Secular Trends

“Crypto is the future.“

“Cryptocurrencies will be like the internet.”

You probably heard this many times. This is an example of the secular trend that is currently emerging. More and more people have access to the internet, are digitally native, and have at least heard about crypto. These will continue unless significant factors change.

However, this doesn’t mean that existing crypto projects will gain a broader user audience and all investors will be wealthy. Similarly, many first internet companies collapsed. I won’t tell you which crypto project will succeed because no one knows. Instead, I will help you to spot them to join the digital revolution.

Secular trends are possible because we have fundamental factors that change only slightly. Some examples are demographics, technology, environment, government policies, and people psychology. These trends create a specific market environment impacting the returns of different asset classes. Understanding secular trends is vital for anticipating markets’ evolution and identifying potential opportunities and challenges. We don’t have a joint agreement on what secular trends we have. Sometimes it is even tough to spot them in advance.

The crypto community multiplies the number of secular trends in this space. NFT, gaming, digital ownership, digital identity, and metaverse are the most popular examples. Some people even create great narratives about specific projects, of which I am not a big fan. It is still too early to formulate detailed predictions. Different forces also drive the market.

Always try to understand the real value of your financial assets. This will allow you to navigate between secular trends. These are my interpretations:

• Stocks – You own part of the business.
• Bonds – You lend money to those who have businesses.
• Commodity – You own something that others need for consumption or investment.
• Cash – You have the equivalent of some created goods and offered services and can exchange them almost immediately.
• Cryptocurrency – What do we exactly own? This depends on a specific coin or token, but for legitimate projects (we don’t have many), it is the promise of something.

Crypto is a marathon, not a sprint. Position yourself to take advantage of the secular trends. Time plays in your favor.

What secular trends will drive the value of your portfolio? What evidences of it do you have?

Market Cycles

Investing has many cyclical rules. The key to mastering this game is understanding market dynamics. Two main factors influence market cycles:

• Traditional economies and profit cycles impact both digital and non-digital assets. Events in the real economy also impact the cryptocurrency market condition. Price is affected by economic growth, regulations, and inflation. To succeed in the digital market, we must understand the offline world. Even the best crypto analysis is worthless if we won’t consider traditional market dynamics.
• The psychology behind investors' behavior is primarily greed and fear. No one is buying when there is fear and cash is king. Fundamentals are irrelevant when market participants are greedy. By investing in riskier assets, everyone is seeking higher profits. This investor psychology is shown mockingly in the graphic above.

In crypto, we usually distinguish four market phases that are caused by market cycles:

• Expansion - The expansion phase in the crypto market is characterized by increased interest, rising prices, and growing market capitalization. During this period, new projects, Initial Coin Offerings (ICOs), and innovations emerge, attracting new investors and fueling the market's growth.
• Peak - The peak represents the highest point of market activity and valuations before a downturn begins. This phase is often accompanied by heightened media coverage, speculative trading, and inflated asset prices.
• Contraction - During the contraction phase, the crypto market experiences declining prices, reduced trading volume, and waning investor interest. This period may be marked by negative news, regulatory scrutiny, and increasing skepticism toward cryptocurrencies.
• Bottom (depression) - The depression signifies the lowest point of market activity before a new expansion begins. This phase is characterized by stabilization, consolidation, and the emergence of promising projects or technological advancements that may spark renewed interest in the market.

We also have three types of indicators in the economy which can help us navigate market cycles.

• Leading - What is likely to happen in the future?
• Coincident - What is happening right here and right now?
• Lagging - What has happened in the past?

Leading indicators are the most useful because they allow us to predict market changes. The other two types can be used to define where we are in the cycle.

Some popular indicators are:

• The yield curve – Represents the difference in interest rates for different maturities of bonds like 10y and 2y US treasuries. It measures the difference in the long-term rates at which banks borrow money and the short-term rates at which banks borrow money.
• Crypto Fear & Greed Index – Measures emotions in the crypto market. The indicator considers many data sources like bitcoin volatility, market volume and price momentum, Twitter sentiment, bitcoin dominance, and google trends.
• Active Wallet Addresses - An increase in active wallet addresses can indicate growing interest and participation in the cryptocurrency market.

Indicators are helpful, but more is needed to understand market volatility fully. Remember that we have common patterns, but every cycle is unique. Assets will also have different returns depending on the market conditions. Additionally, we are unsure of the current timing. This is only readily apparent when examining the chart's left side. All of this means that it is tough to play market cycles. However, if we analyze the past, we will know how fundamental our financial instruments are. This can guide us on how they will behave in different market conditions. You can see an example of the best-performing assets below. Remember that the price and future performance depends on many hidden forces due to the complexity of our world.

What will you use to understand the market situation?

Narratives

We have already covered secular trends and market cycles. The first shows us a broad economic environment and allows us to do long-term forecasts. The second guide us through the business cycles. This can be enough for long-term macro investors, but we need to go one level deeper to be successful here. Crypto is fast moving environment with a lot of developments and new narratives. All of these create tactical trends, which can last weeks to months. We should know them to decide whether we want to play them out.

Tactical trends are created in crypto by narratives. Some of them will stay, but most will disappear over time. The same applies to the opportunities they bring caused by the market inefficient. Investors have problems pricing new emerging trends, so many will be over or under prices. We can use "raw" materials from these inefficient markets to outperform other players. Since everyone wants to profit from this, it is difficult to identify these inefficiencies. A deal must have a purpose if it is to exist. Why don't other investors see it? You should always be aware of who is purchasing or selling from you on the other side of the transaction:

• Who will “pay” it by long-run underperformance (why other investors may take the wrong position)?
• Why other smart investors do not arbitrage away perceived opportunity (why don’t we have other smart investors)?

Most non-professional investors cannot do an outstanding job of predicting short-term phenomena such as narratives. Therefore, they should not pay much attention to their or others' opinions on the subject. They are unlikely to make significant portfolio changes in response to these forecasts, or those adjustments will be wrong. Thus, these are not things that matter for long-term investors. Things are even more complicated because we don’t know which expectations regarding narratives are already included in prices.

However, inefficiencies, mispricing, misperceptions, and mistakes that others make are opportunities for superior performance in highly volatile markets like crypto. Investors must be on the right side of those mistakes to profit from tactical trends. This is my checklist for finding these opportunities:

• Don't you overlook some hidden risks?
• Why does someone want to sell it to you?
• Do you know more about the assets than the seller?
• Why did someone else not buy it before you?

Knowing narratives is not enough to be successful in the crypto market. Other market participants need to play the same game. Your goal is to identify narratives before the catalysts. These are the events that drive hype, which means that they become known to others. Many investors focus only on narratives ignoring catalysts. This is a lottery. The crypto community may never discover their narratives or be overshadowed by those more prominent ones.

What are the current narratives in the crypto space? How do you want to leverage them?

What Next?

You can find more in my upcoming book “CRYPTOCURRENCY INVESTING The Fundamental Analysis Guide: How To Become A Successful Cryptocurrency Investor Using Fundamental Analysis”.

This is the book I wish I had read when I started my journey.

Follow me on Twitter to get a sneak peek of what is coming!