We’re closer to the top than the bottom

I’ve been taking some time to reflect on the markets and the trades I’ve put on over the years. Im currently in my last semester of my graduate studies in Comp Sci. Any CS major could tell you about the concept of a Stack. It’s one of the very first data structure concepts that you would have learned about. It’s a Last In First Out, or LIFO data structure. Take for example a stack of books. You place a book down, and then another, and another until you have a stack of books. And when you start to take out a book, you don’t grab a book from the very bottom, you take the book from the top. Easy enough to understand. Let’s look at another example. A line outside of a coffee shop, would it make sense if the first person to walk in was the first person to walk out with a coffee if there was already a line? No that would be unfair to your fellow compatriot, He was there first after all.

Which brings me to my point, we’re closer to the top than the bottom. Volatility has returned, attention is at its peak, and for new participants, every candle feels like we’re going to Valhalla. It’s the market’s reflexive loop, and excitement fuels more participation, participation fuels more price action, and price action draws in even more people chasing the move. This is especially true at the later stage of the markets, while volumes and users are the most active. This reflexivity then eventually cuts the other way. When the market turns, short term traders get cycled through. They flip bearish at local lows and bullish at local highs until they’re completely chopped out of the market. Contrast this with the comfortable Bitcoin holder who bought near the cycle lows. Their PnL gives them the freedom to ride out volatility, to stay patient, and to focus on the longer arc of the market. This is the paradox of every crypto cycle: short term sentiment always collides with long term value. The market participants who are often the last ones in, are the first one to be shown the door out.

We’re not near the cycle lows, in fact we have bounced so significantly off the cycle lows I would argue that we are close to a cycle top. Nearly 24x off of the FTX blow up lows in 2022 for Solana and roughly 7x off of the lows for BTC. If you are buyer today, at these current prices you would be clapping with excitement if you were looking at a 2x from the highs on majors in similar time frame. Truth be told, the risk reward at these prices just aren’t worth it and you are much better off waiting for a catalyst and buying a significant pull back in the coming months than buying the top of the range here. My portfolio is at all time highs, in fact it’s significantly above its all time high. As an investor you should always be asking yourself would I go back and buy my investments at these current prices? In my case, I was buying Solana around ~$40 and btc and eth around ~$34,000 and ~$1800 respectively. Today the prices are tracking at orders of magnitudes higher, and If I were to take the dollars in my portfolio today and try to allocate at these prices it wouldn’t seem reasonable at all. Im happy to stall my portfolio at ATH until market conditions provide a clear rr opportunity.

There’s good reason to think the September rate cut could mark a local top for risk assets. Markets are already aggressively pricing in cuts, with Polymarket forecasting a 90%+ chance that a 25bps cut will happen in the coming days. While lower rates are bullish over the long run, they free up capital and make borrowing cheaper. History shows they can be bearish in the short term.

Looking back at the 2020 Covid Crash, 2000 dot com crash and 2008 GFC. In all cases, the Fed cut rates because the economy was weakening, not because everything was fine. Rate cuts were a response to stress, and they came just before major drawdowns. When the Fed steps in, it is often a signal that the market needs help, and that help usually comes too late to save near term prices. My bias is up and to the right on the long term time horizon and the acceleration of the debasement of currency which is inherently bullish BTC and crypto, but our job as investors is to position ourselves towards the bottom of the stack so we can ride this trend despite the given and inevitable volatility.

Open interest on altcoins is flashing a familiar signal. Historically, when altcoin open interest surpasses Bitcoin open interest, it has marked local tops. This is the moment when participants push the far end of the risk curve, piling into leverage on the most speculative assets. The chart above shows how previous spikes in altcoin OI lined up with short term tops in the market. It’s a sign of froth traders are racing to squeeze out the last bit of upside, and positioning becomes crowded.

start of major federal funds rate cuts vs SPX

Looking at the technicals, we see we are still in a range. Not breaking out past the all time highs we saw earlier in the summer. If the markets fail to make a decisive decision. Well we can expect some chop, which from a positioning standpoint isn’t where you want to be if you are buying assets at a premium or later stage in the cycle.

I do think the sentiment between many of the traders are that we are in the late innings of this cycle. I think investors are rational, however with these outstanding signs of froth in alt coin open interest and some of the other reasons ill outline below, it has become important to me to have off-risked an amount of cash reserves as a % of my portfolio.

Another glaring frothy signal is seeing IPOs that are opening 50% or more in the green on day one. Startups are rushing to be listed on the public markets. There have now been seven new IPOs on Robinhood since Circle went public in June. This kind of excitement hasn’t been seen since the summer of 2021, when Robinhood, Coinbase, and Duolingo all debuted and immediately gapped to high double digit returns on their first day of trading. Those launches were quickly followed by multi month corrections on higher timeframes as the hype cycle cooled off. The current environment is beginning to rhyme with that same script.

Under the radar I’ve been paying attention to is the Pokemon card market. The first edition Charizard the holy grail of the Pokémon world is printing new all time highs, with prices that haven’t been seen since the last cycle top. The market has gone full mania. Card shop owners are cashing in, buying their second and third homes off inventory they couldn’t move a year ago. The returns on these cardboard dragons are outpacing the hottest tech stocks and even the best VC bets. When collectibles start outperforming startups, similar to alt coin open interest you can assume investors are cashing out crypto and looking to buy into harder assets. Which then reflexively start to trade at a premium.

price of an ungraded first edition charizard

All of these signals together paint the same picture. We are not at the beginning of the cycle anymore we are closer to the end than the start. Altcoin open interest is screaming risk on, IPOs are ripping straight out of the gate, and even the Pokémon market is euphoric. This is what late cycle behavior looks like.

That doesn’t mean the music stops tomorrow. Markets can stay irrational far longer than most people can stay solvent. But it does mean sizing down your risk and being intentional with every position you take. My portfolio is at all-time highs, and my priority now is to keep it there until the market gives me a high conviction setup worth pressing.

And that brings us back to the end of the stack analogy. In every cycle, the last ones in are the first ones out. The goal is not to be at the top of the stack, shaken out when the market pulls back. The goal is to position yourself low enough in the stack that you can ride out the volatility and stay in the game for the next move up. Survive now, so you can thrive later.