Did We Hit Bottom?
Kate (Ksenia) Laurence
CEO & Founder, Bloccelerate VC | Investor in Web3 Since 2015 | Milken YLC
Dear Investors,
In light of recent developments, many of us are wondering if the market hit the bottom or if there is more room to go.
?Sam and I have been collectively through five market cycles in the Web3 space. While each cycle seems unique in the short term, over time it is clear that similar patterns repeat every single time.?
In April of 2021, during our Q1'21 quarterly investor update meeting, we shared with you an update on our exit strategy. This exit strategy was an outcome of our analysis of where we were in the market cycle at that time.?Our stated fundamental assumptions were as follows:
In hindsight, the cyclicality of market played out in line with our predictions: Q1'21 was essentially the first inning of the 2021/2022 bull run. Since then, as intended, we made a series of exits on our crypto positions. We realized roughly 46% of paid-in capital, some of which has been distributed and some of which was recycled. Original presentation can be found?here (see slide 9).
So, Where Are We Now?
First, we don't claim to have a crystal ball - no one does. Second, we can assume we will never be able to catch the bottom. With that said,?based on the following data and facts, we believe that we are?at or near the bottom of the market. And if we are right, it?means that it is the right time to start re-entering highly overcorrected and undervalued positions.??
-> If we review the market data from previous cycles, it is clear that it roughly takes 12-14 months for market peak to the market bottom.?
For example, the peak of BTC & ETH prices -?in the last bull market was roughly Dec'15 of 2017 (BTC hit $19K). BTC hit its lowest point of $3.3K on December 16th of 2018. And while the next bull run hasn't started until 2019, BTC has never hit that point again. Similar patten could be observed in the context of the 2014 market cycle.?
In the current market cycle, BTC & ETH peaked in November of 2021 (BTC hit $68K and ETH hit $4.8K). This was roughly 12 months ago. If we follow the same logic, we are near, if not at the bottom.
-> An additional data point to look at is "top to bottom drawdown %" during previous market cycles.
- In 2014, we saw 82% drawdown on BTC from the top of $1150 to the bottom of $200
- In 2018, we saw 82% drawdown on BTC from the top of $19K to the bottom of $3.3K
- In 2022, so far we saw 76 % drawdown on BTC from the top of $68K to the bottom of $15.8K?
This tells us even if we were to hit the previous drawdown levels, we are within a 6% range. While there still might be room to go down, this is as close to catching the bottom as we can hope for.
What Does This Means For Us?
?The reason we regularly do market cycle analysis is to help us guide our deployment strategy. While we can't time the markets perfectly, we learned that it is important to be greedy when everyone is fearful and vice versa. Based on this analysis, we believe that the time is right to start DCA (dollar cost average) our way into the desired positions.
Some of you argue that it is not clear whether the FTX contagion has fully played out yet. Could we see a series of cascading effects similar to what Luna/Terra triggered in the last 6 months? While the contagion may have further effects to come, we believe that, for the most part, the liquid market has already priced it in as is.
Lastly, you would be right to question why we still use BTC data to understand market cycles in the context of blockchain investments. In reality, we believe that BTC prices are still a leading indicator of broader crypto asset valuations. While private deals are still "catching" up with reality, it is clear that liquid tokens have already gone through the "overcorrection," as indicated by 75%+ draw down in BTC and other assets.
Welcome your thoughts, comments, or questions!