Author: Investing Beanstock

Translation: Shenchao TechFlow

Shenchao Guide: The AI stock market is surging, but this trader is instead liquidating technology stocks and turning to buy Bitcoin at the bottom—he compares the current market against Howard Marks' cycle theory, finding that AI fits almost all of the "bubble top" characteristics. For investors, this article offers a calm framework for understanding market cycles, helping you determine whether to be greedy or fearful right now.

The stock market is undergoing a frenzied bull market driven by AI, which should not be surprising to anyone.

If you are not invested, it feels like you are a fool—because capital expenditures (CAPEX) will only continue to rise, and the future valuations of all these stocks will only get crazier.

I don’t intend to comment on specific stocks or indices, as banks and financial media around the world are all reporting extensively. What I am more interested in is figuring out—or at least attempting to decode—what stage of the market we are in. Not just cryptocurrency, but the entire financial market.

To this end, I drew a lot of inspiration from one of my favorite books: Howard Marks' "Cycles."

Most people understand cycles as a sequence of events. Most people also understand that these events typically follow each other in a conventional order: after a rise comes a decline, and then eventually a new rise again. But to fully understand cycles, that is not enough. Events in cycles should not just be seen as one following another; more importantly, each is leading to the next one.

A straight line = midpoint, with the market's pendulum oscillating around the midpoint in a wavy line. Together, they form market cycles driven by various market forces, causing it to deviate from the midpoint from time to time.

The movement of cyclical phenomena can easily be identified as several stages:

a: Recovering from a severely depressed lower extreme or "low" towards the midpoint

b: Continuing to swing above the midpoint towards the upper extreme or "high"

c: Reaching the high

d: Correcting downwards from the high back to the midpoint or mean

e: Continuing to move down past the midpoint towards a new low

f: Reaching the low

g: Recovering from the low back to the midpoint

h: The cycle repeats

So where are we now?

Is this a bubble? I think it is already quite obvious at this point that AI is indeed a bubble. According to Marks, when the sentiment is strong that "price doesn't matter," that is a sign of a bubble.

In a bubble, investors often conclude: you can make money by borrowing (leveraging) to buy euphoric assets. No matter what your loan interest rate or funding cost is, that asset will surely appreciate faster than that rate.

"No price is too high" is the ultimate component of a bubble, a clear signal that the market has gone too far.

There is a conflicting school of thought that believes the market can be far above its intrinsic value, and still continue to deliver multiples of returns due to mania.

What to do?

Since we are unsure when the bubble will burst, it seems to me that we have two clear portfolio allocation strategies.

Dollar-cost averaging (I mean real dollar-cost averaging, not timing the market; you just buy in a boring, mechanical way bit by bit. The more batches you split it into, the smoother the final cost basis, which is the whole point of doing it.)

Heavy cash position, but still allowing yourself to participate in the market through tactical/satellite positions, such as active trading.

I personally prefer the second approach. But that’s because I actively monitor the market day in and day out, relying on my market experience and intuition to navigate all this.

Dollar-cost averaging is not a bad method either. But it does require a person to genuinely extend their time horizon. Not 1 year or 3 years, but at least 5 years to really see some results. Most people dollar-cost average for a few weeks or try to do so while timing the market, ultimately achieving the opposite. If you plan to dollar-cost average a specific investment, make sure you fully understand that business/industry, then stick with it in a super boring, repetitive way while continuing with your life.

In my 2025 review and reflection post, I mentioned allocating 25% of my portfolio to passive ETFs, including QQQ, SOXQ, XAR, URA, and UFO. I believe a significant portion of those returns comes from QQQ and SOXQ, but I sold all of them in May because I think the market has far exceeded the midpoint.

I also mentioned that I am generally bearish on cryptocurrencies, expecting it to last until early 2026 (which turned out to be right), and managed to retain a substantial amount of cash, which I am now patiently deploying into BTC. The target accumulation range is $50,000 to $60,000, so as I write this article, I have begun to allocate some.

"Cryptocurrency is dead; turn to AI"

To be honest, my only regret is not allocating more to the speculative private market exposures of Anthropic and xAI. I think frontier models still offer the purest exposure to AI, compared to the "selling shovels" types in the public market, such as GPU/semiconductors/storage narratives. Since those are already consensus, I don't think chasing after them now can provide asymmetrical upside potential. That has long passed. Stocks like MU have almost increased tenfold in a year, while stocks like SNDK have fluctuated basically like memecoins. There may still be upside, but the downside risk looks worse.

But CAPEX! Yes, this may translate into real value increment in the future, but it is still speculative. Excessive speculation, excess money flooding into the same thing; I have seen this movie before.

Is missing out on a big chunk of the AI bull market disappointing? Of course, it does sting a bit. But I still have exposure, and I am doubling down. I really don't think it is responsible to tell others that AI stocks are worth buying at today's valuations, unless they truly know what they are doing and are in it for the long term (most people aren’t; they are here for quick money).

