2020 in crypto is a year for the record books.
As I write these introductory lines to our quarterly Market Outlook, Bitcoin almost made a new all-time high. Over $14 billion of assets are locked up in Ethereum. And corporate businesses are warming up to holding Bitcoin on their balance sheets. It’s astonishing how far the space has come in such a short period of time.
The most exciting part about it all… There are now even more opportunities for gains than before. And we plan to show you where those opportunities can be found, starting right here in this report.
But first, if this is your first time reading our material, we sincerely welcome you to Jarvis Labs. We are a diverse group of investors with varied backgrounds in programming, data science, economics and trading.
Two and a half years ago we set out to better understand the markets. To do so we took proven software and tweaked it by adding Artificial Intelligence to it. This code, named Jarvis, is our market translator and income producer.
Over the last few years Jarvis has only gotten more advanced with even greater capabilities. And after some time, our goals at Jarvis Labs changed as well…
Our focus is on helping the everyday investor. Through Jarvis we improve lives for the better and make financial markets not paycheck stealers, but income generators for everyone.
Sure, it sounds cheesy. We don’t care. It’s what we believe and what we are determined to do. If you don’t believe us, just stick around and watch…
Now, back to the party happening in the crypto markets.
The amount of positive attributes we see in the current market are too numerous to count. And because of this, I wasn’t able to include every single thought and analysis in this report. So we made sure to only stick to what you need to know.
But if I had to sum it up and express it in one sentence, here’s what I think… we’re just getting started. This new cycle is early and will be a ride for the ages. But before we get into it, here’s how this report is broken down.
The first section is about how the Jarvis Labs team views the crypto markets now and predictions for the coming year. The best way we found to explain this is by taking a chapter from Japan in the 1980s… What happened then is happening to crypto now.
Second, we preview the four most recent Jarvis updates. Each uncovered more alpha while reducing risk for users.
Lastly, we unveil two projects launching in the coming months — Our Hedge Fund and ChainPulse.
Now that we have the roadmap, let’s get started.
Japan’s lost decade was a result of reckless credit expansion.
In the 1980s, banks were jamming cash into the pockets of anybody willing to sign a loan document. This reckless loan writing was called “window guidance” by bankers. Formally, it was a set mandate which stated the amount of credit banks were required to extend.
These mandates were doled out by the Bank of Japan (BoJ) with a desired effect of economic expansion. Any hint at staggering growth, BoJ pushed out more paper to any willing borrower.
The officials believed if a certain industry was lagging, more credit would lead to growth. Or if more tanks needed to be produced, the BoJ would ensure the businesses involved in the tank supply chain would get ample loans.
BoJ officials were pulling the strings of growth and prosperity.
At first, window guidance was hailed as the new model for success. New money via loans were put towards business expansion… or said differently, the money was used in productive ways. The result was more efficient businesses or higher employment rates.
The result was a higher standard of living and the Yen commanded more bang per buck abroad. This was textbook economic growth.
The formula for this growth was simple. The creation of debt created more money. More money means more spending. Additional spending results in more demand and pushes price higher. This cause and effect is best seen via growth measures.
From 1970 to 1990 the amount of Yen in the economy ballooned by 939%. The Nikkei stock market enjoyed a similar result. In January 1970 the market opened at 2,402. Twenty years later the market opened up the new decade at 38,921. That’s nearly a 15% compound annual growth rate.
Any Japanese citizen who invested in the index over this period experienced 1,520% in gains. The explosion in credit created an asset mania.
Japan’s theoretical land value surpassed the value of all of the United States’ by four times even though the United States has 25 times more land. And Tokyo’s Imperial Palace had a price tag more than the entire state of California. It was an asset mania… It went without saying, prices were a bit frothy.
The cause for these frothy prices… New debt had run out of places to go. After years of window guidance, newly acquired money in the form of debt started going into riskier places.
What was originally being used for productive means was now being spent on speculative assets.
Businesses began buying shares in other businesses or their own issued shares instead of investing in research and design. This led to borrowers gobbling up foreign assets around the world. Even young adults bought second homes. These were speculative asset purchases, which reinforced the idea that prices only go up.
Then exuberance got a bucket of ice water to its face.
The Bank of Japan turned the lights on and said the party was over. The bankers reversed its excessive window guidance and increased interest rates. What followed was a sobering reality.
The carnage that ensued from the BoJ’s change in course is summed up in the chart below. The Nikkei dropped 50% in only ten months. And what was formerly a parabolic growth in money supply, soon flatlined.
Businesses and households looking to refinance in order to avoid insolvency were shown the door. Banks, businesses, and families were filing for bankruptcy at an alarming rate.
