1 Hot Trend for the Next Bull Market
Out with the old, in with the NEW. Here's one trend for the next crypto bull market!
· This Is the Time to Look for Opportunities for the Next Bull Market
· Out of Style: Yield Farming
· New Trend: Revenue Sharing
· GMX
For the next few weeks, I’m going to be focusing on different themes that I believe are going to lead the next bull market in the world of crypto.
It’s common to see people take a break from crypto during bear markets for all sorts of reasons. I get it. It can be discouraging to watch your portfolio’s value fall, especially at the rate that crypto tends to fall.
However, I believe bear markets are actually the best time to dive into the crypto rabbit hole head-first. For a quick update, watch the video below:
I wish I’d done more of that in 2018 and 2019. I wasn’t aware of a lot of the amazing things that had been created in the peace and quiet during the crash and subsequent boring market.
As a result, I went into 2020 with nowhere near the amount of insight that I should have had. I thought that I’d be fine sticking with coins that drove the market higher in 2017 … Wrong!
The summer of 2020, also known as “DeFi Summer,” was when I really began studying what was going on behind the scenes. And although some of the coins I bought did really well over the following year, I still feel as though I could have been more prepared.
So, now that we’re (hopefully) through the worst of this bear market, I want to tell you about some of the things that I believe will lead the market higher during the next bull run.
During bear markets, we get to see the staying power of formerly-strong assets and new innovations come to light that will dominate the next bull market. The less valuable things go out of style, while cool new things begin to trend.
The trendy things will lead the next bull market, and to state the obvious, that’s what you want to be invested in.
Identifying these trends is crucial if you want to be a good investor, but it’s also insanely difficult — especially in such a new and rapidly-evolving market like crypto.
That’s why I’ve described altcoins as “an educated stab in the dark” in the past. Some trends develop faster than others, and you might see value in something that’s still years away from being implemented and gaining favor in the market.
So, sometimes, you might be right about a stock’s potential, but it’s important to know the likelihood that you’re too early. You might actually be better off buying something else that’s already seeing more promising adoption.
This ties into last week’s article, where I mentioned that “leading altcoins” could see 30X to 100X rallies.
In no world will any of us see this sort of return on all of our altcoin investments. However, if we have enough of an idea about what’s been going on behind the scenes in crypto — as we approach one year of quiet and awful bear market conditions — we can make some very good guesses on what the future will hold.
In general, the things with the most upside will likely be relatively small market cap assets with strong use cases. If a coin has a market cap of $10 million, it’s probably going to have a higher chance of going up 100X in a hot market than a coin with a $200 million market cap.
Another advantage would be to look at coins that weren’t around in the last bull market. Since they weren’t around in the last bull market, they didn’t have a “price discovery” moment, which is another way of saying they haven’t seen their prices explode in a crypto mania phase yet.
This isn’t a fixed rule (for that matter, neither is anything else in crypto), as I’ve pointed out SNX and CRV — both of which were around for the 2020 to 2021 bull market — as some of my favorite investments for the next bull run in prior Substacks.
So, this week, I want to explain one trend that I believe will go out of style in this bear market — and one that I believe will emerge as a new trend when it’s over.
Want guidance navigating the volatility of the crypto market? Check out our Platinum Membership, which gives you access to Ian’s crypto picks and video guidance, in addition to guidance on growth stocks and options! All this value for only $19.99!
Out of Style: Yield Farming
One of the biggest problems that’s been top of mind for crypto developers during this bear market has been incentivization — or ways to get investors to buy your token and use your app.
For example, if you want to create a crypto exchange, you need to somehow provide tokens for people to buy and sell.
There are a lot of ways to make this work during a bull market, where money is rapidly flowing into every corner of the market. But in order for a project to succeed, it has to figure out a way that’ll actually last throughout a bear market. That’s where things really get tricky.
During the last bull market, a vast majority of new projects — of which there were way too many — optimized for the short term and brought a ton of people in by offering ridiculously high APYs through “yield farming.” In a nutshell, here’s how yield farming works:
ABC exchange comes out with ABC coin to attract money.
You can buy ABC coin and deposit it into ABC’s app to earn (a.k.a. “farm”) some ridiculously high yield.
It wasn’t uncommon to see projects offer yields of 1,000% or more on their coins. There’s an extreme example called “MaxAPY,” which offered 960,000% interest if people bought their token and staked it on their app. It wasn’t exactly a shock to anyone (hopefully) when MaxAPY turned out to be a fraud!
This resulted in the trend of “mercenary farming,” where people just moved their money from app to app — whichever ones were paying the highest rates. When liquidity began to dry up, it caused rates to drop. And they’d leave and move onto the next one.
Of course, those APYs were all paid in tokens that nobody actually wanted — other than to simply earn an insanely high amount of interest. So, all of this “token printing,” for lack of a better term, flooded the market with tokens that nobody wanted anymore.
All in all, it resulted in a perfect storm of sudden illiquidity and hyperinflation that sent most of these projects into the crypto abyss.
