Bear Market Strategy | Mastering Cycle Allocation, FTX Community Partner Benson: Bear Market is the Beginning of Wealth Distribution!

In June, the year-on-year CPI hit a new high in over 40 years. Despite the soaring inflation figures, the market remained calm. How should we view the future market? The US Consumer Price Index (CPI) for June rose by 9.1% year-on-year. The Core CPI, which excludes food and energy, stood at 5.9%, exceeding market expectations. Interestingly, despite the surge in inflation, the market remained unexpectedly calm, with the S&P index slightly down, the Nasdaq index flat, and Bitcoin even rising by 4.5% on that day. Benson Sun, a partner of FTX Taiwan's community and a well-known figure in the cryptocurrency investment circle, believes that the sharp rise in CPI may affect the Federal Reserve's (Fed) pace of interest rate hikes. Sun pointed out that the Fed has two mandates: to control inflation and employment rates. Currently, the US employment rate is relatively stable, with the June unemployment rate holding at 3.6%, close to pre-pandemic levels. Therefore, the Fed's primary goal now is to control inflation. Sun stated, "Controlling inflation can be done through supply or demand, but due to the pandemic and geopolitical factors, the Fed cannot control supply and can only focus on demand. By raising interest rates and reducing market liquidity through balance sheet reduction, the Fed is curbing overheated demand." In its May financial stability report, the Fed mentioned that financial asset valuations are still too high. Additionally, the Fed chairman has reiterated the determination to combat inflation "by any means necessary." These signals indicate why the Fed is moving towards tightening policy faster this time. Regarding the market's expectation that inflation has peaked, leading to a slowdown in Fed tightening, Sun believes that monetary policy has a lagging effect. Therefore, the probability of the Fed easing its monetary policy before 2023 is low. Sun noted that the Fed's mistaken belief last year that inflation was transitory put them behind the inflation curve. It wasn't until March this year that they began raising interest rates. Now, four months later, inflation continues to rise. At least until the end of the year, there is no possibility of the Fed changing course without substantial data support. Sun emphasized that monetary policy has a lag in affecting prices. To make the Fed change course, there needs to be substantial data support. Unless the unemployment rate sharply rises, or inflation continues to decline for some time, it will not affect the Fed's determination to tighten policy. Sun explained that inflation can be divided into sticky and flexible categories. Sticky inflation refers to slow and long-lasting price changes, such as education costs, public transportation, and car insurance. Flexible inflation includes items with faster cost fluctuations, such as gasoline, clothing, and milk. Looking at data from the past 40 years, all prolonged periods of high inflation saw both sticky and flexible inflation rising together. If only flexible inflation rises, it is more likely to be temporary inflation. For example, in the 1970s-1980s era of high inflation, both types of inflation rose to over 10%. Comparing the current situation, sticky inflation is just starting to rise (5.6% in June 2022). Once sticky inflation starts to rise, it takes a long time to dissipate. Looking at the inflation data from 1970-1980, even though flexible inflation began to decline, sticky inflation continued to rise or showed delayed reactions. Sun believes that as sticky inflation has already been affected, this inflation may persist longer, and the Fed's shift will not be seen in the short term. Source of image: Federal Reserve Bank of Atlanta

Don’t fight against Fed

Sun Binsheng believes that assets like growth stocks or cryptocurrencies are quite sensitive to monetary policy because when risk-free interest rates rise, the force of valuation correction on these assets will be greater than on other assets. Under this premise, he thinks that cryptocurrency investors need to be more cautious in their operations before 2023, avoiding too many mysterious operations or trying to catch the bottom.

Although he holds a conservative attitude towards the market, Sun also does not believe that the economy will evolve into a long-term depression like that of the 1930s, because central banks around the world now have a lot of experience in dealing with financial crises, and there are also many monetary tools that were not available before.

Using the examples of the 2000 dot-com bubble and the 2008 financial crisis, he pointed out that during these two financial crises, the S&P 500 index took about two years from its peak to its low point, and then started to rise again. This time, the peak of the U.S. stock market appeared in January 2022. If we calculate according to the two-year pattern, the relative low point of the U.S. stock market may appear at the end of 2023 or the beginning of 2024. Coupled with the expectation of the "Bitcoin halving" in 2024 in the cryptocurrency market, 2024 could be a turning point for the overall currency market.