Company bankruptcies went from just above 400 in January 1990 to nearly 1400 a month in 1992. Higher interest rates and tighter credit markets only exacerbated the situation… The result was a lost decade for Japan with GDP growth stagnating around 0%.
It was a devastating aftermath to what seemed like everlasting prosperity. Most who study the time period only focus on the effect, which was an asset bubble. Most won’t spend the time digging into cause… Which is only seen by tracking the flow of money.
The newly acquired money, in the form of debt, went from being used for productive means to that of speculative forms. The reasoning is pretty intuitive. Investing in research and design can lead to better and more efficient products, processes, or employees. While using money to buy shares doesn’t lead to economic productivity.
At the end of the day, if you’re a trader or analyst determining if a market has sustainable growth, look at the flow of funds.
This is, in part, what we do here at Jarvis Labs. We track the flow of cryptocurrencies in real-time to determine the strength of the market. And that’s what we’re doing here today. Breaking down the current flow of funds in crypto and what it means for the coming months.
What we saw in Japan in the 1980’s is unfolding in crypto… The flow of funds is not speculative. It’s driven by the spot market. And with the prevailing narrative of Bitcoin being a hedge against inflation, this market growth is productive. Our view today echoes what we believed in our last report published in June of 2020. This is a new market cycle… And the 1,520% gains witnessed in the Nikkei is a starting point for what to expect.
From March 1, 2020 to now the Stablecoin market has exploded by $16.7 billion or 287%.
It’s no coincidence the market cap of crypto has grown 297% since March. As we pointed out in our previous Market Outlook Report, the growth of Tether, a stablecoin that is not necessarily backed dollar for dollar, fueled the market. To date it hasn’t slowed, rising from just under $5 billion to $8.3 billion today.
And earlier this year we witnessed Decentralized Finance (DeFi) enter the limelight of crypto. The reason pertains to our prior walk down memory lane on Japan… credit expansion.
Let’s break down this credit expansion happening in crypto in three ways. Crypto window guidance, favorable interest rates, and debt going from productive uses to speculative uses.
Olaf Carlson-Wee of Polychain Capital is crypto’s modern day P.T. Barnum, who was a famous businessman in the mid 1800’s. He’s remembered most for the Barnum and Bailey Circus. And when it came to town everybody wondered what was inside the big tent.
For crypto, its version of the greatest show on earth was the COMP token. A governance token that acted as a subsidy for anybody willing to park their assets on the Compound platform. In doing so, users earned the COMP token. For Compound it was great. The newly minted token was issued as a reward for not only depositing crypto, but taking out a loan.
The market ate up COMP and with its limited supply on exchanges, the token price went sky high. If there are no tokens available to sell, where’s the selling pressure?
Then, like kerosene on a small fire, price ignited as COMP got listed a few days later on Coinbase. An event which is extremely unusual for the popular U.S. based exchange.
Whether or not it was pre-planned like we laid out in our previous Market Outlook Report, where we explain tens of millions of USDT ran through mixers before winding up on the Compound Protocol days before token launch. The market ate it up.
Olaf Carlson-Wee of Polychain in my mind was brilliant. Sure, he was the first Coinbase employee… Sure, he admitted his role in the COMP token scheme during an UnChained podcast… Sure, what happened was no accident. It was for the most part planned. Yes, there were probably a couple pieces that weren’t preplanned, but ended up working in COMP’s and Polychain’s favor. But what I want to make clear is I think what the team did was brilliant.
Olaf, the ringleader, knew how to bootstrap liquidity. Call it a subsidy, an incentive scheme, or for the sake of our example earlier, window guidance… It doesn’t matter. In true Bank of Japan like fashion, COMP was given out to where the Compound team wanted liquidity and where they wanted more loans to be created.
The platform attracted over a half billion dollars in a week and credit growth shot through the roof.
Now, here’s the second part of the equation… interest rates.
Favorable Interest Rates
Maker, another Olaf and Polychain investment, is a platform where users can deposit their crypto as collateral. In return, they get issued a DAI stablecoin. Its value is based upon the ‘debt’ the user deposited into the Maker protocol, which makes it a nice proxy for credit growth on Ethereum.
This DAI is then charged interest until it is returned to the platform. During the time where credit growth was accelerating, borrowing rates for DAI were 0% and 1% when using ETH as collateral.
These low rates during the time of crypto window guidance had an effect of DAI ballooning 1,159%. Crypto users were going hog wild, stuffing any asset into Maker to earn yield on their DAI. Here’s a chart showing DAI’s growth during the period where liquidity mining took off.
