The long winter of cryptocurrencies

By Jared Dillian

Bitcoin and other cryptocurrency assets are notoriously volatile, often dropping by as much as 50% or more.

This does not seem to bother the hard-core crypto “loyalists” who are accustomed to drops of this magnitude. They just use these drops to buy more. Even so, there are still many people in the field who remember the “winter of cryptocurrencies”, the period between the beginning of 2018 and the middle of 2020, when prices fell and remained low, with much of the innovation in the industry to “pulls the parking brake”.

Long or temporary crisis?

So the question is: what is the conclusion from the recent “spins” of values ​​in the industry, with the Bloomberg Galaxy Crypto Index having recorded a fall of about 60% since its peak in early November 2021? Do they mark the beginning of a new, long winter after a short spring or is it just a refreshing break?

Although the sell-off in cryptocurrencies may not be as large as other analogues in their history, it makes worse sense because the market has grown so much – to the tune of trillions of dollars. The damage to cryptocurrencies is huge, with hundreds of coins falling by about 90%. Bitcoin, the largest and most well-known of digital currencies, has not fared so well, yet it has fallen 56% from its all-time high.

At the top of the bull market last year, there was a broad spirit of “insult”, fire-throwing eyes, CryptoPunk avatars and rude behavior that accompanied the top Bitcoin conferences around the world. All this was a sign of difficult times. Countless skeptics of cryptocurrencies ended up in dogfight pits on Twitter because they claimed the bull market had bubble-like features.

One speaker at a recent conference I hosted was a former Ethereum miner. He talked about crypto last winter when, in the midst of the “carnage”, he bet almost every last dollar he had that cryptocurrencies would recover, buying more and more GPUs for Ethereum mining as prices soared. Eventually the cryptocurrencies did recover, but it is characteristic that he is no longer part of the Ethereum mining space, having redirected his equipment to cloud storage.

Confidence

Most smart people agree that blockchain technology that supports cryptocurrencies has huge potential, although we do not really know what it will look like 10 years from now. Venture capitalists believe in this and have invested heavily in Web3 (decentralized Internet) branding in return. Huge fortunes have been created in non-exchangeable brands or NFTs. The value of all these assets has been “slaughtered” in recent months.

Given the normal cycle of investing in technology, the dot-com decline that began in 2000 and ended in late 2002 has hampered venture capital investment for almost a decade, to the point where FarmVille and various oddities were the best ideas. cleantech projects (technology for environmental sustainability).

The big venture capital companies have raised a lot of money for the crypto industry over the last year and the returns will be abysmal for a long time. This is normal. Whenever an asset does not generate cash flows and profits, the valuation is based primarily on confidence. Sometimes we feel good about these assets and other times we feel bad.

You see this being played right in front of your eyes right now on the stock market. The stocks that have been hit hardest are those that have no strong fundamentals. This is what makes investing in crypto so risky.

The bear market and 2%

In previous bear market cryptocurrencies, people wondered if Bitcoin would recover. Now, they are wondering aloud about the future of blockchain as a whole. There should be no question about the unlimited possibilities of this technology.

If you have a crypto asset basket like me today, it will probably be worth a lot more today than it is in the future. But how much more and when in the future are questions that no one can answer. The cryptocurrencies will go through a new winter, but from this “neglect” a new bull market will develop, guided by a handful of cryptocurrencies that will move far beyond what exists today.

Sometimes self-confidence disappears for a while, but it always comes back. Maybe instead of Web3 and NFTs, it’s a different technology that will capture the imagination.

It is worth noting, however, that many dot-com survivors have continued to be spectacular “winners”, including Amazon, Facebook and Google – even eBay.

Capital markets are a giant sorting machine that filters out bad ideas and rewards good ones. So when people ask if cryptocurrencies will return dynamically, the answer is yes, for sure, but that will affect 2% of them, while 98% will be lost.