The Next Crypto Cycle
A Pivotal Election for Crypto
This piece is a guest post by David Kalk, Founder & CIO of Reflexive Capital, which manages a “macro directional” crypto hedge fund. David Kalk was formerly the CIO of Thiel Macro, and before that a senior swap trader at Goldman Sachs in New York.
We are experiencing a big macro moment in crypto.
A clear regime shift in the U.S. regulatory environment is catalyzing a new crypto cycle phase that can now extend bullishly beyond BTC (and meme coins). BTC has been performing for several quarters alongside relevant global macro thematics (USD debasement, banking issues, etc.) and is further propelled by this year's ETF rollout. However, while Bitcoin has established a foundation of underlying momentum, there haven't been coherent narratives that have motivated new capital into other parts of the market, and the supply/demand picture has been complicated by significant new token supply.
The macro pattern of the crypto space is one of severe reflexivity, which plays a more dominant role than in other asset classes, given the price sensitivity of market "fundamentals," the self-referential nature of asset valuation, and highly cyclical allocation patterns. Reflexivity is the key dynamic, resulting in boom/bust cycles exhibiting significant momentum characteristics. Capital is quickly beginning to flow into a crypto space that many had "left for dead" (as we observe the 2nd anniversary of FTX's bankruptcy).
Historically, capital allocations have been highly concentrated in brief periods of bull markets (often alongside "inflows" generated from leverage/credit growth). The bimodal nature of capital flows creates violently different market regimes – periods of overwhelming liquidity, followed by steep contractions. For dedicated crypto money, these regimes warrant different portfolio construction that are specifically aligned with the character of reflexivity. For the cross-asset macro trader who makes a living around anticipating these changes in flows or the tourist who enjoys episodic crypto allocations, there is a short window to start paying attention in order to best monetize the brewing cycle.
A Pivotal Election for Crypto
The election couldn't have gone much better for crypto. In addition to Trump's victory, after he established himself as a crypto candidate along the campaign trail, crypto-funded congressional candidates performed very well across the board. This should serve as a strong signal to lawmakers, particularly those looking for reelection, that crypto is a growing political force supported by the electorate, and one that can shape elections.
After Trump and his transition team make nominations to critical regulatory positions, we will have the most pro-crypto government by a significant margin. The transition team will nominate banking and market regulators in the short term, and it is expected that many of these positions will be filled by those with positive sentiment and interest in crypto. None of this is more critical than a shift at the SEC, and the rumored nominations look well-suited for a dramatic shift in policy. Within the first 100 days, Trump's team is expected to share a plan of action around crucial policy priorities in the crypto space. Later, as we begin to navigate the Congressional calendar, there should be a heightened probability of bipartisan legislation on stablecoins and other crypto oversight frameworks. Given the previous regime's hostility, a lot of low-hanging fruit is available to policymakers and regulators.
Finally, the prospect of a US strategic Bitcoin reserve stands out as a potential gamechanger to an already bullish outlook. If the US government were to try to purchase a significant amount of Bitcoin (e.g. 1mm BTC tokens), it would likely prompt similar moves from other sovereigns, pushing BTC prices dramatically higher. Given the finite supply of 21mm BTC tokens, with an even further limited circulating supply in the "float", even moderate acquisitions by sovereigns would likely impact prices in a significant way.
The Crypto Cycle — Time for a Regime Shift to Altcoins?
An altcoin cycle–referring to tokens outside of BTC, ETH, stablecoins–is the main event in crypto. The returns associated with these bull stages feature unique returns for liquid markets, but historically few have been able to monetize the cycles. This is likely because these periods are meant to be traded one cycle at a time, given the corresponding reversal in price action and long overhangs. Following this pattern, a prudent approach to the space is to use a macro skillset to understand the cycles, flows, and credit to reconcile the momentum and reflexivity involved.
