Bitcoin and other cryptocurrency assets are notoriously volatile and routinely suffer large declines of 50% or more. This doesn’t seem to bother diehard believers in crypto too much, who have become accustomed to declines of this magnitude. They just use the drops to buy more. Yet there are still many people in the space who remember “crypto winter,” the period between early 2018 and mid-2020 when prices fell and stayed, and much of the innovation in crypto stalled.
So the question is, what do we think of the recent swings in the space, as the Bloomberg Galaxy Crypto Index is down about 60% from its peak in early November? Does this signify the start of another long winter after a short spring or is it just a break that refreshes? While the sell-off in crypto may not be as big as others in its history, it feels worse because the market has gotten so big – into the trillions of dollars. The damage in crypto has been extensive, with hundreds of coins falling by some 90%. Bitcoin, the largest and most well-known of the cryptocurrencies, hasn’t fared too badly, but is still down a painful 56% from its peak.
At the top of the bull market last year, there was a lot of hubris, laser eyes, CryptoPunk avatars and rude behavior to go along with over-the-top Bitcoin conferences. It was all a sign of the hard times to come. Untold numbers of crypto skeptics have landed at the bottom of a Twitter dogpile for suggesting that the bull market had bubble-like characteristics. A speaker at a recent conference I hosted was a former Ethereum miner. He talked about crypto winter, and in the midst of the carnage, he was betting pretty much every last dollar he had that crypto would bounce back, buying more and more GPUs to mine Ethereum as prices rose. They eventually did, but tellingly, he is no longer in the Ethereum mining business and is reusing his equipment in cloud storage.
Most savvy people agree that the blockchain technology underpinning cryptocurrencies has huge potential, although we don’t really know what it will look like in ten years. The venture capitalists believe it and they have made numerous Web3 (decentralized internet) investments and received tokens for it. Huge fortunes have been made in non-fungible tokens or NFTs. But the value of all these assets has been decimated in recent months.
If you think about the normal cycle of tech investment, the dotcom crisis that started in 2000 and ended in late 2002 deterred venture capital investment for nearly a decade, to the point where their best ideas were FarmVille and weird cleantech ventures. The big VC firms have raised a lot of money for crypto over the past year, and the returns will be terrible for a long time. That is normal. When an asset generates no cash flow and no income, the valuation is all based on trust. Sometimes we feel good about these assets and other times we feel bad. You can now see this playing out in the stock market. The stocks that have been hit hardest are those without any fundamental justification. This is what makes investing in crypto so risky.
In previous crypto bear markets, people wondered if Bitcoin would recover. Now they are wondering aloud about the future of blockchain in general. There should be no doubt about the unlimited potential of this technology. If you own a basket of crypto today, like me, it will probably be worth a lot more in the future. But how much more and when is the question no one can answer. Crypto will have another winter, but out of that neglect will grow a new bull market, led by a handful of cryptocurrencies that will grow well beyond what exists today.
Sometimes the trust goes away for a while, but it always comes back. Perhaps instead of Web3 and NFTs, it will become another technology that captures the imagination. It’s worth pointing out, though, that many survivors of the dotcom bust became spectacular winners, including Amazon, Facebook, and Google — and even eBay. The capital markets are a giant sorting machine, filtering out the bad ideas and rewarding the good. So when people ask if crypto will come back, the answer is yes, it will definitely come back, but 98% of it won’t.