Market Rationality Checklist

Now, let’s return to how Marks assesses whether we are nearing or at the market top:

The economy is growing, and economic reports are positive

Corporate earnings are rising and exceeding expectations

The media only reports good news

The securities market is strengthening

Investors are becoming increasingly confident and optimistic

Risk is perceived as scarce and mild

Investors believe taking risks is the only path to profit

Greed drives behavior

Demand for investment opportunities exceeds supply

Asset prices exceed intrinsic value

Capital markets are wide open, making it easy to raise funds or roll over debt

Defaults are rare

Skepticism is low, confidence is high, meaning risky trades can be made

No one can imagine things going wrong. No favorable developments seem impossible

Everyone assumes things will keep getting better forever

Investors ignore the possibility of losses, only worrying about missing opportunities

No one can think of reasons to sell, and no one is forced to sell

Buyers outnumber sellers

If the market dips, investors are eager to buy

Prices reach new highs

The media celebrates this exciting event

Investors become euphoric and carefree

Equity holders marvel at their cleverness: maybe they will buy more

Those who have been on the sidelines feel regret; thus, they surrender and buy

^ This means:

Future returns are low (or negative)

Risks are high

Investors should forget about missing opportunities and only worry about losing money

This is a time for caution!

So, how many of these items do you think the current stock market is exhibiting?

On the other side of the "market top" checklist, the opposite scenario may arise:

The economy slows down: reports are negative

Corporate earnings are flat or declining, below expectations

The media only reports bad news

The market weakens

Investors become worried and frustrated

Risk is perceived as omnipresent

Investors believe taking risks is just a way to lose money

Fear dominates investor psychology

Demand for securities is less than supply

Asset prices are below intrinsic value

Capital markets are closed off, making it difficult to issue securities or refinance debt

Defaults soar

Skepticism is high, confidence low, meaning only safe trades can be made, or none at all

No one thinks improvement is possible. No outcomes seem too negative to happen

Everyone assumes things will keep getting worse forever

Investors ignore the possibility of missing opportunities, only worrying about losing money

No one can think of reasons to buy

Sellers outnumber buyers

"Don't try to catch a falling knife" replaces "buy the dip"

Prices reach new lows

The media focuses on this depressing trend

Investors become dejected and panic

Equity holders feel foolish and disillusioned. They realize they do not truly understand the reasons behind their investments

Those who have not bought (or sold) feel vindicated and praised for their cleverness

Those who hold give up and sell at depressed prices, further exacerbating the downward spiral

^ This means:

Implied future returns are sky-high

Risks are low

Investors should forget about the risks of losing money and only worry about missing opportunities

This is a time for aggression!

Based on the checklist above, I do indeed think BTC is exhibiting many of those traits (especially in the case of Saylor/MSTR). So, I genuinely feel BTC presents a more attractive investment outlook compared to today’s soaring AI stocks.

However, note that the aforementioned progression is simplified; they might not even appear in the same order and do not have to occur in every market cycle, but these behaviors are real, and they truly are rhyming elements in the market over decades.

The AI revolution has clearly benefited technology stocks, especially semiconductors over 1/3/5 years.

But investing is never about looking in the rearview mirror (unfortunately, most people do this and draw references from the past); the advantage appears where people overlook/disregard it. We need to look at "what will happen 1 to 10 years from now," rather than just what the environment today is.

Looking at the above charts, saying you are a cryptocurrency investor and you should have invested in stocks would seem foolish.

According to the above charts, if you chose stocks, statistically speaking, the chances of poor future performance are quite high.

Also, reading this in 2026 might sound like a joke, but based on past lessons on cycles and an understanding of future returns/valuation fundamentals, I truly believe that BTC will outperform stocks in the coming years.

The Most Disconnected Macro Environment Ever

We are also in one of the most disconnected, most irrational market environments ever.

Under the leadership of new Fed Chairman Waller, interest rates are currently maintained between 3.5-3.75%, and he has also publicly expressed a hawkish stance. Yet, instead of compressing, interest rates remain high while the stock market continues to rise, all because AI will cure cancer, and everyone will earn an infinite amount of money forever, right?

The Shiller cyclically adjusted price-to-earnings ratio (CAPE) for the stock market has broken 40 for the first time, the first since the peak of the dot-com bubble. The market capitalization of U.S. stocks is now close to twice its GDP, with valuations even higher than during the 2000 bubble.

Expanding valuation multiples during a tightening cycle is the textbook definition of disconnection.

This disconnection is primarily driven by three narrative/liquidity engines.

AI capital expenditure supercycle: Major hyper-scale cloud service providers are projected to spend up to $725 billion by 2026, almost $1 trillion, accounting for over 30% of the entire S&P 500.

Late-cycle fiscal stimulus: Tax/ tariff refunds for businesses and individuals have boosted nominal earnings, even as the Fed tightens policy.

