How to play crypto’s cyclicality to your advantage… My top crypto to buy… These big “macro forces” are reversing… crypto is pure capitalism at work…

1) Last year was a harsh reminder that crypto is extremely cyclical…

Crypto follows an exaggerated boom-and-bust pattern, shifting between euphoric highs and depressing lows. After soaring 1,569% from March 2020 to November 2021, crypto crashed 64% in 2022.

The key to thriving in crypto is to use the “busts” to your advantage. Times like today are ideal for accumulating quality cryptos at steep discounts.

As value investor Shelby Davis said, “You make most of your money in a bear market, you just don’t realize it at the time.”

To call the current state of crypto “bearish” is an understatement. A lot of folks have written off crypto for good. Can’t say I blame them. Judging by the news, it’s full of criminals, scams, and clowns.

It’s all part of the cycle. And keep in mind, markets tend to bottom when the news is bad and it seems like things will never get any better.

Right on cue, crypto has sprung back to life lately. Bitcoin (BTC) is up 34% off its lows, and above $21,000 for the first time in a year.

Crypto has a long way to go before approaching its former highs… but this is how bull markets always start.

2) We’re entering a new “Ethereum dominance” regime…

My work suggests Ethereum will outperform the vast majority of other large cryptos during the next bull market, including bitcoin (BTC).

From talking with fund managers, I’m hearing Wall Street investors are skipping over bitcoin and buying Ethereum (ETH) instead. This is the first time something other than BTC has been the “first choice” crypto.

Here’s why…

For the past decade, investors have grappled with how to value bitcoin. It’s a virtual currency that just sits there. It doesn’t pay a dividend or distribute profits back to its owners. That makes BTC a tough sell for money managers who like “productive assets.”

Ethereum is a productive asset. In fact, it has many similarities to a traditional “stock” that represents ownership in a firm.

Ethereum has a real moneymaking business. In short, it supports a thriving ecosystem of crypto “apps,” like Apple’s App Store. And the fees it generates are shared with ETH stakers. Also, its burning mechanism works similarly to share buybacks.

In other words, ETH is the kind of asset professional investors are comfortable putting real dollars behind.

With Ethereum down around 50% over the past year, the market is handing us an incredible opportunity. If you thought you were late to crypto, this is your second chance.

3) Regular readers know “macro forces” like inflation, rising interest rates, and a surging dollar weighed down crypto over the past year.

In November 2021, when US inflation numbers came in hot, crypto markets peaked the exact same day.

But now… the macro forces, which dragged prices down, are reversing.

Rampant inflation punished stock, bond, and crypto prices all year. Although inflation remains elevated, the annual inflation rate isn’t what you should base investment decisions on.

What matters most is the direction of inflation. In other words, is inflation rising or falling? That’s the dividing line for market returns.

I’ve studied every inflation spike since WWII. Each time the year-over-year inflation rate peaked, the low was in for US stocks.

In other words, when inflation peaks… it pays to buy stocks. The same is true for crypto.

The year-over-year change in US inflation has now fallen five months in a row. I’m confident inflation topped out in June. And this is great for crypto.

After a historic surge, interest rates also appear to have peaked. The yield on the 10-Year US Treasury, considered the “bellwether” for interest rates, fell from 4.3% to 3.5% over the past two months.

The US dollar has been on a tear over the past year. And that’s bad for financial assets, like cryptos. Just like your morning coffee and grocery bill are “priced” in dollars… so too are US stocks and crypto. I’m sure you’ve seen ETH quoted as ETH-USD. As USD rises, ETH’s value falls.

The US Dollar Index (DXY) peaked three months ago and has been falling ever since. This gives cryptos room to run.

These three powerful macro forces, which made it tough to make money in crypto, are all reversing course at the same time. How could you not be bullish on crypto in 2023?

4) A 50% drop is a once-in-several-decades event for the US stock market. It’s a normal occurrence for crypto.

In fact, over the past decade, bitcoin experienced losses equivalent to three Great Depressions and five 2008 crises.

This extreme volatility is hard to deal with, especially if you’re new to crypto. But if you love free markets and capitalism, like I do, you should embrace it.

Central banks have been in permanent “bailout” mode since 2008. Every time Wall Street gets into trouble, they go crying to the government to rescue them. It’s a sign of an old, creaking market on its knees.

Wall Street merely pretends to love free markets. It really worships cronyism. Crypto, on the other hand, is a beacon of pure capitalism.

Nobody came to rescue FTX (if you missed my RiskHedge Report on FTX’s collapse, go here). There were no bailouts for Terra. The Fed didn’t bail out Three Arrows Capital, BlockFi, or Celsius.

Crypto is the only market in the world capable of enduring the equivalent of multiple 2008 shocks… and nobody goes crying for a government bailout.

There’s no denying 2022 was a tough year for investors. But we should celebrate crypto’s resiliency.

If a traditional financial firm went bust overnight as FTX did… the Federal Reserve would’ve likely stepped in. Maybe Sam Bankman-Fried would still be worth billions of dollars.

But in crypto, there’s nobody to bail you out. There’s no lender of last resort. This is pure capitalism at work. The same type of capitalism that made America great more than a century ago.

Sometimes, free markets aren’t pretty. But the fact crypto doesn’t need constant government handouts to stay alive tells me it’s a thriving asset worth betting on.

To crypto capitalism!

Stephen McBride
Chief Analyst, RiskHedge