The investor participants in the crypto market have evolved a great deal since early 2017. In early 2017, there was limited information and understanding on the fundamental merits and impact of protocols, and the majority bought in big and all the prices went straight up. The strategy of the time was 100% offense: bet bigger and the profits were only bigger.
This bull market strategy caught many off guard as advantageous information in the market began to be a lot more accessible. Participants in the market began to better understand the fundamental merits of some pre-mature and often product-less protocols, they understood how to invest in seed or early stage private sales, they understood the influencer marketing and superficial hype created behind certain assets, they got informed on price manipulation, and overall the investor population evolved from one of bullish ignorance to slightly more wise cautiousness. I see some investors investing with the bullish tactics they were accustomed to in 2017–18, and I think that will end in losses and hard lessons.
This change in environment made it a much more difficult market for the perma-bullish investors to navigate in. No longer were we in a market where you could not be wrong if you bet bigger and bigger; today you can easily lose money by making the wrong investment decisions and trades.
A very close friend of mine who was an ex-lawyer and rose to be one of the top 2–3% of online poker players in the world was recounting about how in the online poker era, as the game got more competitive with better player participants, players lost 90% of their stack and refused to get a day job with their last 10% (BTW, you can follow him on Twitter here: https://twitter.com/adanthar). In many cases, crypto has been a similar story for many in 2019.
The market we were in during 2017–18 was not real. The practices around building speculator community, marketing pros and cons of protocol features, the influencer community and all of the practices around squeezing and OTC’ing into private sales were all proven to be not sustainable. The key reason here is adoption hasn’t happened yet, and there was no fundamental value in what we were investing in.
I had the fantastic opportunity to work for angel investor Jason Calacanis (https://twitter.com/jason) for a few years in Los Angeles and San Francisco, and I knew Jason since 2009 when I pitched him my first startup idea which was an enterprise-only messaging software, much like what Slack is today. Jason made early if not first round investments in startups such as Uber, Thumbtack, Robinhood, Superhuman, Calm and countless others. Jason was endlessly committed to being a top class angel investor for over a decade, and committed all of his time and focus to doing just that. After a decade of knowing Jason, it seems to have paid off big. Why? I would argue that there was true fundamental value to startups — the scale and revenue of internet startups was far bigger than people anticipated in the early 2000s. I personally now find the angel and early stage VC market to be saturated and valuations in the private market over bought as all of the visible success stories were already made transparent in Silicon Valley. (Check out Jason Calacanis’ book the Angel where he unpacks so much of his first-hand experience as an angel: https://www.amazon.com/dp/B01M9C1Y3S/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1) And now, since Jason was such an early pioneer to the practice of angel investing, he’s positioned well with great early deal flow and a helpful reputation to continue to invest for years onwards.
I reflect on my experience with Jason because his ability to commit whole heartedly to his angel investing was a risky career bet, but it paid off big, and I think that has a lot to do with the underlying fundamental value of what he was investing in. These companies, like Uber, could grow to hundreds of millions in annual revenue, touch billions of customers, capture and defend new markets and scale into the future.
When I look at crypto, here are a few theoretical ways how I see the space having fundamental value:
• Bitcoin as a censorship-resistant digital asset
• Ethereum as a protocol for dapps and DeFi
• The liquidity anonymous crypto assets can provide via non-KYC or loose-KYC exchanges is a unique resource
• Revenue-generating dapps
• Other protocols that can unseat ETH from its throne
In my opinion, the application layer on blockchain is at a very early stage and too early for retail speculators to realistically use as a way to justify investments into protocols. I’ve heard a lot of projects talking about investing in their own dapps on their protocols, but that idea does not sit well with me at all because the cause and effect relationship between dapp usage and price appreciation is not proven yet. In my opinion, there are amazing groups understanding the dapp market, and I think MetaCartelDAO (https://twitter.com/meta_cartel), among other teams and funds, are doing an awesome job at it.
Crypto markets at its current form is a lot of narrative and speculation with little usage to show for it. That being said, there are two major events looking forward in crypto markets should be enough “narrative” to shake around how investors will react to them:
1) Halving in May 2020
2) The launch of ETH2
To my understanding, there were ~30 researchers working on ETH2 and the leadership is reliable, I’m told. I think there’s a chance that our crypto-adoption-drought might come to an end with the launch of ETH2, as POS and Sharding will enable new applications that will give investors faith again. When comparing the number of daily tweets on Bitcoin vs. Ethereum, it’s clear the Ethereum camp is still relatively much smaller than BTC and therefore might have more room for appreciation if ETH2 has a real impact on the evolution of dapps.
I also believe the crypto fund environment is equally as volatile. From my personal observation, many were born or raised from LPs near the top, and are getting calls from their LPs to redeem at the bottom. Many of my friends or people I see are investing protocol funds, trading funds, arbitrage funds, bots and more, that are marketing incredible returns in the past, but I cannot urge them enough that although the marketed performance may be outstanding, future performance is virtually random.
In conclusion, crypto markets have evolved drastically as the participants in the market are better informed, and equipped with better knowledge and insights — and we will transition in the next good amount time from a speculation-only market to one of fundamental substance.
P.S. Some book recommendations:
- Most Important Thing, Howard Marks
- Mastering Market Cycles, Howard Marks
- Winning the Loser’s Game, Charles D. Ellis