Was it the smelling salts that did it or was it just a matter of time? We’ll never know, and does it really matter? Digital asset markets have been on a tear the past six months, awoken from their crypto winter slumber of unknown duration.
Last September we published this piece detailing the miserable 2023 trend following and cross-sectional momentum strategies had seen despite the solid year-to-date performance from Bitcoin. We highlighted a set of variables that were likely causing both the mean reverting environment as well as the massive underperformance in the long tail of assets relative to Bitcoin.
The piece wasn’t necessarily meant as a bottom call for trend and momentum, but also, no less than three weeks later everything changed after we led off with the line, “it feels as if sentiment in the digital assets market is nearing a nadir.”
The two charts below show the performance of our top quintile cross-sectional momentum index relative to BTC and ETH. The first shows 1/1/23 - 9/30/23 and the second 10/1/23 to 3/31/24.
Everything changed in October. Coins that had shown prior momentum continued their forward progress instead of traders immediately taking advantage of higher prices to unload larger positions.
Markets also got a lot easier from a trend perspective. Since the beginning of the rally in mid October with a positively sloped 200 and 50 day moving average, Bitcoin has spent only a handful of days below that 50 day and zero days below the VWAP from the beginning of the rally. The VWAP from the start of the second leg of the rally in early February post the ETF approval has also not been violated for even a day. Buyers have been in firm control of this market for six straight months save for a handful of days post the ETF approval.
So what's changed? Back in September we noted a handful of variables we needed to see shift in order for the market regime to turn. In no particular order, liquidity needed to come back into the long tail of tokens, the regulatory environment (or at least the perception of it by traders) needed to shift, the US Dollar and treasury yields needed to stop going up, and stablecoin market cap growth needed to show some consistent life.
Well, In early October right on cue the dollar and rates topped out as inflation was falling quickly. BlackRock got loud about the expected approval of their ETF application and the courts gave the SEC a good smack in the mouth regarding Ripple being deemed a security in secondary sales on exchange. Liquidity did begin to return, stablecoin inflows began and have recently really started to pick up steam as displayed in the chart below.
We’ve even seen the return of retail traders (to an extent) chasing meme coins.
How far we are through this bull market is anyone’s guess. But if you want to use the baseball analogy and compare where we are to previous cycles, we believe we’re likely somewhere around the 4th or 5th inning. While we may be somewhere around half way through this cycle time wise, one thing that has been consistent in previous cycles is that the lion’s share of the returns are accrued in the last three innings when things get truly silly. This is especially true for the long tail of tokens, and doubly so for the top quintile momentum index.
While trend followers should manage risk according to their models if (when) the trend changes, right now this market is innocent until proven guilty and the tokens which have gone up most recently are likely to continue to do so.