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Top Analysis - where does it end?

Updated: Jul 30, 2024
Published: Feb 12, 2021
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The Cryptocurrency market has been in a relentless bull market for months. In the past few weeks, since the start of 2021, this run intensified even further.

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Naturally, questions and worries about a top forming soon prior to a correction begin to flood investors' and traders' minds. Many have seen reasonable profits and want to protect them at all costs.

Before we continue any further we'd like to state the following: when the profit realised is significant to the investor/trader, it is wise to take off 5-10% and reward oneself or at least store cash for emergencies. Profit-taking does not necessarily need to correlate with where a top may form, specifically when it can be life changing or too valuable to fluctuate.

Disclaimer: This report is for informational and educational purposes only. None of the following is financial advice nor any sort of recommendation.

First off, we personally project that this cycle will span over 2-3 years at least. However, within the larger cycle we'll witness smaller boom and bust cycles where euphoria gets punished and blood buying is rewarded.

To better understand where we currently are in the cycle, let us introduce to you a concept called: Market Froth

Market Froth

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By definition, market froth is when the market begins to show a trend heading towards overpricing of assets. This means it is the phase that precedes euphoria.

Sentiment Analysis

As you know we monitor the Fear&Greed index on a weekly basis (posted in every Weekly Technicals). However, certain intricacies are left undetected by this index, which is why keep our ear to the ground.

In September 2020, when the market saw a sharp correction - especially in DeFi - we were quite aware of the fear many were feeling in the face of multiple bullish factors. When public sentiment diverges from the facts we get a clean signal as to where the market is headed next.

Examples:

  • Public Fear + Bullish Factors = Buy the Dip
  • Public Euphoria + Bearish Factors = Sell the Rip
Today, crypto-assets have been repriced after a severe undervaluation. Markets don't go from undervaluation to correct valuation because of human emotions. They go from undervaluation to overvaluation, they undershoot then overshoot.

The objective of an investor is to purchase the undershoots and sell the overshoots.

Emotional Investing

A week ago we tweeted the following:

We were secretly hinting that market froth was beginning. Since mid-2020 we've been paying a lot of attention to the sentiment of retail traders and how their logic was forming, as well as who was entering the market.

As asset prices get repriced from an undervaluation, the class of investors that enter the market declines in quality (in terms of investing knowledge). Their theories are not related to any fundamental factors, they invest purely because "it's been going up for a while so it'll keep going". This is called emotional investing which can be witnessed in coins such as DOGE.

This phase is beginning to show and it is called market froth. It typically precedes bubbles where asset prices rally quite significantly. As prices go up, more and newer investors flow in throwing capital at the market. The latter boosts prices higher. This is the mania phase and the phase we'd like to be sellers in.

We're seeing this phase at the moment with legacy Altcoins: growth beyond intrinsic value. Two examples are: ADA & DOGE (if we owned them we'd be DCAing out). This phase has not been seen in DeFi yet and in fact that sector (includes SNX, SRM, RUNE) remains relatively undervalued compared to its potential.

Note: we're not bashing coins by any means and anyone is free to have their own theory/opinion about different assets. Cardano as a network was built as an "Ethereum Killer" however when we look at the metrics they clearly show where value is being created and transacted and it is not on Cardano.

Our Plan

Our investment horizon is 18-months at the very least, we accept that there will be smaller boom and bust cycles within the larger cycle. Assuming (conditional statement) that this market forth leads to an overshoot in asset prices of the tokens we hold (has not yet occurred), we'd be willing to sell up to 20% of our holdings in each in order to later on buy their respective dips.

Patience & Rationality are our best friends in this phase.

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