Crypto Turns Red

I had plans for a new post this week continuing to explore emerging concepts in the Crypto and web3 space, but I felt like I needed to change paths and cover the big price drops across the sector and provide some historical context. It has been a rough month for risky assets. Fears about inflation and the response from the Federal Reserve seem to have kicked off the selling. Overinflated tech stocks with revenue but no profits have been pummeled.

**Big disclaimer time. I am not your financial advisor. This is not financial advice. I am just reporting the news and sharing some thoughts. Do your own research and make your own decisions. Or consult your actual financial advisor, not me.**

$BTC has seen yet another 50% retracement, from a high of $69K on November 8th to $35K on January 22nd. $ETH has seen a similar 50% selloff, from the all-time high of $4,800 on November 8th to $2,400 today. Higher beta tokens have seen worse performance. Ethereum competitors $SOL and $ADA are both down 65% from their highs. $DOGE is down 50% from November, but a full 80% from its Elon Musk SNL high in April.

For the newly initiated Crypto investor, these losses are brutal. Just as the market was seeing increased retail adoption, the price crashes and leaves newbies with big losses. Unfortunately, no one can really say that the current price levels represent “good value”. $BTC is not a corporate stock that can be valued based on future cash flows. It is not a government backed currency with taxing power to support it. It is not gold, which at least looks pretty and has commercial uses. While Bitcoin has done a lot to establish itself as a store of value currency for the future, $BTC can fall all the way to zero. The value of $BTC is based on market sentiment that it has value and that people will want to hold the coin in the future. If sentiment turned negative enough, there is no telling how far the price could fall. To be clear, this is not what I expect. I believe $BTC has crossed over to having enough payment rails and uses that the price has long term support, but this too can change if enough people do not believe the story.

I think the story for $ETH and its programmable competitors is a bit easier to understand. I firmly believe that all assets and liabilities will eventually be recorded on the blockchain. In the next 10 years or so, your home deed, your car title, your drivers license, your stocks, your student loans, and much more will end up on the blockchain. I don’t know if this will be on the Ethereum blockchain or one of the other chains, but I believe they are all headed this direction. That should keep a floor on prices of programmable chains, unless a new alternative appears and crushes the entire existing market out of existence.

Now it’s time for some quick historical perspective. You don’t have to go back too far in history to see another 50% price retraction in $BTC. The Crypto market peaked in mid-April 2021 with $BTC around $63K, and two months later Bitcoin was trading at $29K. You can see a similar $BTC price drop from $12K in June of 2019 to $6.5K in March of 2020. Cryptocurrencies are super volatile, worse than the highest beta tech stocks. If you don’t like volatile assets, then this sector is not for you.

If you go back a little further in history, you’ll eventually hit the Crypto Winter. $BTC saw an insane price increase through 2017 from $900 in January to $19K in December. However, just five days later the price had deflated back to $11K, a staggering move in just one week. One year later, in December 2018, the price of $BTC was hovering around $3,500, down more than 80% from its high. What started the Crypto Winter? The first drop seems to be from euphoria driven price increases spooking the market. This was followed by concerns about government action banning Bitcoin in a few Asian countries. The collapse of multiple Initial Coin Offering (ICO) tokens exacerbated systemic concerns, and there were some high-profile hacks and trading irregularities. Pretty much a slew of bad news led to a terrible year for the sector. Once the bad news passed, the strong adoption of Bitcoin continued, and $BTC had reclaimed the $12K price level by June 2019.

Could we see another year of bad news and terrible price action in 2022? I suppose this is still possible. Government regulation could pick up in the U.S. if the SEC decides to go after some of the frothier parts of the market. More countries could follow China’s and Kosovo’s lead by ban mining. Or we could see a larger Western country ban Crypto altogether like Egypt, Iraq, Qatar, and others. There could be a large Crypto exchange hack that gives people pause about how safe their assets really are.

There are plenty of risks to this market, we are still really early here. However, if you are in Crypto for the long term, today’s prices might be an opportunity to do some dollar cost averaging. That is what I am doing, adding to my core holdings in programmable blockchains. As I said above, I really believe in this future and am willing to moderately increase my exposure here. I am not going anywhere near “all-in” on the sector. Cryptocurrencies still make up a small single digit percentage of my overall investment holdings.

OK, that is enough on this market crash. Later this week I’ll get back to talking about the market developments and what it means for the bankers and finance executives that are my core audience on this newsletter.

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