This episode delves into the critical data signals suggesting an imminent altcoin season, exploring the macroeconomic tailwinds and on-chain metrics that Crypto AI investors and researchers must monitor for the next market rotation.
Episode Kick-off: The Alt Season Question
- The episode opens with host Ryan posing the central question: "Are we headed for an alt season meltup?"
- He references the popular Vince McMahon meme, humorously depicting investors heavily weighted in altcoins while Bitcoin reaches new all-time highs, capturing a sentiment Ryan and guest Michael Nato believe many currently share.
- Nato concurs, noting that while ETH showed strength weeks ago, Bitcoin's dominance has seen a slight resurgence, yet "a lot of people out there ready for alt season."
Introducing Michael Nato and the Quest for Crypto Fundamentals
- Michael Nato, founder of The DeFi Report, joins the podcast for a new monthly series focused on crypto fundamentals. Ryan praises The DeFi Report as his top destination for in-depth crypto analysis.
- Nato explains his approach to fundamentals, emphasizing a deep dive into data to understand value accrual in crypto networks since 2021. He notes the rising interest in "real economic value" on crypto Twitter, aligning with his long-standing focus.
- Nato: "It's really data driven. You know, everything for us, it starts with data and then we kind of build our thesis from there."
- The discussion draws a parallel to the early U.S. equities market in the 1940s, when concepts like discounted cash flow (DCF)—a valuation method used to estimate the value of an investment based on its expected future cash flows—were nascent and esoteric.
- Crypto, they suggest, is in a similar "1940s" era regarding the establishment of consensus fundamental valuation metrics.
- Nato believes the market will eventually converge on a key set of Key Performance Indicators (KPIs)—quantifiable measures used to track and evaluate the success of an organization or a specific activity—for relative valuation, likely a combination of cash flow and other unique crypto metrics.
Investment Philosophy: Long-Term, Data-Driven Conviction
- Ryan and Nato clarify the new series will champion a long-term investment horizon, akin to Warren Buffett's strategy of buying undervalued assets with strong fundamentals and holding them.
- Nato elaborates on his investment style:
- Deeply understanding assets and their fair value through data.
- Building a strong, conviction-backed thesis.
- Monitoring cyclical market movements.
- Buying significantly when opportune and holding for years.
- Ryan confirms Nato will share his portfolio positions monthly, offering insights into his allocations.
Defining Alt Season and Cyclical Behavior
- Nato defines alt season as "a period in time where for every new dollar that comes into crypto more than 50% of that is going to assets outside of Bitcoin." Historically, Bitcoin's dominance is around 65%, leading cycles, with altcoins typically following.
- Regarding why cycles might repeat, Nato points to human behavior and self-fulfilling prophecies. He suggests investors, having seen Bitcoin gains, naturally look to rotate capital into riskier assets for potentially higher returns, especially towards the end of a cycle.
Macroeconomic Catalysts: Setting the Stage for a Bull Run
- Nato recounts a shift in his market outlook:
- Initial bearishness towards late 2023/early 2024 due to uncertainties around the Trump administration, potential austerity, and budget concerns.
- A pivot to a more bullish stance driven by the expectation of continued fiscal spending. He highlights the importance of understanding Modern Monetary Theory (MMT)—an economic theory suggesting that monetarily sovereign countries can issue currency to fund spending without traditional fiscal constraints—and views the Treasury, not the Fed, as the current primary driver.
- Nato: "When the government is running a huge deficit that is a surplus to us right that's money that they're printing and pushing out into the economy."
- While optimistic for a near-term "pocket" for animal spirits and a potential alt season, Nato expresses caution for July/August due to:
- Tariff pauses ending and their economic impact becoming clearer.
- The bond market showing sensitivity around the 5% yield level for long-duration treasuries.
- The discussion touches on how "dark clouds" like recessionary signs or bond market stress could paradoxically be bullish for crypto if they prompt further government intervention and money printing.