A market-reflexivity-centric model is a feedback loop that explains the reinforcing relationship between price, fundamentals, and capital flows to fuel a boom (and later a bust). Price goes up, fundamentals look better, capital flows in, pushing prices even higher….etc. Unlike other asset classes, in crypto the loop is unconstrained by any shared market heuristics on valuation allowing price to run unchecked as long as it remains in motion.
When people get burned, a new cycle needs a new identity. Historically, cycles are catalyzed around unlocking new economic primitives (via new forms of tokens), where there is innovation on how tokens are used or distributed. Until a week ago, without a compelling narrative driving attention to altcoins, capital flows were the missing ingredient to the reflexivity feedback loop. The big macro question has been how you get money into altcoins to get the feedback loop going.
A New Narrative: Crypto is now Legal?
The US political and regulatory shift feels substantial enough to support a new narrative in altcoins. Whether it's new changes in behavior driven by the perception that "crypto is legal now" or the ability to blame the former regulator for all the consensus flaws of crypto and tokens, there can now be new ways people relate to new crypto investments, and capital can begin to flow.
As confidence grows, so too does the probability of an altcoin cycle, which has increased quite a bit over our tradeable time horizon. Money is already flowing in, and there is a sharp shift in psychology and FOMO as price confirms the significance of this catalyst. As momentum builds and perceptions are distorted by price, the way people analyze existing crypto sectors and assets will be wildly different.
Trading Setup: Enter before the Breakout
Post-election, there have been gains in the largest and most liquid crypto assets. With Bitcoin at an all-time high and dragging the overall market cap higher, it's natural to question whether the trade is already done. But while Bitcoin has been performing, most altcoins are at considerable discounts to where they were trading nine months ago. The altcoin rotation is still pending, despite the idea that the political catalyst could ultimately be more favorable for altcoins.
Arguably, the trade is better today than on November 4th for altcoins, particularly given the developing reflexivity. Crypto is a momentum asset, and while momentum in BTC has already persisted for quite some time, there is still an opportunity to jump on altcoin momentum early as it gets started. Now is the most interesting moment to consider crypto (and altcoins specifically), when the probability of a cycle starting goes up but has yet to start. This moment could be analogous to late 2020, where BTC outperformed until something new emerged in 2021, at which point the rotation to alts played out dramatically over a few quarters.
A pure capital flow lens emphasizes that very little money has come in since 2021. Cycles happen because money flows in and then out, and we have yet to see substantial new money entering the altcoin space yet. One can still debate whether a cycle materializes, but it seems unlikely that we are vulnerable to a flow reversal. We haven't had the main event yet.
Final Thoughts: The Time is Now… Don’t be Late
The crypto cycle is at a turning point, and the potential for a new bull cycle is high. Reflexive dynamics, favorable regulatory changes, and the absence but potential for strong, new narratives are aligning to create a desirable entry point in advance for potential outsized returns.
There are open questions: Which altcoins? What narrative? When rotation? It is hard to have precise answers, but allocating can be a slow process in a market which ultimately moves very fast. The most likely scenario, like previous cycles, is that much of the capital comes in near the end and around highs (which is what you would expect in the reflexivity boom/bust model).
Don’t be late.
The boom/bust is upon us, which is exciting. These are unique returns even when adjusted for higher volatility. The odds of a cycle just went up dramatically, and so the option value of being involved went up commensurately, which doesn’t yet look reflected in the price. The opportunity to invest early – at this stage – is essential to capturing the compounding growth that defines these cycles.
For more information regarding Reflexive Capital, please visit our website at reflexive.xyz or send us an email at ir@reflexive.xyz
The content in this piece is partly based on proprietary analysis that Exante Data does for institutional clients as part of its full macro strategy and flow analytics services. The content offered here differs significantly from Exante Data’s full service and is less technical as it aims to provide a more medium-term policy relevant perspective. The opinions and analytics expressed in this piece are those of the author alone and may not be those of Exante Data Inc. or Exante Advisors LLC. The content of this piece and the opinions expressed herein are independent of any work Exante Data Inc. or Exante Advisors LLC does and communicates to its clients.
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