0% rates, crypto window guidance, and credit growth helped shoot ETH up 445% from its March low to September high, and various DeFi tokens rose even higher.
The market was high on its first dose of debt, and soon we saw asset speculation.
Debt Went to Speculative Vehicles
For those that were active at the time, scams were popping up in record numbers. New projects like Yearn.Finance were becoming billion dollar projects in days. Projects were forking one another at a record pace. And projects were advertising tens of thousands of percent in yield… It was frothiness at its finest. And with this frothiness came a local high in price.
Once ETH briefly touched $400 in September, DeFi tokens face planted in the weeks that followed. FTX’s DeFi index token dropped 43% in 5 days, and 60% overall.
Even the total value of locked up assets on Yearn nosedived over 60%.
The market was waking up from the effects that debt had. It was fun, liberating, and exciting. What’s important is those outside of the crypto market seemed to take notice.
After some cooling off… or said differently, after it sobered up a bit from its credit creation high… the spot market began to heat up.
Wall Street began to highlight publicly traded companies, adding Bitcoin to their balance sheets. Paypal unveiled its crypto abilities. Regulators were turning dovish in their public statements with talks of an ETF resurfacing. It’s like everybody wanted to be involved in the next party.
The only difference was, this spot purchasing created the next cycle for Bitcoin. With the spot market leading the charge, the legs to this rally will travel far.
From the time period of January 2018 to the middle of 2020 the derivative market dictated the market. This meant overleveraged positions and price action resembling a succession of squeezes were commonplace… Squeezes are where a deep pocket trader can force other traders to close positions thanks to their overleveraged positions.
But because today’s price action is being driven by the spot market, it’s different. And that’s why the new cycle only started recently.
What’s important to understand during this type of rally is knowing when the trade is crowded. Now, spot traders don’t crowd a trade. They merely dictate demand. It’s the derivative market that creates crowded trades.
Think of it like a cooling off or cleansing. When traders taking a long position using leverage need to pay a premium for their position, it means the incentive to close a position is getting high. As this premium gets higher, the trade begins to get crowded and thus, force traders to close positions.
This effect of traders closing positions causes the quick pullbacks we witness during strong rallies.
The beauty of this type of market that we’re witnessing is the added volatility. As volatility rises there are more chances to profit.
In our previous special report regarding the 2020 Election in the United States we said it was important to play volatility. Anybody who heeded our message crushed it if they were long volatility. Many of our December dated call options were originally purchased out of the money when Bitcoin was traded below $11,000.
With the election out of the way and the market pushing all-time highs, many are asking if it will continue. To understand where we are going, let’s first take a quick look back at where we were… Here’s the Jarvis Index from our June report:
As you can see, if you bought BTC when this index was published in June and within the green band, you would be up over 100% on your purchase.
Here’s what that same index looks like today:
As you can see, there’s much more upside. We continue to expect higher prices over the coming months with upside in small cap tokens as well.
Which brings us to what will likely unfold over the next six to twelve months…
In the first quarter of next year we think Bitcoin will trade sideways in a pretty large range, between $20,000 and $14,000. This consolidation will eventually give way to another leg up where it’ll realize higher highs. But before doing so, it’ll give way to hundreds of opportunities for Jarvis to trade.
While everybody else treads water and grows impatient, Jarvis will be operating full bore. We truly believe Q1 will be the best quarter we’ve ever seen for Jarvis to date. This is in part to the wide trading range we are predicting.
This also goes for Ethereum. The only difference is the range for ETH will be more along the lines of $850 and $580.
Now, as the two majors, Bitcoin and Ether, cool off and consolidate, we expect act two of credit growth to unfold.
We saw part one when DeFi popped up on everybody’s radar in mid-2020. But part two will come as we consolidate. The only difference is all the assets used as collateral will be more valuable with greater functionality thanks to more tech innovation.
When crypto users go to lock up Bitcoin in the form of WBTC or some other Ethereum-friendly version of Bitcoin (or other layer one smart contract platform — Polkadot, Cosmos, etc.), they will have access to twice the value… Each Bitcoin will go twice as far, meaning the next boom of credit creation will be even bigger.
It’s to a degree why we’ve spent time digging into the biggest firms in the industry… In order to track their wallets. There are some strong trends already forming in this part of the market, but to keep our alpha safe we unfortunately need to keep our cards close to the chest on this one.
Discussing these trends would alert the firms we are closely watching.
Needless to say, we are actively watching DeFi here at Jarvis Labs. The next wave of credit growth will supercharge crypto. In order for Jarvis to make even bigger gains, we made some major upgrades and improvements to the system.
