In this coming weekend's edition of Turning Points, the current state of crypto will be discussed, centering around our current largest allocation to Bitcoin related assets, with a secondary focus on alternative crypto assets.
Perhaps more important than the data I will be sharing is the human psychology angle of crypto as it relates to alternative crypto assets.
The simple fact that asset flows ALWAYS followed a defined path during secular bull markets makes alternative crypto assets a magnet for future inflows.
It is not sometimes. There are no maybes. Human nature never changes.
Greed always reaches a boiling point as fear of missing out mutates into acts of speculative haste and aggression.
Many years ago, in 2011 to be exact, I wrote an article for Forbes describing Phase 4 investors and their role in the markets.
The Cliff Notes version of this theory is that bull markets move through four investor phases:
Phase 1: Start of a new secular bull market - investors have sworn off stocks, reluctant to get involved, sticking to bonds and real estate.
Phase 2: A few years into a new secular bull market - investors begin to defrost a bit. However, they are still too timid to get involved in anything but extremely conservative, blue-chip names.
Phase 3: Recognition and belief - mid-way through a secular bull market institutions ramp up buying, moving into more speculative names, mostly in technology. Wall Street comes alive with bullishness. Words or phrases like "optimistic, "cool," "great concept,", "fantastic," "revolutionary" and "I love" are being used more often.
Phase 4: Pandemonium has broken loose - market participants begin pushing all-in. They become very aggressive, moving into high-beta technology names. Speculative micro and small-cap names begin to experience feverish runs. Two and three baggers becomes commonplace. Greed dominates the investment landscape.
In the current secular bull that started right around 2012, we currently find ourselves in Phase 3: Recognition and belief.
We briefly moved into Phase 4 during 2020-2021. However, it was interrupted by a very aggressive Fed attempting to put the fire that was inflation out in the the years to follow.
What is different from 2011, when I first introduced this framework is there is now a Phase 5.
Phase 5 is ultra speculative, alternative, unregulated asset classes, namely alternative crypto names.
It is not a matter of IF Phase 5 will come into play over the next few years, but simply a matter of WHEN.
Increasingly, we live in a society that sees gambling, whether on stocks, sports, crypto or political outcomes as the only means to escape the headwinds that are increasing costs, lower relatives wages and a general feeling of hopelessness to escape the hamster wheel that has become the modern economy.
Risk is no longer an option, but rather a requirement to acquiring the comforts that were once available to individuals with an individual working salary.
The greed that this current secular bull market will bubble up in the coming years will be unlike any other we have seen in any secular bull market during the current generation due to the sheer amount of liquidity that continues to grow within the global economy.
As a result, it is only a matter of time until the trickle down effect of bubbling greed makes its way back to alternative crypto names, many of which ran 1000% plus from 2020-2021 and are presently a good 90% plus off of those highs.
The second iteration (the first being from 2020-2021) of the alternative crypto run will be that much more powerful, as there will be much more capital, created from gains in equities, real estate, Bitcoin etc. to chase what are relatively illiquid names in the alternative crypto complex.
As risky, unpredictable and erratic as these names have been, it will pay to keep an eye peeled, as they will indeed have their day in the sun, once again.
When that day comes, the potential gains will be far too attractive to turn a blind eye.
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