Why Buying the Altcoin Dip Failed in the 2022 Bear Market

TL;DR

Buying the dip on altcoins during a Bitcoin bear market is a mistake because altcoins act as falling knives, putting in lower high after lower high. The total altcoin market (excluding Bitcoin and Ethereum) is down 74% from its high, with Ada down 92%, Solana nearly 97%, and staying on the sidelines has outperformed.

Transcript

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Key Insights

• Altcoins act as falling knives in a bear market, meaning just because an altcoin drops 80% does not mean it cannot drop another 80%, a common misconception among people who joined crypto in 2021.
• The total three index, representing the altcoin market excluding Bitcoin and Ethereum, is down 74% from its high and continues putting in new lows even when Bitcoin and Ethereum are not making new lows.
• Ada is now down 92% from its all-time high, but during the last bear market it dropped almost 98-99%; a 98.77% drop this time would take it back to around four cents.
• Solana has dropped 80% two separate times during this bear market, then fallen another 15% from that level, and is now down almost 97% at less than nine dollars.
• Low Bitcoin dominance, currently at 42% or roughly 48% excluding stablecoins, is the main metric that kept the speaker out of altcoins; altcoins should remain falling knives until dominance resolves to the upside.
• Patience has been rewarded during this bear market, as rejections off the 200-day SMA signaled continued weakness and told investors that new lows were eventually coming.
• Altcoins are falling knives on both their USD pairs and their Bitcoin pairs, as shown by the Ada Bitcoin valuation still being a 43% drop from its December level.
• A few altcoins hold up better than most, such as Matic, but showing weakness back below its 200-day SMA means it can still roll over the same way others did.

Questions & Answers

Q: Why is buying the dip on altcoins a mistake during a bear market?

Buying the dip on altcoins in a Bitcoin bear market is a mistake because altcoins act as falling knives, continuously putting in lower high after lower high. Every counter-trend rally throughout 2022 that made dip-buying look useful ultimately resolved to the downside. During a Bitcoin bear market you simply do not know what a cheap altcoin is, and the idiosyncratic risk of a single altcoin is not worth it until the bear market is over.

Q: How much is the total altcoin market down in 2022?

The total three index, which represents the altcoin market or basically everything besides Bitcoin and Ethereum, is down 74% from its high. It has continued putting in new lows even today, even though Bitcoin has not made a new low over the last month or so and Ethereum has not made a new low since June. The altcoin market as a whole continues to push lower.

Q: How far has Ada fallen and how low could it go?

Ada is now down 92% from its all-time high. During the last bear market, Ada dropped almost 98-99% from its all-time high. If it were to fall 98.77% again it would go back down to around four cents, which is how bad it got in 2018. A milder 94-95% drop would still put Ada at around 15 cents, which the speaker considers completely possible given the momentum and macro outlook.

Q: What is significant about the difference between a 92% and 97% drawdown?

There is a big difference between being 92% down and 97% down even though it may not feel like it. The speaker points out that Solana is down almost 97% and trades at less than nine dollars, whereas if it were only 92% down it would be around 21 dollars. Going from 92% down to 97% down represents a huge additional drop in dollar terms, illustrating how much further prices fall in the later stages of a bear market.

Q: Why has low Bitcoin dominance kept the speaker out of altcoins?

Low Bitcoin dominance, currently at 42% or roughly 48% excluding stablecoins, is the main metric that kept the speaker from buying altcoins throughout 2022. His thesis is that as long as dominance stays this low, the altcoin market should remain a falling knife. He expects altcoins to keep falling until Bitcoin dominance resolves to the upside, and so far avoiding altcoins based on this metric has worked out well.

Q: How has Solana performed during this bear market?

Solana has been one the speaker was very bearish on this year. It dropped 80% back in May, then dropped another 80% measured from that drawdown, meaning it fell 80% two separate times during this bear market. Even from that level it dropped another 15%. Solana is now down almost 97% at less than nine dollars, and its Bitcoin valuation has fallen below its channel, looking like an absolute free fall.

Q: Do altcoins fall only against the dollar or also against Bitcoin?

Altcoins remain falling knives not only on their USD pairs but also on their Bitcoin pairs. The Ada Bitcoin valuation is still a 43% drop from its December level, and its higher lows do not hold, eventually breaking to the downside as they do in bear markets. The Solana Bitcoin valuation has fallen below the lower part of its channel. This shows altcoin weakness persists even when measured directly against Bitcoin.

Q: Are there any altcoins that held up better than the rest?

A few altcoins held up better than most, with Matic being one example. However, holding up better does not mean an altcoin will avoid rolling over the same way the others did. Matic is already showing a little sign of weakness back below its 200-day SMA. The speaker warns that some coins do better than others for a time, but that does not mean they will hold up the entire bear market.

Summary & Key Takeaways

• Throughout 2022 altcoins have simply been falling knives, and every counter-trend or bear market rally that made buying the dip look useful ultimately resolved to the downside. The total altcoin market excluding Bitcoin and Ethereum is down 74% from its high and keeps making new lows even when Bitcoin does not.

• Individual altcoins show how deep the damage runs: Ada is down 92% and fell nearly 98-99% in the last bear market, Solana has dropped 80% twice and is down almost 97% at under nine dollars, while Polkadot and Avalanche are each down about 92%. Chain link recently put in its lowest daily close near 5.67.

• Low Bitcoin dominance at 42%, or about 48% excluding stablecoins, is the key reason the speaker avoided altcoins all year, a strategy that worked out. Staying on the sidelines beat going knee-deep into altcoins, and the market should remain a falling knife until Bitcoin dominance resolves to the upside.