We’ve added four major updates to Jarvis that we consider to be a game changer. We break down each one of them below.
The first is correlation modeling.
Jarvis scans through various currencies and looks for correlation among pairs using a rolling thirty day period. Jarvis then takes correlated cryptos and lumps them into groups. Then once Jarvis receives a signal to either go long or short, it assesses which crypto within this correlated asset grouping has the highest volatility. The asset with the higher volatility is the one used to open a position in.
This means Jarvis is entering positions in assets with the highest profit potential.
The second upgrade is swing trade signals.
Jarvis operates on a block by block timeframe. Every transaction that gets broadcasted gets digested through the AI/ML system. This means onchain metrics like active addresses, transaction counts, and similar indicators are difficult to trade off of because they trend over long periods of time, making hour to hour fluctuations insignificant.
However, when we normalize the data using some in-house tooling, we can turn onchain metrics into more actionable signals. What we found through a few months of testing is that these signals are best used for swing trades.
Jarvis uses a technique of position building over time. You can think of this like you do when trading from a directional bias. Doing so results in more upside on each trade without sacrificing our risk management methods.
The third improvement is what we call Price Action Analog Modeling.
Think of it like you do when seeing double tops or triangles repeating on a price chart. If a crypto tends to react a certain way to these double tops or triangles, chances are it’ll do it again. These repeating patterns can also be referred to as fractals.
Jarvis compares these fractals in the asset’s history while comparing it using the history of other assets. That’s what is so unique about Jarvis.
Jarvis is leveraging repeating patterns of assets in lue of others. For example, let’s say one asset tends to consolidate before breaking higher. And the timing of the break coincides when another asset tops out. This translates to Jarvis as a trade signal.
To accomplish this Analog Modeling, we had to use a combination of similitude, affinity and a Hurst Coefficient. We won’t go into detail here, just know there’s a lot of calculations involved to determine the significance of a pattern.
The final update is Hashribbons. You may have heard of this, it’s a model that relates miner difficulty to price action. It’s a useful indicator that can be helpful over longer periods of time. The strongest signal we received from this was Bitcoin Cash. Over the course of a month, traders locked in nearly 50% on a single swing trade.
These updates are being pushed into Jarvis in the coming weeks. And our subscribers won’t need to do a thing. Just sit back and relax as Jarvis crunches millions of data points a day to make a trade.
The upgrades to Jarvis for Q4 are not the only events unfolding at Jarvis Labs. Earlier we mentioned there are two new projects that we are really excited to bring you in the coming months.
The first is the Hedge Fund.
We’ve been in talks with several platforms, lawyers, and even venture capitalists. After a great deal of consulting we’ve come to the decision that Enzyme Protocol (formerly known as Melon Protocol), is best in line with our vision.
We see the fund enabling the everyday investor to get involved with Jarvis without a formal subscription. Many have asked for a free trial or signed up for a monthly membership. This fund serves these individuals best without sacrificing on performance. Which means it’s incredibly valuable for just about any investor looking for exposure to hedge fund level AI/ML trading software.
We are unveiling our fund once Enzyme Protocol releases version two of their platform. It’ll give us the capabilities needed to operate at the level we are accustomed to. It also allows investors to never give up control of their crypto assets. This is made possible thanks to smart contracts and onchain trading.
The fund will operate via the spot market and conduct trades onchain. Over the last five months we’ve been building out a suite of spot algorithms, models and systems that make up the software that powers the fund. We look forward to showing you the results in real-time as the fund opens its door. We welcome you to take part.
The other major project we are unveiling is ChainPulse.
The best way we can explain it is Glassnodes meets CryptoWhalebot. For those of you that don’t know either, Glassnodes is an onchain data provider. CryptoWhalebot provides alerts for large transactions happening across blockchains. ChainPulse does both and provides you with actionable insights.
There’s no need to figure out if the indicator or whale transaction you are looking at is actually something you should act on. That’s the biggest problem with most tools in the market today. We cut through the noise and give you what actually matters via ChainPulse.
As you can see, there are several exciting tools, upgrades, and projects rolling out in the coming months. We understand that it might be difficult to keep up with it all.
In order to keep it all straight and digestible, we’ll be communicating with you more often. So be on the lookout for an updated Espresso, our daily newsletter. It will be coming out as 2020 comes to a close.
We plan to touch base with you via e-mail and provide even more relevant data, signals, and information.
Until then, thank you for taking the time to read our Market Outlook and learning who we are at Jarvis Labs.
Your pulse on Crypto,
Ben Lilly and the Jarvis Labs team
P.S. To subscribe to our daily newsletter and receive on-chain insights and exchange flows over the last 24 hours click here.