Editor's note:
From the dramatic shift in tariff policy by the Trump administration to the recession risks lurking in US economic soft data, global markets have been fluctuating under the influence of liquidity and sentiment. Meanwhile, Bitcoin seems to be brewing new highs, and the entire market also seems to sense the 'Altcoin Season' approaching.
So, what exactly is the situation in the entire market right now? Could Bitcoin's dominance be peaking? Is 'Altcoin Season' really coming? This article takes you through the data indicators.
We have been monitoring the key support areas for Bitcoin (BTC), planning to either exit the market (expecting further declines) or redeploy funds to riskier assets as cash flow allows, anticipating a possible 'Altcoin Season' or market peak later this year.
Next, we will discuss how we manage risk in the context of improving tariffs and market sentiment.
01
Macroeconomics
Tariffs
We initially believed the Trump administration would take a hard stance against China while negotiating with other countries. When Trump raised tariffs to 145%, this view seemed correct. Of course, this actually created unsustainable trade barriers between the world's two largest economies.
Now, we see tariffs on China capped at 30% with a 90-day pause. The market reacted enthusiastically to this news. However, it is important to understand that the global effective tariff rate is still 17.8%, while it was only 2.5% when Trump took office.
Looking ahead
We cannot predict the short-term trend of tariffs; attempting to do so is futile. However, it can be said that traders who bought when Trump said 'buy' and sold when he said 'sell' may have made a fortune over the past few months.
Long-time readers know this is not our investment style. We look forward to returning to long-term thinking. Meanwhile, in the later stages of the cycle, short-term views are also necessary.
From a long-term perspective, we strive to focus on the big picture:
Tariff rates will not return to 2.5%.
Tariffs are primarily aimed at rebalancing trade with China (power struggle) while catering to Trump's populist base (bringing manufacturing back to the US). Killing two birds with one stone.
Economic recession
Before the 90-day pause on tariffs on China, soft data (surveys) indicated rising recession risks:
The ISM Manufacturing Index fell to 48.7 in April (business cycle contraction), although the services sector rose to 51.7 (expansion).
The University of Michigan Consumer Confidence Index was 52.2 in April, well below the long-term average of 85 (71 during the COVID peak).
One-year inflation expectations rose to 6.5% in April (Michigan University survey).
The March Challenger report showed layoffs reached the highest level since the Great Recession, and while April saw a slight decrease, it was still 63% higher than last year.
Los Angeles port data shows a 30% decrease in freight from China, expected to impact retail in May/June.
Overall, Polymarket set the recession probability at 66% on May 1 (now 40%).
Data source: Polymarket
We believe soft data will eventually reflect in hard data (actual data) - currently, hard data still shows a strong economy.
Now, with a 90-day tariff pause, we believe short-term recession fears have eased.
The question is how long this 'wall of worry' can be climbed before another wave of negative news suppresses expectations.
This could happen tomorrow; no one knows, making the current situation more of a trader's market.
Nevertheless, it seems that a window of increased risk appetite may emerge in the short term, and capital allocators may need to chase the market.
02
Crypto market
Increased risk appetite is most evident in the crypto market, the asset class most sensitive to liquidity conditions.
The crypto market seems to sense the following trends:
US government fiscal spending has not decreased, still exceeding 7% of GDP.
Government and corporate debt will face a refinancing wave of $3.5-4 trillion in Q3 and Q4.
Tax cuts, regulatory easing, and adjustments to the supplementary leverage ratio (SLR) may occur later this year (potentially increasing bank leverage/liquidity).
Inflation is declining (this week's CPI and PPI reports show inflation slowing), which may greenlight the Fed for rate cuts.
Overall, liquidity conditions are favorable, as the Fed may need to purchase some upcoming refinancing and new debt issuances.
These factors have increased the likelihood of a 'Altcoin Season', even though the Federal Reserve is currently standing still.
Since the fourth quarter of last year, we have observed a sustained rise in altcoins and Meme coins for the first time. Meanwhile, Bitcoin's dominance seems to have peaked:
Data source: Glassnode, The DeFi Report
Altcoin Season
If we really enter 'Altcoin Season', there is still a long way to go down for Bitcoin's dominance shown in the above chart. This means that (some) altcoins will perform excellently.
But how do we confirm 'Altcoin Season'? Here are the key factors:
The final year of the cycle.
Bitcoin's dominance was 65-70% at the beginning.
From quantitative tightening (QT) to quantitative easing (QE).
ETH/BTC ratio rises.
Retail investor interest and 'Meme' revival.
At present, we are in the early stages of this process. ETH/BTC is still at 0.024, and the ETH/USD price is 46% lower than its historical peak. The Fed is still executing QT.
Nevertheless, last week's 35% rise in ETH reminds us of the 68% rise from January 1 to January 7, 2021 (from $729 to $1224).
At that time, the ETH/BTC ratio rose from 0.03 to 0.07 four months later, and ETH/USD increased by 370%.
This has triggered a surge in altcoins, NFTs, 'metaverse' tokens, and alternative Layer 1s. There were almost no pullbacks from January to May 2021. The market then crashed in mid-July (ETH fell from $4000 to $1800) and reached an all-time high in November.
Some altcoins (like Terra Luna) continued to rise after BTC and ETH peaked until the entire market crashed.
This was the case in the previous cycle.
So, how do we respond to the current situation?
03
Portfolio management
We were satisfied with the profits locked in our long positions last December/January. Since then, we have been monitoring the market for signals: either the market crashes into a bear market or rebounds to form another peak.
We currently lean towards the latter.
But that doesn't mean we are going all in.
As many readers know, our style is to wait for 'fat pitches' (high-certainty opportunities). We do not believe the current situation is a 'fat pitch', but we also believe there is upside risk.
Here is our strategy:
We are not interested in BTC at the current price levels.
Instead, we are reallocating a small amount of profits to riskier assets.
Historically, assets that perform well in the late cycle are those that performed well early on + emerging/shiny things. Tokens that have strong communities/narratives and low circulation may see the largest gains.
DeFi projects with strong fundamentals may also perform well, and we also expect top 'blue-chip' Meme coins to perform excellently.
04
Risk
I want to be clear that we are not going all out right now. We just hope to capture some upside potential when the market rebounds strongly.
Risks to consider include:
Bitcoin needs to break through its historical high. If this does not happen, our viewpoint may be irrelevant.
Summer is usually a period of volatility/consolidation. Current sentiment is somewhat extreme, and further declines similar to last year may occur.
Bond market. We believe long-term yields will eventually rise. The stock market (and cryptocurrencies) may rise during these periods, but valuations are ultimately determined by DCF calculations, and if that happens, the stock market (and cryptocurrencies) will eventually correct.
Stablecoin legislation did not pass the Senate last week (the Democrats are still blocking cryptocurrencies). This is significant; the crypto market may have underestimated its impact. If this legislation fails, larger crypto bills could also be stalled, becoming headwinds for the asset class.
05
Summary
'Altcoin Season' refers to more than 50% of new inflows into the crypto market flowing into non-BTC assets. This does not mean all altcoins will perform excellently.
Asset selection and timing are crucial.
Please understand that, in addition to market risks, there are many other risks. Yesterday, we learned that Coinbase user data was recently exploited. With rising prices, hacker attacks, hidden leverage, and social engineering scams pose additional risks to crypto investors.
We believe there will soon be opportunities to buy BTC and other blue-chip assets at discounted prices. But we also want to have fun and try to capture the remaining upside potential of the current cycle.