- Nato also points to potential mechanisms for managing Treasury issuance, such as changes to the supplemental leverage ratio (SLR)—a capital requirement for large banks—to allow them to hold more treasuries, and Treasury stock buybacks, as forms of "shadow QE."
- Strategic Implication: Investors should monitor fiscal policy and Treasury actions closely, as these are seen as primary liquidity drivers for the crypto market.
The Stablecoin Bill: A Potential Game Changer
- Both Ryan and Nato view the "Genius stablecoin bill" as a hugely significant and potentially under-discounted catalyst.
- Nato believes its passage is crucial not only for stablecoins but also for broader crypto legislation. He sees it as another avenue for the Treasury to issue debt (into stablecoins), which he considers bullish for crypto, the U.S., and the U.S. dollar.
- He draws a parallel to an OCC (Office of the Comptroller of the Currency) ruling related to stablecoins in early 2021, which preceded a massive ~65% move in ETH within a week, kickstarting that alt season.
- Actionable Insight: The passage of stablecoin legislation could be a major trigger for market momentum, similar to past regulatory clarifications.
Reflecting on the 2021-2022 Alt Season and Current Cycle Differences
- The previous cycle saw a Bitcoin run-up in 2020, followed by an ETH-led alt season in 2021 that lasted until the Luna collapse in April 2022.
- Nato suggests this cycle differs due to the market's increased maturity:
- Protocols are four years more developed.
- Better data availability.
- Some protocols demonstrate strong fundamentals, including cash flows and buybacks.
- His base case for the current potential alt season includes:
- ETH appreciating against Bitcoin.
- A resurgence of "animal spirits" and meme coins.
- A "barbell" effect where both highly speculative assets and those with strong fundamentals perform well.
- Strategic Consideration: Investors might consider a diversified approach, looking at both high-growth speculative plays and fundamentally sound projects.
On-Chain Metrics Signaling a Potential Alt Season
- Bitcoin Moving Averages (50-day & 200-day):
- Bitcoin recently experienced a "golden cross," where the 50-day moving average crossed above the 200-day moving average. This is a bullish long-term signal but can sometimes indicate a short-term consolidation or correction after an aggressive move. Bitcoin has moved ~50% in the last six weeks.
- ETH Moving Averages:
- ETH's 50-day moving average is trending upwards towards its 200-day, with a potential golden cross projected if ETH reaches and sustains above approximately $3,000. This could be a confirmation point for altcoin season.
- Nato clarifies he views these moving averages as longer-term momentum indicators rather than short-term Technical Analysis (TA)—a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.
- Bitcoin Long-Term Holder (LTH) Supply:
- This metric tracks coins held for extended periods. When LTHs start distributing coins to Short-Term Holders (STHs), it often coincides with market heating.
- Currently, after a correction, LTHs have been accumulating. A shift to LTH distribution would signal increasing market froth.
- Bitcoin LTH to STH Ratio (Glassnode data):
- Historically, Bitcoin price peaks correlate with a bottom in the LTH to STH ratio (meaning more coins are in STH hands).
- The ratio recently bottomed locally and is now rising, suggesting room for further market strength before overheating.
- MVRV Z-score (Market Value to Realized Value):
- This metric compares Bitcoin's market cap to its realized cap (the aggregate price at which all Bitcoins last moved on-chain). The Z-score indicates standard deviations from the average.
- Bitcoin's realized price is currently around $46,000. The MVRV Z-score is at 2.8.
- In the 2021 cycle, it peaked above 7. Nato suggests it could reach around 5 this cycle, considering the "law of diminishing returns" as the asset class matures.
- Insight: Current MVRV levels suggest the market is not yet in euphoric bubble territory and has room to grow.
The ETH/BTC Ratio: A Key Indicator
- The ETH/BTC ratio, which tracks Ether's price relative to Bitcoin's, has been in a prolonged downtrend but recently showed a "tick up."
- Nato expresses strong conviction: "I don't think there's any like I would not fade ETH you know sort of gaining ground on Bitcoin here. It's just just a you know a matter of time in my opinion."
