Two and a half months passed since I have looked at the Bitcoin bull and bear market cycles. Since then we recorded a new marginal low in September and, last week, a continuation of the bear market, triggered by the collapse of FTX and Alameda . In this post I will extend analysis from August till mid-November and analyze the bull/bear cycles of Ethereum and market capitalization weighted portfolio of Bitcoin and Ethereum.
Let’s first look at the updated table summarizing past Bitcoin’s past 4 bull/bear market cycles. The changes vs. August have been italicized.
The most “encouraging” development is the fact that the bear market was extended from 7 moths to just over a year. That was one of my main concerns with cryptos – the bear market was not long enough to purge the necessary excesses of the bull phase. The depth of the drawdown has also increased – from 72% to 76%. Cycle 4 Sharpe ratio fell from 0.89 to 0.69, a combination of lower cycle profits and extended duration of the cycle.
It is only now, that it seems like the necessary conditions for the bear market to end have been fulfilled: it has sufficient duration and sufficient depth. Which is not to say that it has necessarily ended. It may last several months longer and the drawdown may increase to 80+%. However, such developments would still not invalidate a long term positive outlook for Bitcoin in particular or crypto in general.
To extend the analysis, I have decided to include the same statistics for Ethereum and a market capitalization weighted portfolio of Bitcoin and Ethereum. This is a relatively agnostic and conservative position as to whether the #1 or #2 wins in the long term. I have followed this approach since mid-2017. Ethereum has a shorter market history, so I include only the last two cycles (2015-18 and 2018-22)
One of the reasons for optimism in crypto space is that the FTX/Alameda fiasco has not impacted Ethereum to the extent that it made a new low in November. It currently trades at around 1200 ETH/USD, while the low was made in June at 994 ETH/USD. The drawdown then for ETH was still deeper than current drawdown for BTC (79% vs. 76%). The reason for that may be the successful Merge, which brought the ususal “buy the rumours” 100% increase in Jul/Aug, which was followed by “sell the fact” 40% decline in September. So, kind of mixed bag here – the ETH bear market phase was a bit short (just over 7 months), but sufficiently deep. Please note that the Sharpe ratio for ETH this cycle is still excellent at 1.08, despite the deep drawdown.
The market capitalization weighted index of BTC and ETH made a new low in November. This extended the drawdown to -77% and duration to just over 1 year. Similarly to BTC, current cycle’s decline of the index seems sufficiently long and sufficiently deep for the bear market to end. Again, this is not a call of the bottom, we can obviously go down more.
For an easier comparison, I put the most important statistics of the last cycle for the three portfolios in a summary table:
As we see, Ethereum had substantially better growth rate compared to Bitcoin (102% vs 50% annually). It was not offset by higher volatility, hence the higher Sharpe ratio. The market cap weighted index volatility is only slightly higher than that of Bitcoin alone. BTC and ETH are very highly correlated, but not at 100%, hence the volatility is somewhat lower than the market weighted average of BTC and ETH.
Disclaimer: I keep ~10% of my usual crypto allocation through BTC, ETH and BITW CEF.
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