Bitcoin and other cryptocurrencies are having a rough few weeks. Bitcoin is currently down more than 18% over the last 30 days. CoinGecko’s tabulation of total crypto market cap shows a peak way back on Nov. 10, and steady declines since. The floor prices of some NFTs have also started to show hints of weakness.
For a truly stunning number of crypto newcomers, this may be something of a new experience. The past two years have seen incredible growth for platforms like Coinbase, where verified users rose from 37 million in the second quarter of 2020 to 68 million in the second quarter of 2021, then up to 73 million in Q3.
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That likely translates to tens of millions of crypto holders who have never experienced a true crypto bear market, much less an extended “crypto winter.” It’s not certain that we’re in for either of those, but both are possibilities – and for new entrants, it’s worth doing some psychological preparation.
First, some perspective. Bitcoin dropping towards $40,000 doesn’t exactly sound like the apocalypse for anyone who has been in the space for very long. BTC rose to that price for the very first time just one year ago, in January of 2021. It even dipped well below that barrier as recently as July, briefly breaking under $30,000. On a longer time span, BTC’s current 38% drawdown from a November peak doesn’t even rank among the token’s biggest crashes: As recently as 2018, BTC crashed 84% in just a few weeks.
In short, those who bought at moments of highest hype are probably feeling some pain right now, but a lot of other holders – those who looked for good entry points to accumulate – are still up big. That’s perhaps the most important lesson in crypto investing: because they are so accessible and liquid, these assets are subject to big, quick swings in sentiment leading to fragile blowoff tops. Even more than in equities, Warren Buffett’s timeless advice applies: Be fearful when others are greedy, and greedy when others are fearful.
The most recent sharp crash was back in July, when the drawdown was over 50%. The price recovered handily from that dip, partly fueled by subsequent major developments such as adoption by El Salvador and Twitter. Something similar could reverse the current trend, though broader conditions point in the wrong direction. Above all, the U.S. Federal Reserve’s intent to tighten the money supply this year will be a drag on Bitcoin’s specific “inflation hedge” proposition, and likely tighten startup funding and other speculative investments more broadly.
But what seems likely to remain intact is the cyclical nature of cryptocurrency adoption, interest and markets. That pattern has held for most of the past decade. Each crypto boom attracts a huge new inflow of speculators and venture capitalists, many of whom have only the vaguest understanding of the technology and why it’s important. Many of these new entrants get burned by FOMOing into a top. Just as often, they outsmart themselves by buying some token hyped by founders as “the next Bitcoin” that turns out to be a cheap sham or just a bad idea. In the current cycle in particular, “decoupling” among crypto assets has accelerated, and the gap between good bets and bad ones has been huge.
Some of those who get burned – as many newbies are getting burned right now – take their ball and go home, embittered and resentful. But a huge chunk of them actually stick around, learn from their mistakes and ultimately wind up even more deeply involved and committed. Newly armed with understanding, they form an even stronger phalanx of users and advocates the next time price action draws mainstream attention. This cycle obviously can’t continue forever. Eventually, Bitcoin in particular will find a steadier “correct” price. Maybe it’s somewhere around $50,000 and that has already happened – though I personally don’t think so.
As I laid out in my 2022 predictions, the rhythm of new ideas, integrations and adoption (particularly by nation-states) is likely to remain high regardless of price action. That, along with the literally millions of new folks learning about, using and even developing crypto systems, will form a strong foundation for the next round of excitement and growth, whether that happens in three months or three years. Either scenario is possible right now. Position your portfolio – and your expectations – accordingly.
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