Ethereum network that, among other things, will greatly reduce transaction costs, increase transaction speeds and network bandwidth, and allow for people to use their ETH to earn passive income through securing the network (staking).
• Q4 2021 / Q1 2022 - Ethereum & the Ethereum Improvement Protocol (EIP) 1559: this is another massive change to the structure of Ethereum network. Most notably, this will switch Ethereum from the costly Proof of Work security mechanism(which use tons of electricity and super-computer) to a much more democratized security system through staking (wherein people stake their Ethereum as collateral for the right to be a part of the computing network). These changes will also make Ethereum more user-friendly (thank goodness) Here's a great, more technical explanation of all of this from Anthony Sassano at The Daily Gwei.
• Likely November 2021 - Bitcoin's Taproot Upgrade: this will be the largest upgrade to the network since 2017 and this upgrade will allow for more complex and private multi-party transactions as well as decreased transaction costs. In short, it greatly increases the use cases of Bitcoin (more detailed explanation here).
• Large Institutional Support for Crypto Remains High: although ETFs may not be happening soon (keep reading), there is still large and increasing support among time-tested institutions for crypto.  Some examples of this from this week include these two news bites:
• Wells Fargo is still planning to offer a crypto fund to its richest clients starting next month.
• Finally - ARK Invest CEO Cathie Wood restated strong bullishness regarding BTC:  "We do [still think Bitcoin is headed to $500,000...we go through soul-searching time like this and scrape the models... and our conviction is as high." ARK  Invest is the leader in exchange-traded funds focused on disruptive innovation.

https://twitter.com/BloombergLive/status/1395055770924896264

The increased scalability and efficiencies gained through these upgrades to Bitcoin and Ethereum will not only create a lot of hype but could also spark an even greater explosion in DeFi.

Medium-term = flat/bearish

In the medium-term, I do think there will be another bear market.

Of course, holding might still be the best strategy (or "#hodling" as crypto geeks like to say). This is because it's very possible that the current bull market still sees a lot of runway in front of it. Thus, a medium-term bear market might yet occur at price levels higher than today (esp. after such a dramatic correction). Plus, holding might still be the best strategy because it's very hard to time the market…not to mention emotionally taxing.

That said, I highly doubt that this is the year that crypto prices stabilize. In other words, this isn't the "super cycle." And that makes me relatively bearish in the medium-term.

Why is that? Why do I think that there will be another bear market in the medium-term?

In short, investing in crypto is definitely mainstream right now.

BUT actual usage of decentralized finance is definitely not. Here are a few things worth noting:

• Everyday usage of DeFi creates a hellish accounting nightmare. In all seriousness, have you used DeFi for anything and tried to track your tax obligations? It's borderline impossible. A basic user of DeFi might have a MetaMask wallet, a Coinbase Pro account, a BlockFi account, and a FTX US account + a few other smaller token accounts (like SolFlare and Terra Station). Every single transfer of coins from one wallet to another triggers a taxable event since the transfer fees are paid in the cryptocurrency. And what about swapping coins? In that case, you are realizing a gain or loss in the coin you are selling and establishing a new cost basis in the coin you are acquiring. But, USD price valuations are recorded nowhere in the transaction and automated tracking of all haof that doesn't exist. It's an absolute mess. Honestly, I'll probably write more about this topic in the future. But, for now, let me just speak from personal experience: tracking your taxes is a DeFi disaster.
• There are very few, commonly used apps in the USA that are decentralized apps. Most are relegated to obscure financial derivatives, savings accounts, and foreign currency exchanges/transfers.
• ETH and BTC exchange-traded funds (ETFs) are probably not happening soon. After some brief optimism regarding SEC approval of these investment vehicles, things have taken a wrong turn in the last couple of weeks. The SEC recently warned about the volatility of BTC and hinted that such volatility may make it currently unsuitable for an ETF. Coupled with the new OCC chief, these developments put a major damper on the prospect of massive institutional and retirement account capital inflows into crypto.
• There is undoubtedly a generational gap in embracing the digital age. A few NFT art platforms like NBA Top Shot are notable exceptions. But NFT art is of almost zero interest to most adults with purchasing power. Widespread adoption of NFT art -- and along with that, a frictionless valuation of digital assets -- needs Generation Z to grow up and make some more money.

I will, however, give one caveat: I do think that it's possible that crypto hits the mainstream in a few countries with failing governments and draconian capital controls. For example, Nigerians understand and love the benefits of cryptocurrencies -- online surveys reveal that adoption may be more than 30% in this country where Bitcoin ATMs are now a thing. Also worth noting: Nigeria's population is expected to double by 2050 to 400+ million people.

Long-term = still extremely bullish

In regards to the long-term, as always, we remain incredibly bullish on decentralized finance. Some of the many applications long-term application of DeFi include:

• Lower foreign exchange fees and transfer costs
• Better yields on savings
• Sound money and currencies as the USD continues to weaken as a global reserve currency
• Trustless economic activity with third parties in other countries
• Censorship-resistant records and ledgers
• Bringing electronic checking and savings accounts to the 25% of the world that aren't currently in the banking system
• Making credit accessible to that same, massive global population with currently no credit score or access to financing
• And much, much more.

That's all coming down the pipe. It's just a matter of time.

Finally -- lest we forget, Bitcoin is still worth 350% more than this time last year and more than 7000% from five years ago. Ether was priced around $200 a year ago and about $13 five years ago.

So, maybe the best strategy after all is to just hodl on.

Stay tuned,

Citizen Writ

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