My first trading job was with a floor broker on the Frankfurt Stock Exchange, which, at the time, was open for a highly civilized three hours a day: 10 am to 1 pm.
I joined just as the exchange started offering a screen-based alternative called Ibis (now Xetra).
We had multiple Ibis screens in the office, so everyone could watch prices, but only one keyboard to trade with (because we only had one license).
I was the quickest Ibis operator in the office, so the keyboard usually stayed with me, and if anyone else wanted to trade, they’d have to shout their orders over.
(I still am the quickest on a keyboard. You wouldn’t believe how fast I typed this sentence.)
One colleague of mine would always give me orders to buy Siemens, always two Deutsche Marks below the current bid.
If Siemens was trading at 77, he’d give me an order to buy at 75. And the moment it got to 75.50, he’d shout, “CANCEL!”
He wanted to buy Siemens but always only 2 DM below the current price.
It’s derisively called “cancel-if-close” and he did it so often I eventually stopped placing his orders — I just said “OK” when he shouted over a buy and said “OK” again when he inevitably shouted over the cancel.
I’ve been reminded of all those canceled orders lately because here’s where I keep seeing people say they are a buyer of BTC and ETH: Current price minus X%.
That’s a cancel-if-close valuation metric: Everyone seems to be a buyer of crypto down, say, 20% — until it is down 20%, at which point they are only buyers down an additional 20%.
This actually has some logic to it.
Crypto is highly self-referential (much like myself).
Tokens are worth only whatever people are willing to pay for them at any given moment.
You might counter that that is true of any asset class and, on short enough time frames, you’d be right.
But longer term, stocks are worth the present value of all future dividends, bonds are worth the present value of future interest payments, etc.
That is not really the case in crypto.
Bitcoin, for example, has no future payments to discount back to present value. Ether has staking rewards, but the value of those are a function of the price of ether (hence, self-referential).
This is why I think so many of the price targets you see in crypto are based on things like “the previous cycle high” or some form of technical analysis (aka, astrology for traders).
There just isn’t a lot else to go on.
Arthur Hayes concluded his most recent blog post with a formula for calculating his “effective yield”: Protocol Revenue / Fully Diluted Market Cap:
As the market marches lower and lower, as long as I believe usage of these services will continue and grow in the future, then my average entry price gets lower and lower, and my effective yield (Protocol Revenue / Fully Diluted Market Cap) goes higher and higher.
The problem, however, is that a token’s market cap is denominated in dollars and a protocol’s revenue is denominated in crypto.
So when the price of a token goes down, the market cap falls, but revenues fall as well (in dollar terms) — which means that tokens don’t get cheaper as they go down.
This is a unique aspect of crypto: A protocol’s revenue is largely a function of the price of the protocol’s token.
But not entirely: Revenues go up and down with usage, too.
Unfortunately, the news on that front is not great, either.
Most of crypto’s revenue at the moment comes from DeFi, and DeFi is also highly self-referential: When token prices are going up, there is more demand for trading, borrowing and lending.
And when they are going down, there is less.
That makes crypto-industry revenues pro-cyclical: Higher token prices mean higher revenue, and lower token prices mean lower revenue.
In this way, too, crypto revenues — even if denominated in crypto — are largely a function of crypto prices.
Right now, we are experiencing the worst of this circular logic: Crypto revenues are worth less because crypto prices are going down. And there is less crypto revenue because there is less crypto activity.
This of course works in reverse, too.
But knowing that “it’ll go up when it goes up” is not much help in determining what’s a good entry price for, say, BTC or ETH.
So thinking about this bear market in terms of prices is maybe not very helpful.
Instead, we should probably spend less time thinking about prices and more time thinking about use cases.
It may be that the Fed stops raising rates and Nasdaq rallies and crypto follows and everything is fine again.
But it may also be that this bear market will not truly end until DeFi and crypto build new use cases — specifically, use cases that will allow revenue to increase independently of token prices.
Because without that, it will be difficult to ever buy crypto on arithmetic.