This episode unpacks the critical on-chain data that led The DeFi Report's Mike Nato to shift risk-off, exploring the compelling argument that the crypto bull cycle may already be over.
Mike Nato’s Shift to a Risk-Off Strategy
- Mike Nato of The DeFi Report reveals he has moved to a "risk-off" position for the first time since 2022, a significant shift from his previously bullish stance. Host Ryan Adams notes this change occurred just before the recent market flash crash, prompting a deep dive into the data that signaled a potential cycle top. Mike confirms his view has evolved from anticipating a Q4 2025 peak to now seeing substantial left-tail risk, meaning a higher probability of the market rolling over.
- Previous Stance: Anticipated a market top in Q4 2025, holding a 20-25% cash position.
- Current Stance: Has moved to a 50-60% cash position (and later 70%), signaling a strong conviction that the cycle may be ending.
- Mike explains his rationale: "We've been sort of evaluating both...left tail risk of cycle being over...and also potentially right tail risk of sort of a meltup. And we can kind of go through how I've been thinking about sort of the risks in both directions."
An Investor’s Philosophy: Playing the Cycles
- Mike Nato outlines his investment philosophy, which is heavily influenced by Warren Buffett and Charlie Munger, focusing on fundamentals, macro cycles, and disciplined entry/exit points. His strategy is not to day-trade but to play the multi-year crypto liquidity cycles by rotating into cash during late-stage bull markets. This allows him to deploy capital aggressively during bear markets when assets are undervalued.
- Core Strategy: Identify a small number of high-quality assets based on on-chain fundamentals.
- Cycle Play: Accumulate during bear markets and de-risk during late-stage bull markets to preserve capital for the next cycle.
- Actionable Insight: This approach contrasts with a simple buy-and-hold strategy. For investors looking to optimize returns across cycles, developing a framework for identifying late-cycle signals is critical for capital preservation and future deployment.
Early October: The Base Case for a Melt-Up
- Just weeks before his shift, Mike’s analysis still pointed toward a potential market "melt-up." At the end of September, he noted the expansion phase was on day 1,044, aligning with the length of previous cycles and suggesting a Q4 top was likely. His base case for Ethereum, predicated on Bitcoin reaching $150k, was a price target of around $8,500, with a bull case of $10,000.
- This highlights how quickly market conditions and data can change an investor's outlook.
- The analysis was based on historical cycle symmetry and on-chain metrics like ETH's price relative to its 200-week moving average and its realized price—the aggregate price at which all coins were last moved on-chain, serving as a proxy for the network's cost basis.
The Pre-Crash Call: What the Data Revealed
- Mike explains that his decision to shift risk-off on the morning of October 10th, before the flash crash, was not a prediction of the event but a reaction to mounting underlying weakness. He observed a dangerous combination of record-high leverage building in the system without the support of strong fundamental activity, creating a "wobbly house of cards."
- Key Bearish Signals:
- High leverage in the system, particularly in ETH futures.
- Declining spot trading volumes and slowing ETF inflows.
- Weakness in on-chain activity, including a slowdown in new token launches and trading bot usage on platforms like Solana, which he uses as a proxy for "animal spirits."
- Mike’s perspective: "You have like a situation here where the market's tilted heavily towards risk with all the leverage. But I'm seeing weakness underneath that and that's when the house of cards can get a little bit wobbly."
Post-Crash Analysis: Leverage and the Stages of the Cycle
- Following the crash, Mike doubled down on his risk-off stance, moving to a 70% cash position. He points to the ETH futures estimated leverage ratio, which approached 1.0 before the crash. This indicated that for every ETH held on an exchange, there was nearly one ETH of leveraged long exposure, an all-time high that fueled the massive liquidations.
- He breaks the cycle into four phases:
- 1. Early Bull (Jan '23 - Oct '23): The post-FTX recovery phase.
- 2. Wealth Creation (Oct '23 - Jan '25): The period of massive price appreciation, ETF launches, and peak retail interest.
- 3. Wealth Distribution (Jan '25 - Present): A prolonged 10-month phase where long-term holders have been selling into market strength above $100k.
- 4. Wealth Destruction: The potential next phase, typically a bear market.
- Strategic Implication: The extended "Wealth Distribution" phase suggests that early investors have been de-risking for nearly a year, raising the critical question of who the marginal buyer will be to push prices significantly higher.
On-Chain Profit-Taking: A Tale of Two Assets
- Mike presents compelling on-chain data from Glassnode on realized profits, which measures the total dollar value of profits taken by investors selling their coins.
