Bitcoin and other cryptocurrencies are going through a few weeks. The price of Bitcoin is currently down more than 18% in the past 30 days. CoinGecko’s scheduling of total cryptocurrency market capitalization shows a peak on November 10, and has been steadily declining since then. The lower prices of some of the NFTs are also beginning to show hints of weakness.
For a truly astounding number of newcomers to the crypto space, this could be a new experience. The past two years have seen an astonishing growth for platforms like Coinbase, with the number of verified users rising from 37 million in the second quarter of 2020 to 68 million in the second quarter of 2021, and then reaching 73 million in the third quarter.
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This will likely translate to tens of millions of crypto holders who have never experienced a true crypto bear market, let alone an extended “crypto winter.” We’re not sure we’re into either of those things, but both are a possibility – and for newcomers, it’s worth making some psychological preparations.
First, some perspective. Bitcoin dropping towards $40,000 doesn’t quite sound like the end of the world to anyone who’s been in space for very long. BTC rose to that price for the first time in just a year, in January of 2021. It even dropped below that barrier as recently as July, briefly breaching below $30,000. In a longer period of time, BTC’s current 38% decline from its November peak does not rank among the biggest token crashes: in 2018, BTC crashed 84% in just a few weeks.
In short, those who bought in at high-hype moments are likely to feel some pain right now, but plenty of other stockholders – those who have looked for good entry points to pool – are still big. This is perhaps the most important lesson in investing in cryptocurrencies: due to their accessibility and liquidity, these assets are subject to large and rapid fluctuations in sentiment that lead to shaky exploding tops. Even more than arrows, Warren Buffett’s timeless advice applies: Be fearful when others are greedy, and greedy when others are fearful.
The last sharp crash was in July, when the decline was more than 50%. The price easily recovered from this drop, partially driven by subsequent major developments such as the adoption of El Salvador and Twitter. Something similar could reverse the current trend, although broader conditions point in the wrong direction. Above all, the US Federal Reserve’s intent to tighten the money supply this year will be a drag on Bitcoin’s specific “inflation hedge” proposal, potentially tightening startup funding and other speculative investments more broadly.
But what seems likely to remain the same is the cyclical nature of cryptocurrency adoption, interest, and markets. This pattern has persisted for most of the past decade. Each cryptocurrency boom is attracting massive new flows of speculators and venture capitalists, many of whom have only a vague understanding of the technology and why it is so important. Many of these newcomers are being burned by FOMOing at the top. As is often the case, they outdo themselves by buying some tokens that the founders called the “next bitcoin” that turned out to be a cheap scam or just a bad idea. Especially in the current cycle, the process of “decoupling” crypto assets has accelerated, and the gap between good and bad bets is huge.
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Some of those who have been burned—many newbies are being burned at the moment—take their ball and go home, bitter and resentful. But a large portion of them actually stay put, learn from their mistakes and end up being more deeply and committed. Newly armed with understanding, they form a stronger battalion of users and claim that next time price action attracts mainstream attention. It is clear that this cycle cannot continue forever. In the end, Bitcoin in particular will find a more stable “correct” price. It’s probably somewhere around $50,000 and it has already happened – although personally I don’t think so.
As I make clear in my predictions for 2022, the cadence of new ideas, integration and adoption (particularly by nation states) is likely to remain high regardless of price action. This, along with the millions of new people learning about, using, and developing crypto systems, will form a solid foundation for the next round of excitement and growth, whether that happens in three months or three years. Either scenario is now possible. Position your portfolio – and your expectations – accordingly.