This cycle of the bull market is finished, but we will not enter a bear market.
The bubble will be internally digested, that is, capital resources will move closer to top projects and institutions, and wealth will shift to top-tier practitioners.
The promising fund classifications:
a) big names that can partake in regulations;
b) technical and innovative that participates in project design;
c) past success in the secondary market;
d) specialized in a certain sub-sector.
Sub-sector forecast:
a) Only several public chains will keep their leading role, while special-purpose public chains have more rooms to grow;
b) GameFi upstream and downstream ecosystem will be prosperous;
c) More jobs will be created in Metaverse over GameFi;
d) Web3 SocialFi will be derived from GameFi and Metaverse, not copying of Web3 social app;
e) Institutions are new users for DeFi projects, and compliance will be a competitive advantage.
Since 2020, it shows a high correlation between Bitcoin and US stock market. The trend of the US stock market is one of the most vital effects on the price of Bitcoin. There’s a saying in the industry: if you made a lot of money in the past year, it could be a misunderstanding by attributing to your success. It might be just you are on the trend.
I agree with this. It’s important to realize the cycle, and don’t do things against it.
There is a strong expectation of tapering next year since the strong recovery of the US economy and low unemployment rate as Powell stated recently. It’s time to pay back for QE of the past 2 years. The fundamentals of BTC, after futures ETF approval in October, is lack of bullish elements in the near future. It was said by the SEC that Bitcoin spot ETF will be considered in 6 months. Therefore, I see the market for next year be relatively moderate, especially in the first half of the year.
I take now as the end of the current cycle, not only because of changes in the micro economy but also the full-scale crypto bull market has come to an end with a big bubble. Clues are as follows:
With the fiercer competition among the primary market, funds start to provide “incubation services” such as CEX listing, community management, and other non-necessary supportive services. Funds are trying to distinguish themselves from others to acquire allocations. We saw this in 2018 when all funds started to provide PR/marketing services.
If we look at the market before the slump of May 19, it followed this trend. Everyone in the market was looking for private allocations. It became even worse in recent weeks. We've seen this happen in 2018, where BTC started to drop, the primary market was still hot, until in late 2018 BTC crashed to the bottom of $3000ish then projects started to shut down and funds lose their money.
This was the question asked in June, and maybe this time again. My one-word answer is -- No. In the past 2 years, major institutions started to put BTC in their portfolios and compliances are on the roadmap. The whole industry’s fundamental has changed. Bitcoin becomes one of the mainstream assets. Huge buy orders appear whenever a crash happens. It is very hard to go into a bear market like in 2019.
However, we are still in a big bubble. If we are not entering a bear market, how to eliminate the bubble?
There are 2 ways to eliminate bubbles. One path is crash, such as what happened in 2018-2019. Another one I name it internal digestion. When a bubble is not huge enough to break, it can be slowly decreased by itself.
Let’s see how exactly the bubble was created. In the past year, the player in the industry accumulated much wealth, especially paper wealth. Let’s define paper wealth here. One type of paper wealth is locked tokens. You cannot sell those at this moment, so they are on paper yet. This one is easy to understand. Another type is low-liquidity assets, such as some NFTs. When you want to sell them, you might not be able to do that in a very short period, and it might strike the market price if you sell all you have.
When we convert paper wealth to real wealth, there will be an impact on the market. The level of this impact becomes the size of the bubble. In the circumstance of enough in-flow capital, it’s easy to convert paper wealth to real wealth, such as the end of 2020 or early 2021. However, let’s assume the market starts to sell off their paper wealth now, what will happen?
As said, traditional finance is adopting Bitcoin, so the buying power of Bitcoin is huge. But altcoins have a different story. Even though old money seems to start to pay attention to alts, they are much slower adopting than the hype of the market. Plus the restrictions on regulation, in-flows for alts are much less than what we need.
Following the logic above, if we don't go towards a bear market, and there is not enough capital to take over paper wealth sell-off, where the market will go? We don’t have much choice now. Internal digestion seems to be the only way.
Internal digestion, or wealth transferring inside of the industry, will be the keynote of 2022.
Let's explain internal digestion in an example. A crypto fund invested in 100 projects. 20 of them are profitable whereas 80 of them are not. Or, 100 funds on the market, 20 of them are profitable whereas 80 of them are not. In this way, bubbles are digested within its players, transferring from one group to another. The winner will be the top-tier players in the industry. Gaps between different tiers will be much huger than what we see today.
Resources will approach the best players. For funds, there are several types of potential winners:
A) big names, such as a16z, who is close to regulators and has an influence on regulations.
B) technical and innovative, such as Paradigm and the new star Delphi Digital, which takes deep dives into the design of projects.
I believe there is no disagreement about these two categories. But I mainly want to introduce another 2 types of funds with special advantages.
C) funds with a secondary market basis. Since the allocations for private sales are often limited, and we believe that winners will be the top few projects, funds may need to buy from the secondary market instead of selling at launch if they are optimistic enough about a project. Funds with strong secondary market experience have an inherent competence, such as Alameda Research.
D) funds focus on a specific sector, for instance, YGG. Yes, you heard that right. I said YGG is a fund. We know that YGG has invested in many games in addition to its guild business. In the GameFi sector, YGG has unique advantages that can be helpful for projects on user acquisition, marketing, and ecosystem development. With the increased competition among funds, focusing on one track can easier seize the opportunity in that sector.
Public chains are the biggest winners in this cycle. Looking at the top market cap projects, the list is full of public chains. Many people say multi-chains co-exist will be the keynote of public chains' future. I cannot fully agree. As stated, there are always cycles. The public chain sector is not an exception. Let’s ask ourselves, do we need that many Ethereum forks? Do you really want to bridge your assets to 10 chains??? Same logic, not everyone will become a winner. Only the top ones will gather the most users.
On contrary to the general-purpose public chain, specific-used chains have more rooms to grow. Such as ImmutableX/Flow/Ronin/Efinity (just examples, not mean all of them will be winners), they may not grow as big as general-purpose chains but it’s a less crowded sector that has not finished value discovery yet.
GameFi is in its early stage, like DeFi in 2018-2019, which has a huge potential. Unlike the development environment of DeFi, traditional gaming players are running into this space. It may harvest sooner than we thought. We will see more projects upstream and downstream of the games, such as guilds, tools, dev platforms, and more.
Metaverse is a border sector. This year we saw job opportunities in GameFi. We will see more of them happen in metaverse as it has stronger freedom and connections to the real world. For example, I see metaverse architect as a future career. When projects are selling lands, they will need buildings as content in their universe. Such work needs a special technique that is similar but not exactly the same to real-world architects.
SocialFi attracted much attention, but unfortunately, has not made enough breakthroughs. Web3 version of social should not be the copy of the on-chain version of web2 social. It has to be crypto native. Think about why we want to socialize. Will you use a new platform just because it is decentralized, or even semi-decentralized? The key element is connection. GameFi is naturedly connecting players. You may know that Discord was a gaming company in the beginning. From this logic, the next SocialFi will be derived from GameFi, or Metaverse.
Last but not least, DeFi. The previous pioneer seems not in the spotlight for a while. As DeFi business logic being more mature, products are more professional and complicated. High returns no longer exist. It marks that DeFi has passed the starting stage and is entering into a relatively stable period. Degens may not be the core users anymore. To bring more assets into DeFi, institutions should be the next major users and thus compliance is a vital part of the further development of DeFi.
I haven’t covered all sectors here. Details will be discussed in future series. I’d like to end this chapter by a saying -- The future is already here. It's just not evenly distributed yet. Let’s embrace the industry in 2022, and find the next pleasance.