In this blog post, I explore the nature of reflexive blowoff-tops, and speculate on the resulting implications for BTC, ETH, and shitcoins.

Exponentially increasing prices require exponentially increasing amounts of new money and participants

Crypto cycles consist of blowoff tops with exponentially increasing prices. Bitcoin’s price history is a great example of this:

BTC blowoff tops

These blowoff tops require exponentially increasing amounts of new money and subsequently, participants. In a world with infinite amounts of uninformed people and money, crypto cycles would go on forever. However, the world obviously has real limitations, and so eventually the cycles come to an end.

One relevant aspect of human nature is that humans love green candles. They’re just so attractive and alluring. This creates a reflexive loop where green candles drag in exponentially increasing masses of new people and money, which creates more green candles, which drags in more people, and so on and so forth until there’s no more new people to come in.

Once the system runs out of new people willing to put money in, the reflexiveness takes hold in the opposite direction. Suddenly, at the same price where everyone wanted to buy when there were green candles, no one wants to buy when there’s red candles. So the price goes down, creating more red candles. Which scares off even more people from buying, and so on and so forth. The new money stops flowing in and the system can no longer support the high prices and valuation, and crashes.

People need to lose money

Let’s be clear - most shitcoins are complete scams. People create a token at basically zero cost, and sell them to people willing to pay anything greater than zero. Later investors pay off earlier investors, with the hope that they can find some even later investor, who they can offload the token to, for more than what they bought it for.

The thing is, these shitcoin scams don’t just disappear one day (although some get rug-pulled). Instead, it’s much more insidious - the shitcoins just gradually lose interest and attention-share. The late investors are left bag-holding, desperate for exit liquidity. Or even worse, they keep adding to their losing positions because of sunk-cost fallacy.

All these people need to lose their money. That’s just how it works. These shitcoin scams can’t just go on forever. In general there will always be uneducated schmucks but the market will get smarter over time.

Shitcoin cycles vs BTC (and ETH?) cycles

As I’ve discussed, crypto cycles are reliant on exponentially increasing amounts of uninformed participants, and will always run into real-world limitations. How can we reason about the different cryptos with this principle in mind?

Shitcoins like LTC, BCH, XMR, XRP perform terribly against BTC and are basically dead. Fundamentally it’s because they are intrinsically worthless (unlike BTC). But at the end of the day it’s because they simply fail to attract the same amount of new money. They’re essentially one-trick ponies - they can convince gullible people to invest in them one time around, but that’s it. They have no sustainable demand because they have no long-term future. And after their first cycles, they’re not even good single-cycle pump and dumps, because there are newer cryptos that are less liquid and can pump more with less buyers.

LTC to BTC ratio

BCH to BTC ratio

In contrast, BTC has been able to continue finding exponentially increasing amounts of new money, and has made new highs every crypto cycle. This is because it actually has product-market fit as a new hard money. People actually save in it!

I want to talk about ETH, because I think it has potential to outperform BTC, and I also think it doesn’t need extremely uninformed and naive investors to create another blowoff top. I think there will be various kinds of people who basically get conned by intellectual dishonesty into buying the next ETH top:

• new crypto entrants (ETH is now often recommended as a “blue-chip”)
• institutional/VC money that wants to buy the new “Internet bond”
• noob shitcoiners left over from the last cycle who didn’t learn about Bitcoin maximalism or didn’t stick around through the bear

Thanks to a smaller market cap but more importantly the Merge pumpamentals, ETH needs much less money compared to Bitcoin to start its next exponential cycle paradigm. And once ETH starts printing green candles, it will be quite easy to find its next unwitting buyers, since it has such a great narrative.

It’s really quite nuanced.

The argument against perpetual exponential blowoff-top cycles

I don’t think these cycles will exist forever. They can’t keep happening with the same asset because the world is pretty small and well-connected these days in terms of information. There will always be waves of less-informed people who are more driven by green-candle FOMO, but I think these waves will become smaller and smaller.

Instead, what I’m really waiting for in the near future, at least for Bitcoin, is the traversal of the most vertical part of the S-curve. This will be when the world begins to understand the value proposition of Bitcoin and converges on it as the new hardest money. But until that happens, maybe I should try and outperform BTC by trading ETH… famous last words?