January 4, 2023
Cryptocurrencies: Weekly Update
2022 has finally wrapped after having been one of the nastiest years for the cryptocurrency market in its short existence. The current bear market began with the rollover from all-time highs in November 2021 and continued throughout the entirety of 2022, in which the total cryptocurrency market cap dropped from $2.2 trillion all the way down to $795 billion at year's end. (≈ -63.7%)
Despite all of the bad press surrounding crypto in the past year that has made it seem like an unprecedented period that the industry may not recover from, this actually has happened before.
The first major crypto bull market to take place with attention from the mainstream media and retail investors was back in 2017, in which the total cryptocurrency market cap really skyrocketed by an astronomical 3,175%.
This was probably when a large number of you heard about Bitcoin, Ethereum, and Litecoin for the first time as everyone began asking their friends for the first time if they had heard about this new crypto thing. Basically, anybody that bought crypto in 2017 made quick and easy returns (kinda like buying altcoins in 2020) as long as they didn’t hold their coins through to 2018.
Annual Candle Stick Chart of Crypto Total Market Value
Early 2018 saw a quick and painful crash from the highs that were created the previous year and despite some shorter timeframe volatility, it was a devastating year across the board, with the total crypto market cap dropping by 78% that year. Some of the same themes that forced a continual cascade in crypto markets in 2022 were very similar to the catalysts in 2018, including mass media coverage sewing seeds of uncertainty and doubt throughout the industry, as well as bad actors and hacks that helped to proliferate and reinforce the negative sentiment that was created.
At the time, there weren’t many traders and investors that retained hope in a potential cryptocurrency comeback. However, with the benefit of hindsight, we now know that the market would not only get away from the rut of 2018 but also go on to create new highs yet again just a few years later in 2020 and 2021.
The reason that it's important to look back on 2018 is to remind ourselves that the pain we experienced in 2022 has happened before, and will likely happen again at some point in the future thanks to the cyclical nature of the young crypto market.
This also means that we are highly likely to see more bullish cycles in the future for crypto, and throwing in the towel now means you would be at risk of missing the next major trend change.
Although it wasn’t particularly pretty, our CryptoPulse Quant (CPQ) strategy significantly outperformed the rest of the crypto market in 2022 and served as a strong tool for preserving capital during the worst crypto bear market we’ve seen since 2018.
A down year for the strategy isn’t all too surprising given the minimal upside volatility throughout the year, with the only real opportunity for a short-term rally taking place back in June/July after the crypto market put in new multi-year lows. However, years like 2022 were considered when we refined the rules that drive our CPQ strategy because as long as we outperform during down years, we will be primed to outperform by leaps and bounds when the direction of the market does in fact change back to the upside. Not only did we outperform the rest of the cryptocurrency market in 2022, our CPQ strategy outperformed by a factor of 3 (BTC = -64% vs. CPQ =-21.4%).
Along with the start of a new calendar year comes our quarterly reranking of the top 10 symbols by market cap that we will use as the list of tradable symbols for our CPQ for the first 3 months of 2023. We also display these symbols in a list that is organized and reranked daily to show which symbols have the strongest or weakest trends measured by our Trend Strength Indicator (TSI). Interestingly, all 10 of the strongest symbols by market cap from the last reranking will remain in this quarter’s list, as none of them have fallen out of the top 10 by our criteria (excludes exchange tokens, stablecoins, and meme coins)
This list of top 10 symbols really hasn’t changed much over the past year actually, as it seems that the market has stuck to its handful of top coins even amongst all of the crypto chaos in 2022. We firmly believe that as the cryptocurrency industry grows and is more appropriately regulated as time goes on that there will likely only be a handful of large-cap projects to survive over the long run. Having seen the list of top coins stay relatively the same over the past year has been evidence of consolidation within the crypto space, where investors and traders have derisked themselves from far more speculative altcoins available in the market in favor of the more popular and established coins.
This isn’t to say that these top 10 coins aren’t susceptible to the same type of volatility as the rest of the altcoins floating around out there, but they definitely do have a higher likelihood for long-term success as a result of them having held their ground relative to the rest of the market throughout the 2022 bear market. There are of course plenty of other strong projects that don’t make our ranking, but until they have pushed higher in their market cap and see more user adoption, we won’t be considering anything else outside of our current list for trading.
The first potential discretionary trade idea of 2023 may actually be coming from the absolute bottom of our TSI list. Solana (SOL) has gotten absolutely crushed as a result of the project's previous affiliations with Sam Bankman-Fried and FTX, as the implosion of the FTX exchange saw both retail and institutional holders cash out their SOL en masse.
However, even with all of the negativity that the Solana network has faced, it is still considered one of the most used and fasted Layer 1 blockchains for retail users in existence. Unlike other coins that had major falls from grace in 2022, the SOL community has managed to still hold up the price of the SOL token even after it temporarily lost the support of the psychological $10 level just last week.
Since SOL put in a new low at $8 on 12/29/22, it has already rallied by more than 65%. This could be an indication of a short-term capitulation bottom for SOL, especially now that the coin looks likely to close above its 50-day moving average for the first time since early November.
Barring any more bad news from the FTX debacle that would directly impact Solana’s reputation more than it already has, SOL looks like it could make a strong swing higher from oversold levels on both price and momentum measured by RealMotion. Be weary about buying SOL after its first daily close outside of its current parallel range and above the 50-dma, as 2 day confirmation above these levels would be far more likely to confirm a further move higher.
Although the volatility of the crypto market is at lows, we have seen quite a few of the top tokens get beaten up pretty badly in the last couple of months so it would not be surprising to see a handful of top altcoins claw back some of their recent losses as they swing higher from deeply oversold levels.
A strong indication for a short-term rally in the crypto market also comes with looking at the classic relationship between ETH and BTC. Currently, the ETH/BTC trading pair looks like it will break out of its long-term wedge pattern, and it would be wise to trade in the direction that this trend breaks:
If the ETH/BTC pair breaks to the upside, that will be your indication that altcoins will lead any short-term rally that may come in the crypto market. If the pair breaks to the downside, BTC is likely to outperform altcoins for an extended period which could indicate a further selloff across the broader market.
As always, make sure to always keep a stop loss on any open crypto positions that you may have in order to protect your downside, but a short-term rally led by altcoins may be ready to go.