Before we move onto the next part, I have to add that not all yield farming was harmful.
In fact, yield farming, which was started by Compound Finance, gave way to DeFi Summer and was one of the major factors that launched the bull market in 2020.
Unfortunately, it became a target for all sorts of scams and money-grabs. And I think it’s fair to say that, at this point, it’s reached the point of no return.
But now, new — and hopefully much more sustainable — types of incentivization structures are taking place. I highlighted one a couple weeks ago with Curve Finance, as well as revenue sharing, which we’ll take a look at now.
New Trend: Revenue-Sharing Tokens
While crypto has its share of shady players, its advantage is that it’s also full of extremely smart and adaptable people who know how to innovate. And the thing about innovations is that a lot of the best ones are made as a result of past mistakes.
One of the biggest reasons (at least in my opinion) that this bear market has been so brutal for altcoins is because of the “toxic liquidity” that entered the crypto space as a result of the liquidity farming described above. And I’m confident that some of the best innovations that are beginning to emerge are a direct result of poor incentivization during the 2020 to 2021 bull market.
One of the major answers so far has been revenue-sharing tokens. As the name implies, these are tokens that offer holders a percentage of the overall fees that the app brings in. This is a huge plus for DeFi and crypto in general, as one of the core elements of the space is to make the ability to earn income much more accessible and transparent — as well as to reward people for using any given app in general.
It also sets a constraint on the amount of interest paid out, which means that the payout rates can’t spiral out of control like they did with yield farming.
For example, if your crypto exchange makes $1 million in fee revenue in a month, the most you can pay out to users is $1 million, which is resistant to shady, short-sighted developers.
One of the most successful “experiments” in this category has been GMX, which is a trading app on Arbitrum and Avalanche.
A Breath of Fresh Air: GMX
As a refresher, the way that fees work on Ethereum (ETH) is that you pay a “gas fee” for every transaction you make, and then the app charges you a fee on top of the gas fee.
A lot of decentralized exchanges (DEX’s) take the money they charge on top of the gas fee and either put it into a treasury account, or pay it to people who supply liquidity to the DEX.
There are a lot of inefficiencies with these methods — most of which benefit large players who can manipulate their own holdings to earn an outsized portion of the fees. But for brevity’s sake, I’ll wait for another time to get into the details about that.
However, GMX does things a little bit differently (and better if you ask me). First off, they have two different tokens that pay rewards: GMX and GLP.
People who hold GMX can stake it on their platform and receive 30% of all the fees that the app accrues, while those who hold GLP and stake it receive the other 70% of the fees.
Another innovation from GMX is the way the GLP token actually works, as GLP holders are actually the ones supplying liquidity to the GMX exchange.
With most DEX’s, liquidity providers have to deposit specific coins into the exchange. For example, if you provide liquidity to Uniswap, you have to deposit a trading pair — say ETH and USDC — and whenever someone buys ETH with USDC, you get a portion of the transaction fee.
GLP makes this a much easier process by just offering one token that acts as a pool of all different types of liquidity. And it also has a much better system of paying fees, which we’ll see in a minute.
This means that GLP is essentially an index fund of the different tokens that GMX has to offer. Since the index is almost 50% stablecoins, the GLP is much less volatile than most cryptos in general.
Here are the tokens that back GLP, as well as their weightings, for the Arbitrum side of the exchange:
Source: GMX
And here’s the composition of the Avalanche side:
Source: GMX
Now, in order to buy GLP tokens, you have to pay with one of the coins in the “index.” That’s because the token itself is a basket of these different coins and measured by the weightings listed above.
To me, it makes more sense to pay GLP holders more of the fees because they’re the ones essentially keeping the exchange afloat by providing liquidity.
However, paying 30% of the revenue to GMX stakers is extremely generous, and it’s undoubtedly brought lots of attention and money to the GMX exchange.
One of the big differences between GMX and GLP is how the stakers of each one are paid.
GMX stakers are paid with the GMX token as well as ETH, while GLP stakers are paid only in ETH. In my opinion, the fact that the payouts are directly in ETH is absolutely huge, as it’s not just paying a ton of interest in the native token which can dramatically inflate the supply.
This shows the beauty of revenue sharing; the fees (paid in ETH) are directly passed on to users (in ETH).
The overall APR is constantly fluctuating, but here’s the current rate of each one:
Source: GMX
Source: GMX
These rates are already very high compared to a lot of other DEX’s. And the fact that the interest is paid out in ETH makes it even more appealing. I think this has been pretty apparent in the token price, as GMX is one of the few investments that’s actually up so far in 2022 to the tune of 79%!
Conclusion
As the bear market churns on, more opportunities will present themselves.
While most people are looking away during times like this, it can literally pay to pay attention, as you’ll have the opportunity to get into things very early at suppressed prices.
This was the case with DeFi and NFTs in the crypto winter of 2018 to 2019. And personally, I can’t wait to find out what the next big things will be in the next bull run.
There are several more trends that I’ve seen gain traction despite the bad market conditions, so I’ll be back with more ideas next week!