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There are few things that are certain in this world....Death, Taxes, and -40% drawdowns
David Hoffman David Hoffman Jan 11, 20214 min read
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Welcome to the Show

Dear Bankless Nation,

We’re currently experiencing our first major retracement of this bull cycle.

BTC and ETH prices skyrocketed to such unexpected highs, and for so long, that people began to perceive a new status quo.

“The institutions are here, and they're gobbling up all the dips! No major retracements are possible anymore, there’s too much demand!”

And yet, here we are. There are only three things that are certain in this world: Death, Taxes, and 40% crypto drawdowns. (On our Rollup last week we said this would happen!)

Crypto is famous for its volatility. And for the last 2-3 months, a lot of people made a lot of money very quickly. Here’s my personal rule of thumb for gauging these markets: If too many people make too much money too quickly, we’re due for a pull-back.

For many people, this was their first major correction (and it might not be over!). If this is your first time experiencing this pain: welcome to the show.

Welcome to the Show - Reaction GIFs
(Above) The Commander in Chief welcoming you to the wild west of crypto

Crypto is volatile. It’s volatile up and it’s volatile down. You don’t get exposure to an asset that has the possibility of 10x price increases without also being exposed to the potential of a 50% drop. Markets don’t just go up and to the right in a straight line.

There needs to be fear and pain. Without these, we don’t get to have the joy and euphoria upside potential.

Here’s Bitcoin in 2017:

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  1. Pump from $1,200 to $3,000: 38% retrace to $1,800
  2. Pump from $1,800 to $5,000: 40% retrace to $3,000
  3. Pump from $3,000 to $7,600, 27% retrace to $5,600

These are just three examples. The 2017 market cycle is littered with 30-40% retraces because it’s also littered with 2-3x pumps. If you want to build wealth with crypto assets, be prepared to hold through major retraces and pain.

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I’ll leave you with a few thoughts as we enter this pullback.

1. Zoom out to get perspective

We’re only a few days into the new year. It may not feel this way, but both Bitcoin and Ether are still up significantly from January 1st, 2021 (eleven days ago!).

Bitcoin was $29,300 on Jan 1, it hit a local peak of $41,985 and is now around $32,800. That’s a YTD Change: +12%
Ether was $740 on Jan 1, it hit a local peak of $1,351 and is now around $1,000. That’s a YTD Change: +35%

When in doubt zoom out.

2. Ask yourself—what’s different this cycle?

Bigger players have entered the market this cycle. People like Michael Saylor, Paul Tudor Jones, Stanely Druckenmiller are leading individual money-mangers and hedge funds into the crypto markets.

Firms like Square, MassMutual, and Galaxy Digital are illustrating the viability of a Bitcoin-denominated balance sheets, instead of holding cash, and signaling that it’s not a crazy thought to put Bitcoin on a public company’s balance sheet.

How does the entrance of these new types of players, who typically are not speculators and are not in the market for a quick buck, impact the behavior of the market? These market participants are less likely to panic sell. They are far more likely to brush off these retraces without a second thought.

Meanwhile, they are leading more and more investors of this same disposition into the markets, who perhaps are more ready to pull the trigger on a correction and not think twice.

Will the entrance of these new players impact the way these markets behave? Or are they all getting on the same rocky ship like the rest of us? Only time will tell.

3. Are you a single cycle or multi-cycle holder?

The time-horizons for institutional players may be different than those of the typical retail investor, but as we enter this cycle you should be asking yourself:

  1. What is my time horizon for crypto?
  2. Am I a multi-cycle crypto-believer?
    or;
  3. Am I trying to sell the top and improve my financial life in the near term?

Are you here to denominate your wealth in crypto monies like ETH and BTC, or are you trying to ride the hype wave and get out while the getting is good?

While I think the aforementioned new players and new institutions are generally less emotional, I still believe there is plenty of opportunities for them to be in the cohort of people that “sell the top” and exit the markets as they become frothy and over-extended.

We won’t really know until this cycle of crypto comes to its conclusion.

Until then, only one thing is assured: Death, Taxes, and 40% Retracements.

Welcome to show.

- David

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