The “Merrill Lynch clock” of blockchain market: How to grasp the cyclical opportunity?

“Merrill Lynch clock” is an asset allocation model developed by Merrill Lynch in 2004 through a statistical analysis of more than 30 years of data. It guides the asset allocation at different stages of the economic cycle by linking asset rotation and industry strategies with the economic cycle.

The blockchain industry has existed for only 10 years since the birth of Bitcoin. Compared to financial assets, the entire digital currency assets only account for a tiny percentage. Besides, there is no clear direction in its application. The whole industry has been in a groping state, and it is also vulnerable to the impact of the economic cycle. Trying to suggest asset allocation at different times for segments within segments seems far-fetched and hard to quantify. This article is only used as a summary of the observation of prices and emotions in the past few cycles, hoping to provide some inspiration and help for your future investment and entrepreneurship direction.

Different development directions of blockchain

From its birth to being well known, Blockchain has been touted as decentralized assets, and this feature has firmly embedded in all investors and the public mind. But in the process of technology development, there is also another different direction, which is to use blockchain as the central mechanism of the underlying tools, which has also become a mainstream direction of development.

On the vertical axis of what problems blockchain can solve, it has been difficult to determine whether to use it to solve financial problems, or to combine it with the real industry. In particular, among China’s blockchain industry and other governments, their attitudes towards blockchain are often wavering on this vertical axis.

Here are a few typical examples that have already happened, and because the industry is growing so rapidly, there is no guarantee that the next wave of real-world usage scenarios will be included.

1. High degree of decentralization, financial attributes: ICO, DeFi,

2. High degree of centralization and financial attributes: STO, DCEP

3. High degree of decentralization, industrial attributes: privacy (identity), data storage, games

4. High degree of centralization, industrial attributes: traceability, copyright, supply chain finance

Emotional,financial,regulatory-led market transformation

The volatility of returns across asset classes is largely due to sentiment at this stage. When the direction of the whole industry is not so clear and people are looking for so-called “Killer apps”, the emotional ups and downs will largely determine the asset price, which is also called “price is faith, faith is price”.

When the magic boxes of Bitcoin(2013), ICO(2017), and DeFi(2020) were opened, we expected a complete disruption of traditional finance, a weakly regulated and global financial market. However, the development of technology does not depend on will and price. When it is discovered that 99% of the projects are frauds and 99% of the tokens have no price support, it is easy to rush to withdraw funds, causing a sharp drop in asset prices.

Every ups and downs are bound to attract attention from the regulatory community, and entrepreneurs who are under the regulation tend to move the stories told in the previous round towards the direction where the regulatory community would be more likely to accept. Thus, the market trend will gradually shift to STO alike direction. At the same time, regulators and traditional large enterprises will also find directions consistent with their strategic goals from each round of blockchain development, such as the digital currency issued by Central Banks.

Because of the strong regulation, the whole process of centralized financial applications to landing could be really hard, especially for a startup to really survive the long policy review period and then to profit. Projects, which use Blockchain as the database, can profit quickly, and they are more accepted by developers. From what we have seen, a large number of companies became an “outsourcing” one and survived through the so-called “winter” of blockchain.

When the market was weak, developers and funds shifted to landing a centralized project. However both capital and developers found it challenging to start a business, on the one hand, there was no explosive growth, and on the other hand, there were new problems to figure out. Thus, the trend turns to the direction of decentralization. When entrepreneurs got the support of token, its business was also developing faster. After this process, more and more projects entered the coin issuing cycle, and it is only through the implementation of token allocation and technology that problems can be better solved.

As more and more projects are issuing their tokens, and there is a lack of regulation towards decentralized industrial projects, it will gradually give entrepreneurs a positive signal, and market investors would seek new decentralized financial applications again, which would push it into the peak again, and start a new cycle.

The switching of asset prices and the fluctuation of emotions do not move in a horizontal symmetry, so it is difficult to draw this transition cycle as a clock. More often, it is in a spiral shape. On the chart above, sections on the upper right have a short duration, strong outbreak and large price fluctuations, while sections on the lower left have a long duration, small price fluctuations and more stable relative returns.

Choose the right time to intervene

So how can we take advantage of this periodicity? Based on past experience, step in by 1–2 quadrants ahead of time, and when everyone realizes the cycle is approaching, opt-out. Do not join after each cycle has a clear trend, in which way, you will probably be stuck.

For example, for the star projects in the DeFi cycle we are currently in, if we entered at the end of last year or the beginning of this year and exited at the peak of the market with SUSHI and other projects, there is a high probability that we will have good returns. At the current stage, it is better to lock in high-yielding loans and asset management in advance than to start looking for the team configuration when all the capital parties are looking for the next cycle of the mainstream token appreciation scheme.

In addition, in the current stage, the risk-return ratio of investing too much in early private equity projects will be relatively poor. It is likely that the project has not been online, and the market turned to a new bear, which may need the next cycle to unlock your assets.

The odd thing about startups, of course, is that the projects that lead the next wave tend to come at the end of the last bull market. The best companies typically start at the end of a round, get enough financing, develop technology products, survive the long wait, grab more market share, and lead when the market matures.

Search for the next Holy Grail

We also need to explore, in the process, what the real infrastructure is and what can go through the bulls and bears. As we can see from the above chart, when an asset attribute is more difficult to divide and occurs in more quadrants, then it has the ability to traverse cycles.

Here are a few areas that are slowly taking shape, and you’ll hear from them at all stages. Such as payment (stablecoin), Bitcoin, trusteeship & wallet, data, asset management, lending, mining, etc

Firstly, payment, especially the application of stablecoin, is the foundation of the industry and the traditional world, the issue of it is the gas of the whole industry, and also the underlying of the whole industry. It can be said that whoever occupies more in stablecoin market will get the “holy grail” of the whole industry, and only the most reputable companies can issue stablecoins. In addition to dollar-based stablecoins, there will be more and more currency mappings, including mappings between BTC and other assets on other chains.

Trusteeship & Wallet: Due to the particularity of the digital currency industry, the market cannot develop without the safe custody of assets in the trusteeship and wallet industry. Only when this market segment develops can a large scale of new users and more institutions enter the market.

Asset management: There is a high demand at all stages to maintain and increase the value of assets by means of trading. The supporting quantitative team, market makers, derivatives and exchanges constantly help to provide liquidity to the market so that assets can be better priced.

Mining: Mining related industries also belong to the market segment that can cross the bulls and bears. The related chip, mining machine, mining pool and financial services market will have relatively fixed and clear demand in most stages.

What problems can blockchain solve? For entrepreneurs, it is more like to ask about the meaning of life. The meaning of life is to explore the meaning of life. The question that what problems can blockchain solve, actually is the problem that needs entrepreneurs to figure out by starting a business. The biggest risk of entrepreneurs is the investment of their own time, only combine their own advantages with the trend can they seize the next chance.

Article from Zuo Changbai, Cobo VP, in charge of quantitative finance, former co-founder of TokenInsight.

Translated by Yang(Milian Tech)

To translate some latest policy and issues on blockchain and fintech happened in China