- Strategic Implication: A sustained upward move in the ETH/BTC ratio is a classic signal for the start of a broader altcoin rally.
The Verdict: Is an Alt Season Meltup Coming?
- Nato believes the probabilities point towards an alt season meltup.
- However, he cautions: "Asset selection is critical here. I don't think that, you know, everything is going to rise."
- He expects Ether to be a primary beneficiary, potentially outperforming Solana (SOL) due to the extremely negative sentiment ETH has faced.
- Actionable Insight for Researchers: Focus on identifying assets with strong narratives, fundamental underpinnings, or significant attention, as broad market lifts are less likely than in past cycles.
Michael Nato's Portfolio Allocation and Strategy
- Cash: Approximately 30%. Nato emphasizes always maintaining a significant cash position (at least 10%).
- Crypto (70% of portfolio):
- Bitcoin: ~60% of his crypto holdings.
- ETH Ecosystem: ~19%, including ETH itself and Pepe (PEPE) as a "culture coin" beta play on ETH due to its high correlation.
- Meme Coins: A small allocation to Bonk (BONK), Pepe (PEPE), SPX6900, and Giga (GIGA) for "fun," curiosity, and as an end-of-cycle speculative play. Nato mentions they do fundamental analysis even for meme coins, focusing on attention metrics.
- Celestia (TIA): A position based on a bet on the Data Availability (DA) space, acquired at lower prices.
- Worldcoin (WLD): A speculative bet with an AI angle, noting its L2's significant activity in paying for "blobs" (data packets on Ethereum).
- zkML (Zero-Knowledge Machine Learning), while not explicitly detailed for Worldcoin here, is a relevant concept for Crypto AI researchers, enabling private verification of AI models. Worldcoin's focus on identity and potential AI integration makes it a project to watch.
- Nato highlights WLD as a low-float token—meaning a small percentage of its total supply is actively traded. This can lead to high volatility but also presents risks due to future token unlocks from investors and the foundation. He views it as an end-of-cycle play, not a long-term hold.
- General Strategy: Nato was bullish post-FTX, rode the cycle up, took some profits, and is now re-allocating further out on the risk curve as conviction for an alt season builds.
Sell Plan and Long-Term Vision
- Nato's sell plan is personal and involves scaling out opportunistically rather than selling heavily at current levels. He maintains a core long-term Bitcoin position.
- His research, including for The DeFi Report, is increasingly focused on deeply understanding alt L1s to build conviction for the next bear market accumulation phase.
- Strategic Takeaway: The current cycle's gains are viewed as capital to be redeployed into fundamentally strong assets during the next market downturn.
Deep Dive: Solana's MEV Infrastructure
- Nato discusses a recent DeFi Report piece, "How durable is Solana's MEV infrastructure?"
- This research explores the sustainability of Maximal Extractable Value (MEV)—the maximum value that can be extracted from block production in excess of the standard block reward and gas fees by including, excluding, and changing the order of transactions in a block—on Solana.
- Key questions include whether Solana's MEV is primarily driven by transient memecoin activity or has a more durable foundation, and how Jito (a liquid staking and MEV infrastructure project on Solana) contributes to returning value to SOL holders.
- The report also considers the impact of emerging private DEXs on Solana's MEV landscape.
- Nato frames this within his "Triple Point Asset" valuation model:
- Capital Asset: Real yields, MEV.
- Commodity Asset: Utility in the network.
- Store of Value: Monetary premium, brand, community ("cult").
- Relevance for Researchers: Understanding MEV dynamics is crucial for valuing L1s and assessing the sustainability of their economic models, especially for networks like Solana where MEV significantly contributes to validator and staker revenue.
Conclusion: Navigating the Next Crypto Phase
The discussion underscores a probable shift towards an altcoin season, driven by macroeconomic liquidity and evolving on-chain fundamentals. For Crypto AI investors and researchers, this means diligent asset selection, monitoring key data like the ETH/BTC ratio and MVRV Z-scores, and understanding the nuanced value propositions of emerging L1s and their ecosystems.
