The State Of The Crypto Market - November 2022
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The State Of The Crypto Market - November 2022
2022 has been a rough year for crypto. The heavy money printing from 2020 to 2021 eventually had to come to an end with extensive inflation as a consequence.
In the bull run that followed after the Covid low, we saw the narratives changing from DeFi summer to NFTs, to Stablecoin winter, P2E/Metaverse to Web3. And of course the Layer 1 wars (that still continue) with the newly released Aptos. And I won't forget DeFi 2.0 with OHM, TIME, Daniele Sesta, Sifu, and Solid w/ Andre Cronje.
I was mostly a stock market bull until late 2020, so I missed the first DeFi run, but oh boy do I remember the will DeFi and NFT mania that appeared with the comeback of Ethereum in August 2021. New narratives were popping up left and right, and you had to be there to understand how crazy it was. Between September 21' and May 22', I was on average outside of my house 2 days per week. I neglected my health and when the bear market low appeared in June 22' I understood I had to get back to life.
More about this here in my thread:
Crypto is still in its early days. Because if we're honest with ourselves, what good is it to use crypto vs. just using regular banks so far?
The vision of crypto is amazing. It's a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions.
But what is the focus today in the crypto space? And how many new L1's do we really need? We have overcollateralized lending, but do we really need it when you can have an undercollateralized loan IRL?
Let's say you want to buy a house for $500K. In crypto, you could deposit eg. 1,000 $ETH into Aave, and borrow $500K USDT to pay for your house. That's great, but if you qualify for a loan IRL you could deposit $50K and then borrow the last $450K without the risk of liquidation.
There's a lot of innovation in crypto, but sometimes it just feels like we're trying to build better versions of things that already works pretty smoothly in web2.
As of today, I see crypto as a PvP (player vs. player) market and that it's normal greedy people fighting against smarter greedy people. The losers are the bagholders with 30-40 coins in their wallet, buying simply because they saw an influencer shill it.
And then they forget it. Forget their coins, and hope that they will return to new ATH in the next bull run. Or maybe they DCA into small altcoins that goes to zero. You see, unlike stocks which you actually can calculate what it's worth, the real value of crypto could be zero or 10 trillion.
This is also what leads to speculation and why several coins can move 100x with the right narratives. The narratives when they're there are so strong that it is only after the “narrative” has died that most people publicly dare to admit it was an outright scam or mega failure.
Something I've Been Thinking Of
Most tech stocks are down around 70%. Both Bitcoin and Ethereum are down around 73% as of this writing. To break even on a 70% drawdown you need a 233% return. So if you bought $BTC at $69,000, you now need a 233% return on your $BTC which is worth $19K.
Now, why do crypto investors see this as very likely to happen within a couple of years vs. stock investors think this could take a long time?
As I mentioned in the last paragraph, stocks can be calculated for their value while crypto is way harder to measure for their "real" value. The right narrative can send a token to the moon.
Since no one knows how to value it, expect speculation and inefficiency. On the other hand, if there is news regarding a stock it will be reflected in the price within 10 seconds.
This is exactly why I prefer to trade crypto vs. stocks. It's fewer players, and it takes time for the news to be priced in. I also believe that there are more dumb people in general in crypto (no offense, if you've already read so far in this newsletter you're not one of them). I'm talking about people that do zero research and that buy based on something they've heard from others.
Market Making In Crypto
Why did $BTC move from $18k to $20k last week?
And why do markets move in the first place?
Markets are moved based on supply and demand dynamics.
When buyers and sellers agree on fair prices, markets are in equilibrium.
Traders willing to buy and sell an asset are placing their orders in the order books.
These resting orders are what is called liquidity.
You are a liquidity maker if you are putting orders into the order book (place limit order).
You are a liquidity taker if you take liquidity from the order book (use the market order).
The market works as an auction.
This means that there has to be a seller for every buyer and vice versa.
Your counterparty is either another trader, institution, algorithm, or market maker.
The market makers’ job is to stay delta neutral and capture bid and ask spread.
Spread is the difference between the buying and selling price of a trading financial instrument.
In this example, if you’d like to buy this asset, you’ll have to pay 103. If you are selling this asset, you’ll get 97. A market maker will get 6 as profit.
The winning way for a market maker is to profit from an asset's volume and volatility, and not from the appreciation of the asset.
In liquid markets with many buyers, sellers, and market makers, the spreads are small. Market makers need to make a very large number of trades to get profits. They use very advanced quantitative algorithms to take very short-term positions — these could be hours, minutes, or seconds. The higher the asset volatility (i.e. enough movement in the market) and the higher the trading volumes, the more trades market makers are able to make, and the more profit they make.
So just to summarize this simply:
If you're a trader (market taker), you're paying the spread now in hope of profits in the future.
For example: you're buying $BTC now for $20,500 in hope of selling it for $21,000 in 3 days = 2.5% profit
If you're a market maker, you're taking the profit now and managing the risk later.
For example: say you have two exchanges (Bybit and Binance). Let's say you could purchase $BTC (long) on Binance for $20,480. On Bybit you're able to short $BTC at $20,530.
You're now delta neutral.
Because of maker/taker-fees you'll end up with maybe a $20 profit ($30 goes to fees).
Good news, you're in profit.
While this sounds easy, it's seldom or maybe even impossible you'll get opportunities like this in a market as efficient as $BTC. This was just an example for informational purposes.
If you want to try market-making yourself, you can try it for free at: https://hummingbot.org/
Good Tweets I've Enjoyed Lately
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I’ve also started a free Telegram channel:
Telegram Channel: @cryptogoodreads
An archive of tweets, threads, articles, blog posts etc. that I find interesting within crypto
It will basically be an archive of tweets, threads, articles, blog posts etc. that I find interesting within crypto.
Mostly things that I bookmark on Twitter.
Will be updated on a daily basis.
Feel free to join here: https://t.me/cryptogoodreads