Passive index fund capital flows: Index funds mechanically pour every dollar from 401(k) pensions into the largest market cap companies, regardless of price. The baby boomer generation is now forced to buy these mega-cap cloud service stocks at historical highs, and it continues.

Risk Appetite Is Selective

Today, capital is flocking to AI/semiconductor sectors, while almost everything else, including Bitcoin (the darling of the last cycle), shows little growth or is bleeding. This is not a market of universal greed, but rather a market that funnels all funds into a single narrative (AI and its related verticals).

In 2025, AI-related stocks accounted for around 80% of the entire U.S. stock market's gains. Behind these historic highs, market breadth is extremely narrow, with most stocks contributing little to the rise (unless you are AI-related).

Cracks Are Forming

The whole edifice assumes that AI capital spending can be met by real demand and that the energy-driven inflation shock will dissipate/become irrelevant. Core PCE rose from 3% to 3.3%, and oil prices surged from $57 to $113 during the Iran war before falling back to $76, which is exactly why rate cuts are being ruled out.

Cracks are already becoming visible.

In the last complete week of June, the South Korean KOSPI was suspended twice, with Samsung and SK Hynix dropping 12% in a single day, a warning to the number of sellers compared to the remaining buyers.

Dalio also stated that his bubble indicator is nearing levels seen in 1929 and 2000, while Buffett... still holds a record $381 billion in cash. Prices have become dependent on narratives, positioning, and leverage; there really isn’t much of a safety margin left.

My Personal Plan

Given all the above factors, here’s how I think about the whole situation as a capital allocator.

Please note this is highly customized to my own life circumstances, investment goals, and personality. Do your own research, and this does not constitute financial advice.

I currently divide my capital into three different buckets, managing according to the specific buckets.

Trading capital (highest risk, highest volatility, highest variance)

Long-term accumulation capital (a buy-and-hold type I do not plan to sell)

Illiquid capital (private equity-SPV, alternative investments)

How I allocate capital to which bucket relies heavily on market conditions and liquidity.

At present, I retain most of my cash for bucket 2. Given the weakening market advantage, I have significantly reduced my allocation to bucket 1. In the crypto space, I currently only see BTC, HYPE, and LIT as worth holding. Watching the stock market feels like playing musical chairs. Given current valuations, long-term allocation in the stock market also doesn’t make sense.

For bucket 3, the amount is basically fixed, around 20% of my net worth. Given its illiquidity, it will take years to realize full returns, so this bucket will remain unchanged in the foreseeable future.

As of writing, I am mostly cash (>80%), with allocation weights among the three buckets being 10%, 70%, and 20%, respectively.

Under bucket 2, I have made 4 purchases of spot BTC so far, averaging about $59,000. I am also interested in certain ETFs, which I will disclose when I decide to allocate long-term.

In summary, there’s nothing too fancy. More like fishing, waiting for that big fish. I don’t mind catching a few small fish before the big one comes, but the key is to keep fishing, stay focused, and not give up.

Perpetual DEX Airdrop Mining Still Has an Edge

Although my trading has reduced in June, I think a severely underestimated advantage in the crypto space is perpetual DEX mining, particularly Variational.

While primarily driven by airdrop incentives, it still ranks among the top three in perpetual DEXs, excluding the clear market leader Hyperliquid.

Variational is still in private testing stage, meaning you need an invitation to use it. What’s special? It’s a RFQ-based perpetual DEX, which theoretically means they can launch various trading pairs (even the most obscure ones) while still having deep liquidity, unlike order books that require insane guidance.

I primarily use it to trade commodities like crude oil, gold, silver, copper, and other trading pairs. Focusing on volume and holding long-term earns the most efficient points.

Recommendations earn a 15% points bonus, and my code will automatically grant you 90 days of SILVER status upon registration.

I am still mining and have a significant amount of points allocated on other platforms:

All previously mentioned perpetual DEXs have a TGE target of Q3 2026.

I think the fear surrounding STRC has been excessive. But this financial engineering has indeed changed investor behavior around it. Before Saylor sold $1 billion worth of BTC, he was unwilling to allocate; now it has become a major "bottom signal."

At the $58,000 BTC price, I believe the valuation is reasonable. It is now even below the 200-day moving average.

This suggests that the second half of 2026 may be an important period for long-term accumulators. I do believe there will be one last capitulation and a significant amount of forced selling (including Saylor), likely coinciding with a time when the stock market begins to weaken.

While this is not purely a BTC bullish post, I do think that among all assets that exist today, BTC offers one of the widest safety margins, even if the final low drops about 15-20% from here.

Think about it: in a long-term stagflation environment, scarce assets perform best. In the past, it was gold, an asset existing outside of the monetary system for thousands of years.

I believe that ten years from now, accumulating BTC today will be one of the most rewarding moments for a long time.

While the stock market will indeed rise over time in the future, at this current moment, I cannot prove that buying at such high valuations is reasonable, and I am more than willing to wait until it returns to earth.

What do you think? How are you currently considering capital allocation?