The Booms and Busts of Crypto
Most Bitcoin investors I know are supremely self-confident and self-approving of their investment in Bitcoin, and this alarms me. They feel as if they are “first,” or have some supreme foresight that makes them ahead of the curve on their investment.
Ironically, this contrasts sharply to a lot of my friends heard of Bitcoin or invested in it when it was worth a few single-digit dollars. To this group of folks, Bitcoin is nothing new, as it’s been around in the media and have been successful at being popularized in mainstream culture, at least on an awareness level, over the course of 10+ years. What surprises this group of people most is the amount of popular imagination and speculation that has popularized Bitcoin, and the great magnitude of investors that feel they are “first” or have discovered some great innovation before the rest of the world has. Making investors feel so self-confident and self-approving in their self-perceived, not-yet-known investment is perfect fuel for a bubble.
Don’t get me wrong, I do think Bitcoin has its merits and has utility. At the heart of Bitcoin’s value proposition is a censorship-resistant digital asset. The technology does in fact make it possible to have a fungible asset that can be moved anonymously and liquidated for fiat in most parts of the world. A lot of the utility of Bitcoin comes from its liquidity that can be found via OTC and exchanges. And I do think Ethereum is very innovative with its ability to programmatically tap into the liquidity of Ethereum assets via smart contracts for DeFi and soon-to-be other Dapp innovations.
However, the start of any technology bubble is often spearheaded by a group of self-confident people who feel they have some brilliant innovative discovery. It could be Bitcoin. Or, it could be the technology promised by new alt coins. In Bitcoin’s case, the market seems to have a very weak short-term memory, and seems to cycle back to it ever few years, praising Bitcoin as the most important disruptive technological innovation of the future.
When the prices are euphoric, believers will try to defend, justify the circumstances, ignore and put down people who have any doubts. Pre-2012 investors are the most defensive of bitcoin as it would be in their own self-interest to continue to defend what has made them a majority of their wealth. However, it would be wise to consider that the future price trajectory they hope for, as it would make them more money, is not guaranteed.
Funds in particular help fuel the euphoric frenzy, as they have the social status of a deeper and more sophisticated view on the market. However, dealing with money in large amounts is not a measure of intelligence, and the average speculator could not be more wrong in their social perception of some of the praised crypto individuals and institutions. With the consensus of popularized investors, institutions and the media, speculators will gain confidence in the valuations and will think “how could the masses and branded and well-known institutions, who are smart and sophisticated, be wrong?”. They absolutely can be wrong.
When the prices go up and make investors feel they will continue to forever go up, it attracts more buyers. However, a lot of money comes in to ride the momentous swing, and it all ends with a bang. Even long-term buyers will be challenged on their emotions not to sell when it collapses. And only after the collapse of crypto markets, does the truth and some reflection emerge. What was thought to be an excellent store of value, proves to have nearly 90% pullbacks. What was thought to be a decentralized operating system of the world, proves unable to support a single betting game. The alt coin market collapsed because the expectations for the technology were set too high, as words and promises were an easy way to increase valuation in 2017 and 2018. The inevitable lack of delivery on these expectations eventually exhausted the number of new and incoming crowd-following buyers to these assets.
It is common for all speculative assets for the individual or institution investors to have an unbalanced amount of self-pride in discovering what is new and a great new vision. When this insight, a merit of truth is widely confirmed, and others chase the same thesis only slightly later in their discovery. All at the same time, rewarding the egos of those who felt right. The process feeds on itself, until it all ends if there is no delivery of expectations.
Following the bust of the crypto alt coin markets, the bitter participants will start to search for people and things to blame. These scapegoats might be exchanges, market makers, influencers, institutions, founders, and so on and so forth. People even start fights and blame random people they don’t even know on Twitter. The sad truth is the speculators never once acknowledge or take responsibility for the speculation and the greed to ride the momentum that was behind all their actions.
A thick layer of skepticism would be wise to equip oneself with in the introduction of new shiny new assets, whatever they might be. It might be reserved for investors who have special foresight, and it may be dressed in excitement and promises.
The being said, I anecdotally feel that the population of long-term Bitcoin investors who don’t sell in the drops and months of downwards trend, is growing, particular in the U.S., China and Korea. Combine that with the scarcity of Bitcoin with 21M pieces, this may be a bullish point of view for its long-term appreciation. This trend is also reflected in the consistent investing of Bitcoin via Coinbase, Robinhood and Square. I would argue that the conclusion of the 2017 ICO market was most investors coming to the same consensus that Bitcoin is a legitimate long-term asset worthy of holding. And I think this should be the trend in the years to come: Bitcoin not blockchain. Until the dapp market shows more convincing traction, which might be the undervalued opportunity today.
I also think speculators are still too stuck in 2017 ideologies, thinking they have an edge on understanding certain under the radar projects over others. This behavior is concerning to me as well.
In my point of view, it’s guaranteed that Bitcoin will always collapse, and it will always rise, only giving enough time for the public’s memory and pain of the losses to be forgotten until it can cycle again. It may take years, but people will always be back for more.
Recommended reading on bubbles:
• “A Short History of Financial Euphoria” by John Kenneth Galbraith
