With the market warming up and showing signs of spring, a timely moment perhaps to look at the importance of your entry levels. It is a well-known phenomenon of a still volatile yet maturing market that returns on investments, and longer-term trades for that matter, can be expected to diminish as relative to previous gains. Though this is commonly recognized in the abstract, what often gets missed - in the more practical activity of placing actual trades and making investments - is the impact this will have on actual expected returns going forward.
This article will look to further describe the way in which the macro principle of reducing returns will likely affect potential trades and investments, not to mention the activity of profit-taking. I’ll first look at how it may relate to the market price of Bitcoin before then looking at how this may also relate to the alts, taking one particular alt as proxy.
As I’ve always advocated, it pays to keep a longer-term core position in Bitcoin. I’ve also suggested it can function best as your investment vehicle for the future as it moves forward on its path of capitalization in the marketplace, or price discovery. But of course, if the macro concept of diminishing returns is indeed applicable to BTC, as has been shown to have developed and been substantiated in the above LGC [logarithmic growth curve] chart, then this has major implications for one’s return on investment [ROI].
In the following chart we can see these returns diminishing as measured with subsequent cycles.
And yet there is also an unreality to this chart that involves its abstraction - it simply measures the absolute bottoms to the absolute tops. Though these absolute measurements are interesting data points, perhaps more useful, from the practical perspective and for those that are actually trading and investing, is the more realistic levels where entries were likely made… or are now being made.
In the following chart, more realistic entries are highlighted [and comparable at this particular juncture of the assumed cycle], that involve recoveries in the market, where price starts to make its more parabolic move toward previous all-time-highs.
As can be seen, once again the real returns are reducing remarkably - 21x, 7x and [on the basis of the macro chart] to around 5x for the next cycle. Though this projection is in no way a certainty, based as it is on a model, it is still very much a real possibility and so accordingly something to be taken into account, or weighted, in one’s expected trading and investing outcomes.
The investment certainly still makes sense with not only a 5x spike on the cards, from the lower band of the ‘buy zone’, but with those returns also becoming more sustainable at a not-too-distant later date. This is similar to the previous cycle, which saw a 7x spike, and where continuing to hold has actually proven a worthwhile strategy - even though in hindsight we imagine selling the high and buying the low. Those that had continued to sit would still be 3.5x up and in a good position to be up a possible 18x on the next spike as the following chart depicts.
This is where investment in BTC, as opposed to trading BTC, starts to make sense, especially as the LGC channel converges towards price discovery, and the macro volatility reduces as shown above in the first chart.
As regarding investment, this is all fine with still good gains expected to be made in the aggregate over the longer-term. But of course, the reader may ask here how this affects the taking of profits. The easiest reply is just to sit and wait for a cycle or two or three. And yet naturally, we want to realize some profit in the here and now, and rightfully so for that also equates to the actualization of real wealth in assets as opposed to sitting on the abstract/ liquid wealth of money, Bitcoin being a currency.
This sets up something of a ‘problematic’ - we rightfully take Bitcoin as our primary investment, and yet diminishing returns and reducing macro volatility are at work. This point is especially pertinent when we factor in the likelihood of yet again another correction as the following chart depicts in a scenario that pragmatic trader/ investor must take into account.
Here we see the real possibility of price, based on a model that has performed since 2018, coming back to the LGC ‘buy-zone’ [before going on to greater heights]. In this scenario, where diminishing returns [and increasing stability] continues to bite, the investor may only be up something like a 2x in a couple of years’ time from a present entry after a solid correction.
In this scenario, the alt may come into play, where an alt longer term cyclical trade - to be sold into a future manic market - is entered at an optimal level. This may provide a solid return on a cyclical trade due to its extra volatility. While a more volatile alt provides an opportunity for taking profit [without having to lose one’s BTC position] due to extra volatility as relative to BTC, the entry level of that alt trade becomes more crucial due to the over-riding general principle of diminishing volatility as relating to all Crypto. The following section will look to illustrate the importance of the entry level as it relates to realizing profit.
If the ‘problematic’ - for those looking for massive volatility and returns - is diminishing returns, then the alts may be the solution. My focus will be on one particular alt in order to use as an example. I think VET/ USD makes a good example, given its previous performance, and its period of stability subsequent to the extended correction [an alt trade in order to take or skim off profit into the real assets is best done in the USD pairs as this is where you find maximum volatility].
It’s a solid looking chart, as many of them are. We first see the explosive run-up followed on by 50 to 61% correction [in real terms]. Then we’ve the extended horizontal basing range with price still relatively low in this range. Speculating [and yes, we are speculating here given there are no certainties] that price should at least make the previous highs on a renewed manic market, we have on the chart a possible 11x. If the trade was placed as almost an ‘investment’; that is, as a longer-term cyclic trade, one has something with which to trade/ invest in and something also to take profits in:
1] The profits are likely to be greater than a profit taken in BTC
2] One has the added ‘luxury’ of sitting on their BTC position for the longer multi cyclical term
3] One does not have to be concerned whether the alts go to oblivion in another extended correction as profits in them would have been taken [even at say an 11x] as in the following chart:
And to the final point as pertaining to and focusing on the importance of your entry levels. If returns are diminishing with the maturing of the market, in both BTC and alts, then the entry level becomes crucial for prospective returns. Keeping with our example chart, this is made clear when plotting two distinct entry levels and the implications this has for returns.
Taking our more conservative of 11x from the current level, one sees that the return is halved to only 5x if the entry level were to be delaying until a 100% rise in price from here [2x]. Clearly seen is the radical difference in returns the entry level makes at the bottom. Again if the possible peak and exit is the higher target [as below], the principle stays the same - a halving of returns, which is obviously very significant for those looking to take actual profits.
My aim here has been to draw out not only the implications of diminishing returns for BTC holders, but also how these implications could possibly be off-set with some cyclical trades in the more volatile alts.
Over and above this, I’ve also sought to outline why one’s entry points into the volatile alts are crucial given that diminishing returns are likely, i.e.; in so far as we may not see such astronomical returns as last time. If this does turn out to eventuate, those looking for significantly higher prices, before entering a bull market gone manic, may have already missed half the gains to be had… if not more.