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November 20, 2020

Weekly Market Wrap

Find your own ‘Happy Medium’

Howard Marks famously penned a note to clients titled “The Happy Medium.” In it, he suggested that “the mood swings of the securities markets resemble the movement of a pendulum” – this idea is especially true of crypto and digital assets. 

Bitcoin maximalists have upped the ante this week as BTC continues to power on, surging to within a touching distance of an all-time high. Bitcoin is up 31% month-to-date (MTD) and 149% year-to-date (YTD), truly remarkable performance by any measure.


Gravity defying price action is not uncommon in the world of digital assets and makes any assessments in relation to the position of the aforementioned pendulum particularly challenging. In addition to that, market participants’ preferred narrative when it comes Bitcoin is also changing just as fast. What started off as a non-correlated asset, has morphed into something that is akin to a risk asset, while others, Deutsche Bank in this case, point out Bitcoin’s increasing demand to use Bitcoin where gold was used to hedge dollar risk, inflation and other things.

Back to Marks’ letter for a moment. He further opined that “the midpoint of its arc best describes the location of the pendulum ‘on average,’ it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc. But whenever the pendulum is near either extreme, it is inevitable that it will move back toward the midpoint sooner or later. In fact, it is the movement toward the extreme itself that supplies the energy for the swing back … This oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at the extremes than it does at the ‘happy medium.’”

However, it is also normal for narratives to change and to evolve, especially for something like Bitcoin and the rest of the digital assets ecosystem which is undergoing a rapid institutionalisation process. Nowhere is this more evident than by looking at the emerging use of stablecoin-margined futures products over Bitcoin-margined products, and add that to the growth of the open interest (OI) on the CME and the market looks rather healthy; in spite of the recent relentless surge higher.

DeFiantly pushing higher

There is also another area of the market which is less concerned with the Bitcoin narrative altogether, and that is decentralised finance (DeFi). There, the recent end to the first farming round on Uniswap did not lead to market participants dumping Ethereum (which was widely anticipated) and switching to Bitcoin in search of an all-time high. Instead, some of the liquidity moved to competing protocol SushiSwap, where total liquidity has since risen to $1.1 billion. Others have also turned to Bancor, which recently announced a proposal for BNT Liquidity Mining (LM) — aimed at driving new liquidity to Bancor pools & incentivizing long-term liquidity provision. 

Broadly speaking, it appears that while some liquidity did shift from UNI to Sushi, i.e. Vampire Attack 2.0, most of the capital remained in ETH and stablecoins. What is more compelling is that current multiples at which the likes of Uniswap and Sushiswap are trading. For example, following the recent strong run up, Sushiswap still trades at 10x (based on price/sales ratio), as does Uniswap. At the same time, Curve trades at 120x, and Balancer at 86x. While these may be sky high multiples, in the world of fast-growing companies, it is not entirely abnormal and eventually the multiples find their own happy medium depending on the industry the company operates in. 

On that note, Ned Davis of NDR, in his 1991 book “Being Right or Making Money,” tells the story of missing trades, investments, and rallies because they did not fit some expectations of his regarding the economy or valuations or other factors. 

In the end, “do you wanna be right, or do you wanna make money?”

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