Sun Binsheng emphasizes not to fight against the Fed: "Now it seems that the yield on the 10-year Treasury bond may continue to rise with monetary policy, so the valuation of risk assets will continue to correct. I think it is not necessary to enter the market to take risks before inflation shows a clear turnaround. My current exposure is not large because I subjectively believe that there is still a long time to buy cheap assets in 2023. The second half of this year is a good time to settle down and rest, without the need to operate too frequently in the market."

How to allocate assets?

After setting up the overall framework, Sun Binsheng continued to share his asset allocation.

Sun Binsheng stated that after the collapse of 3AC and Celsius, he carefully examined the financial reports of BlockFi and Voyager and found that these two asset management companies, which are considered top players in the industry, could still lose money during a bull market. If the industry leaders are in such a situation, smaller asset management platforms may be even worse off. Therefore, he has concerns about the liquidity of asset management platforms, and most of his assets are currently used for arbitrage within the FTX exchange.

He gave an example: "Even in a bear market, there are still many arbitrage opportunities. For example, most people are bearish now, leading to a negative funding rate. Generally, the leverage in the futures market is more aggressive than in the spot market, creating room for arbitrage. We can sell spot and then go long in perpetual contracts to earn the spread between funding rates and borrowing interest."

He also puts some of his assets into the FTX App (formerly known as Blockfolio) to earn interest rates of 5% to 8% annually.

As for when to enter the market, Sun said that he plans to start entering in 2023, gradually buying in the range of $9,000 to $16,000 for Bitcoin, and allocating about 50% on both the left and right sides. The left side is buying in the subjective guessing of the bottom range, while the right side is trend trading.

Major exchanges like Binance, FTX, and Bitfinex have had their highest trading volumes in the past three years concentrated around $10,000, which is not only a psychological barrier but also very close to the starting point of the bull market in October 2020, which is expected to provide strong support. This is currently the lowest position Sun can see.

"From a technical analysis perspective, the main support levels for the price now are in three ranges: $16,000, $13,000, and $10,000. I will buy in the price range of $9,000 to $16,000, with a ratio of about 50% (referring to the total assets willing to be invested in Bitcoin). The other 50% is to wait for clearer signals, such as Bitcoin's daily chart breaking above the 100-day moving average, or when the Fed begins to cut interest rates before entering the market."

Each bear market is the beginning of wealth distribution

The cycle in the cryptocurrency market is very fast. It often only takes a few months from the bottom to the peak, with gains of several times. Although the risks are high, it also means more opportunities.

"It took Taiwan's stock market 10 years to have a big wave in shipping stocks, but similar situations occur every year in the cryptocurrency market. If there are 2 to 3 big cycles in the cryptocurrency market in the next ten years, it is a great opportunity for retail investors to turn around. Otherwise, if there is a perpetual bull market, where will the bottom for retail investors to participate come from? Instead of learning various trading skills, it is more practical to learn how to judge the cycle position," he said.

In addition to being clear about the cycle position, Sun also gave advice that retail investors should pay attention to future hotspots rather than sticking to past winners.

He pointed out that the cryptocurrency market follows the norm of "speculating on new, not on old," and that past winners may not necessarily regain their glory in the future. "If you look at the top 30 cryptocurrencies in 2018, after four years, only 9 are still in the top 30. Excluding leading cryptocurrencies like Bitcoin and Ethereum, very few actually remain. If you had invested an average of $100 in each of the top 10 tokens in early 2018, the total profit after four years would only be 1%, while the total market value of cryptocurrencies increased by 420%. So, apart from the cryptocurrencies like Bitcoin and Ethereum that have seen multiples of gains, other tokens have actually declined."

While former champions may perform well in the future, it is more important to pay attention to new hotspots.

Although the next hot spot cannot be predicted, Sun believes that this hot spot may revolve around the Web3 theme. He points out that many primary markets are attracting funds based on this theme, so institutions such as venture capital and funds will continue to move in this direction.

Finally, Sun Binsheng emphasized that each bull and bear cycle marks the beginning of wealth redistribution. Therefore, for retail investors, they should not feel despair in a bear market but should take the opportunity to learn seriously and pay attention to what stage the market is in.

"If you are a newcomer to cryptocurrency investment, regardless of whether you make money in this bull market, you need to seriously reflect on what you did well and what you did not do well in this cycle, in order to have a chance to make real money in the next bull market. Many people who were busy during the 2017 bull market are leaving with a smile in this round of bull market because they have learned the importance of holding profits and gradually withdrawing," he concluded.