Anyone who has experienced a cycle in the cryptocurrency space knows that it's easy to buy at the bottom but hard to escape at the top. This is because the bottom cycle tends to have a longer consolidation period, giving you ample time to react, and you are very likely to buy at the bottom. The difficulty in escaping peaks lies in their shorter time cycles, often just 2 to 3 months, or even less than a month. For instance, the opportunity in the 2017 bull market was a V-shaped reversal; anyone misled by the rise of altcoins at that time and hesitated for a few days would quickly face a significant loss. Moreover, the greed in a bull market can cloud many people's judgment, making it extremely challenging to escape peaks both in terms of time cycles and psychological preparation.
Although investing is an art, we cannot perfectly escape a peak; however, we can get closer to the truth and achieve a kind of 'fuzzy' correctness. Below, I would like to use a simple method called 'Market Capitalization Judgment' to help most people find a trace of rationality amidst the madness of a bull market, by building their own peak escaping strategy through quantitative indicators, narrative analysis, and several dimensions in an unpredictable market.
1. The Energy Required for Different Levels of Market Capitalization:
In the cryptocurrency space, market capitalization is undoubtedly an important indicator for judging a coin's market position and stability. Let's first look at the energy demands of different market capitalization levels:
1. Micro Market Capitalization (Below 100 million USD): This is essentially at the stage of speculative coins, in a wild period, relying solely on a very small number of believers and early developers for support, characterized by extremely inactive trading and inadequate liquidity. However, at this time, because holdings are too concentrated, like a cloud of marsh gas, it only takes a spark and a lot of patience; as long as you can ignite the emotions, it is the prototype of a thousandfold coin, but it may also disappear into nothingness forever without that spark.
2. Small Market Capitalization (100 million - 1 billion USD): This stage is just beginning to emerge. Once market capitalization breaks into the billion level, the sources of funds begin to expand to 'curiosity seekers'—those who have heard of but do not understand the cryptocurrency space. These coins often require relatively little capital momentum to significantly impact prices. This energy primarily comes from the collective actions of a small group of investors or the manipulation of a single whale. The source of energy mainly comes from small teams' promotions and initial market recognition. At this stage, the energy sources are usually niche capital and some high-risk investment funds, and the narrative begins to possess the quality of 'foresight,' such as 'Bitcoin is digital gold.'
3. Medium Market Capitalization (1 billion - 10 billion USD): This stage is gradually entering the mainstream view and requires a larger pool of funds to maintain price stability or drive upward movement. Here, market energy comes not only from capital inflows but also from news, partner announcements, and other external factors. This range also has a very good balance of risk and return, with future opportunities for a 10x to 50x increase, but the relative risk is much lower than that of speculative coins.
4. Large Market Capitalization (Above 10 billion USD): A market cap above 10 billion basically places it among the top 20 in the cryptocurrency space. These coins are generally recognized by the market and can withstand the test of time. Here, the energy demand can no longer be filled solely by internal funds. The market needs a larger and grander narrative to attract outside capital, such as Ethereum's 'smart contracts will change the world' or Dogecoin's 'payments for all.' The fluctuations of these coins often require large-scale funds and market confidence to drive them.
5. 1 Trillion Market Cap: When a coin breaks the trillion market cap, relying solely on boring concepts and speculation is no longer sufficient; it requires a strong global narrative behind it, such as Bitcoin's 'anti-inflation asset' and 'decentralized finance revolution.' At this stage, market participants include individual investors, institutional funds, and even national-level wealth.
2. The Narratives Required for Different Levels of Market Capitalization:
Pricing in financial markets is driven by future expectations or risk; companies that can make money do not necessarily get a high premium in the capital market. For example, why are there so few retail investors buying Industrial and Commercial Bank of China (ICBC)? Is ICBC not profitable? Clearly, it is; it’s just too stable, so stable that you can even see what it looks like 100 years later. The cryptocurrency market is especially driven by narratives. Narratives are guides to capital flow, and each breakthrough in market capitalization requires a grander 'story' to continue attracting people.
1. Small Market Capitalization: You will hear talk of 'the next XX' (for example, 'the next Bitcoin'). This relies on dreams and potential.
2. Medium Market Capitalization: The narrative shifts towards practical applications and collaborations, addressing a real pain point and potentially being a revolutionary force in a certain industry or collaborating with major companies.
3. Large Market Capitalization: At this point, the narrative becomes grander, possibly as a tool to change the global financial system or the widespread application of blockchain technology globally.
3. The Number of Community Members Required for Different Levels of Market Capitalization:
1. Small Market Capitalization: It may only require a few thousand to tens of thousands of active users to drive prices. The community plays the role of grassroots marketers here.
2. Medium Market Capitalization: Requires hundreds of thousands to millions of user support. The community's role begins to shift towards brand promotion and ecosystem building.
3. Large Market Capitalization: This requires a user base of millions or even globally. The community must not only have quantity but also quality, with participants ranging from individual investors to enterprises and institutional investors.
4. How to Use Market Capitalization to Build Your Own Strategy:
1. Determine Your Exit Market Cap Target: Identify the current situation of your chosen asset, whether it can support the next level of market capitalization, and estimate the potential limit of market capitalization based on historical data and current narratives.
2. Narrative Evaluation: If a coin's narrative begins to become difficult to justify and has not materialized, or if the market consensus on its future development starts to collapse, then if there is an emotional speculative surge under such circumstances, it is a very good time to exit.
3. Community Emotion Indicators: The number of community members starts to increase slowly, and some individuals begin to express disagreements and start selling. Even newcomers start ridiculing the old investors, indicating that it is highly likely that market capitalization is difficult to maintain, signaling a peak.
Finally, I will take the popular meme, Pepe, as an example: Pepe is currently ranked 19th, with a market capitalization of exactly 10 billion. Let's check a few key points to see if they meet the current market cap:
We can easily find that Pepe fails to meet many aspects, such as grand narratives and institutional entry. Let's attribute Pepe's success to: a strong community + favorable timing and location + trends + speculation + celebrity endorsements. Even so, this stage is undoubtedly filled with bubbles, but if it expands to a market capitalization of 50-100 billion without changing its inherent qualities, then you must leave immediately and not be greedy for that last bit of profit.
For instance, many people are saying that Dogecoin's narrative can break through 1 trillion, but a little rational thinking reveals that breaking through 1 trillion is almost impossible, as there is currently no national-level super global consensus and no global application has emerged. This means that when the bubble reaches the range of 200 billion to 500 billion, it is an absolute signal that we must leave.
Emotions have temperature, but data is cold. Observing data is an important tool for us to remain calm during a bull market: 'Knowing when to stop allows us to stay grounded.' The wisdom of escaping a peak is not about greedily seeking higher heights, but about knowing where your limits lie and leaving calmly. The frenzy of a bull market comes from the collective illusion of a desire for wealth. When that illusion collapses, it is often extremely brutal; those who can withdraw unscathed are usually very few.
That's how the world works; some fall, so others can rise to the top; some collapse, while others stand up. As I often say, the essence of this world is a massacre of low-cognitive individuals by high-cognitive individuals. It is precisely because of those who lose everything that we hear stories of underdogs transforming into A8A9s. This wealth creation effect leads countless people to go all in, aiming to defy fate and change their destiny! This is not survivor bias; it is the true law of operation in this world. I have finished speaking, I do not hope for you to fall, captain; welcome like-minded friends to communicate together.