- Bitcoin: This cycle has seen nearly $900 billion in realized profits, almost double the $500 billion from the last cycle. This indicates significant selling pressure from long-term holders has already occurred.
- Ethereum: In stark contrast, ETH has only seen $26 billion in realized profits this cycle, far below the $220 billion from the last cycle.
- Actionable Insight: This divergence is critical. For Bitcoin, it supports the late-cycle thesis. For Ethereum, it suggests its cycle has been muted and has not repriced relative to Bitcoin as it has in the past. This could mean either ETH is due for a catch-up or that the market structure has fundamentally changed, favoring Bitcoin.
Valuation Check: The Capital Base vs. Market Premium
- Mike introduces a framework for valuing the top seven crypto assets by comparing their capital base (the total realized market cap, or ~$1.73 trillion) to their current market valuation (~$3.1 trillion). The difference represents a premium driven by valuation sentiment and leverage.
- In a bull market, this premium expands as leverage and speculation increase.
- In a bear market, the market valuation tends to collapse back toward the capital base as leverage is wiped out.
- Investor Takeaway: Tracking this ratio provides a macro-level indicator of market froth. The significant premium suggests the market is still priced for optimism, but a contraction toward the capital base would signal a definitive bear market and a prime buying opportunity.
The Counterpoint: An Extended Cycle Fueled by Global Liquidity
- Ryan challenges Mike with the bullish thesis from macro investor Raoul Pal, who argues for an extended cycle lasting into 2026. Pal’s view is grounded in global liquidity cycles, which he believes were delayed by COVID-era policies and have not yet peaked. He sees the recent flash crash as a healthy leverage wipeout, similar to September 2021, which preceded new all-time highs.
- Mike’s Rebuttal:
- Global liquidity is not a perfect predictor: Last cycle, liquidity continued to expand well after the market peaked.
- Crypto-native fundamentals matter: You cannot ignore on-chain data like profit-taking and wallet cohort behavior. A thesis must explain who the new buyers will be.
- Monetary plumbing shows stress: Mike points to the SOFR (Secured Overnight Financing Rate) exceeding the Fed Funds Rate, a sign of tightening liquidity in the interbank lending market, which often precedes market volatility.
The AI Bubble and Other Macro Factors
- The conversation touches on the idea that the entire risk-on market, including crypto, is being propped up by the AI bubble. If AI stocks were to pop, it would likely trigger a broader market downturn. Mike agrees but sees the AI boom as another expression of the global liquidity cycle.
- He also highlights a less-discussed liquidity drain: fiscal policy. Rising tariff receipts are pulling capital from the private sector into government coffers, acting as a form of quantitative tightening that is negative for overall market liquidity.
Sentiment Check: "The Shittiest Bull Market Ever"
- Ryan voices a common sentiment among crypto investors: this cycle has been disappointing. Unlike previous cycles, there was no euphoric blow-off top, retail never fully entered, and most altcoins have underperformed significantly. Many key on-chain bull market indicators, like the MVRV (Market Value to Realized Value) ratio, never reached their historical peak levels.
- MVRV Ratio: This metric compares an asset's market cap to its realized cap to assess if it is over or undervalued. Bitcoin's MVRV peaked at 3.5 this cycle, compared to over 6.0 in prior cycles, suggesting the market never reached true euphoria.
- This lack of euphoria fuels the hope that "this can't be it" and that one final push is still to come.
What Would Change Mike's Mind?
- Mike remains open-minded and outlines the specific signals that would cause him to redeploy capital and shift back to a "risk-on" stance.
- A Definitive Bear Market: A drop to the $60k-$80k range for Bitcoin would represent a clear buying opportunity.
- Sustained Strength Above Key Levels: If Bitcoin continues to hold above its 50-week moving average (currently ~$102k) despite ongoing selling from whales, it would demonstrate incredible market strength and consolidation, building a strong base for another leg up. Two consecutive weekly closes below this level would confirm a bear market.
- A Major Liquidity Catalyst: An unexpected, massive injection of liquidity, such as a "Trump money cannon" involving stimulus from tariff revenues, would change the entire market calculus.
Conclusion: Weighing On-Chain Data Against Macro Narratives
- The discussion reveals a critical tension between bullish macro liquidity narratives and bearish on-chain fundamentals. Investors and researchers must now closely monitor Bitcoin's 50-week moving average and spot ETF flows, as these indicators will likely determine whether the cycle extends or enters a definitive bear market.
