Money Reimagined: Price Swings Versus the Long Term

The popping of bubbles does not indicate the failure of crypto technology itself, which continues to see massive long-term venture interest.

AccessTimeIconJun 25, 2021 at 4:48 p.m. UTC
Updated Sep 14, 2021 at 1:17 p.m. UTC
AccessTimeIconJun 25, 2021 at 4:48 p.m. UTCUpdated Sep 14, 2021 at 1:17 p.m. UTC
AccessTimeIconJun 25, 2021 at 4:48 p.m. UTCUpdated Sep 14, 2021 at 1:17 p.m. UTC

Volatility is the defining feature of crypto investing. The past few months – with yet more whipsawed price action creating and then quickly destroying hundreds of billions of dollars in wealth – have provided a reminder of that. But despite these stomach-churning moves, money is flowing into crypto projects like never before. As we discuss below, perhaps it’s because this volatility problem has become a “known known” that investors simply factor into their valuation metrics. 

One field of projects that has seen a boom is interoperability protocols, which tackle the big problem of getting different blockchains to talk to each other and enable cross-chain asset transfers without relying on a centralized intermediary.

In this week’s “Money Reimagined” podcast, Sheila Warren and I talk to two leaders in this space: Denelle Dixon, CEO of the Stellar Development Foundation, and Peng Zhong, CEO of Tendermint, who develops the Cosmos “blockchain of blockchains.”

Have a listen after reading the newsletter.

50% swings are mere flesh wounds

Spring is supposed to be a period of rebirth and growth. Not so in Cryptoland this year. 

In a direct reversal of its spectacular gains through the winter, bitcoin dropped a painful 52% from its March 20 equinox peak to its summer solstice trough this past Monday. 

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Ether had a better first half of the spring, rallying from $1,800 on March 20 to an all-time high of $4,382 on May 11. But then it lost almost all of those gains in the following 40 days. Ether is currently trading at $1,854. 

Meanwhile, during the same spring period, non-fungible token (NFT) auctions went from mind-blowing eight-figure digital art sales to a trickle of low-value deals. 

What does this stark reversal of fortunes portend? 

A consolidation to a lower base that will allow new buyers to come in and bid prices higher? 

The start of another 2018-like quiet phase in which prices stagnate for a year or more while crypto developers continue to work on new projects?

Or something more ominous, such as legendary short-seller Michael Burry’s warning of the “mother of all crashes” that will see retail investors suffer losses “the size of countries?”

I don’t know the answer. If I did … well, you know how the line goes.

What I can say is we’ve been served another useful reminder that volatility is an ever-present feature of cryptocurrency markets. 

Volatility goes with the territory. The development of any highly disruptive technology, especially one that, much like the internet, aspires to achieve global adoption rather than just a niche role in the economy, will breed ups and downs in prices. 

The good news is that even as prices get walloped, investors with multi-year time horizons seem to be getting more comfortable with this reality and continue to place long-term bets on the industry.

Crypto stability is impossible

I’ve always thought it unfair that economists dismiss bitcoin as too volatile to ever become a useful medium of exchange. 

If that’s the case, there will never be an alternative to fiat currencies, as any new monetary technology would have to achieve mass adoption (and price stability) at the very instance of its introduction to society.

Adapted from Rogers, E. (2003). The Diffusion of Innovations.
Adapted from Rogers, E. (2003). The Diffusion of Innovations.

To be sure, cryptocurrencies lack the compulsion power that governments hold with taxation, which means they must pass through the same “Rogers Adoption Curve” that all new technologies confront. Introduced in Everett Rogers’ 1953 book “Diffusion of Innovations,” the bell curve starts with a small group of innovators, followed by a somewhat larger group of early adopters, who make way for the early majority and late majority occupying the middle and later half of the curve, before it moves to the laggards in the right-hand tail. 

That process can be relatively smooth for technologies that aren’t directly tied to liquid assets. But if there’s any chance to speculate on the adoption curve’s progress, the prices associated with those assets will inevitably see exaggerated gains and retracements, independently of the progress of the tech itself. 

Case in point: The late-nineties dot-com bubble and bust, when excitement around the internet’s otherwise truly disruptive potential, pushed prices far ahead of what was then the online industry’s ability to monetize itself.

Crypto tech is especially prone to such big swings. 

For one, as mentioned, it must be very widely adopted to achieve its true impact on the world. That means it’s on an especially long journey to eventual widespread acceptance and the stability that will come with that.

Also, the prospective disruption is so vast that many crypto investors assume huge future returns in their investment models. The resultant high valuations in turn attract waves of momentum-driven, FOMO-suffering retail investors who collectively drive excessive price gains that are unsustainable over the medium term. 

What’s more, that vast disruptive potential inevitably creates a clash with the vested interests of the existing financial system and with their stewards in government. 

The potential changes pose a challenge to the regulatory framework of the existing financial system, which in turn generates policy risk and encourages people with significant influence to feed negative narratives against the technology in response to its ascendence. It’s no coincidence the spring sell-off was accompanied by a regulatory backlash in China and by criticism of bitcoin’s environmental impact by Tesla CEO Elon Musk and political leaders such as U.S. Sen. Elizabeth Warren. 

And let’s not forget this past year has also seen unprecedented monetary expansion by central banks, which means inordinate amounts of money poured into speculative assets such as crypto. 

All these factors ensure that booms, bubbles, busts and bankruptcies are unavoidable at times like this. 

Invest during the downturn

Twice previously, in 2014 and 2018, crypto showed the bursting of a bubble does not signal the failure of the technology itself. As with investors in internet technologies who shrugged off the dot-com era’s ups and downs, diehard crypto investors have been convinced there will continue to be future money-making opportunities if they stick with it.

There’s also evidence these lessons have been learned by a new breed of deep-pocketed mainstream institutions. 

On his "The Breakdown” podcast for CoinDesk on Wednesday, Nathaniel Whittemore listed a slew of major investments by venture capital firms, institutional investors, corporations and celebrity investors in crypto projects. A small sampling: Fox Entertainment investing $100 million into an NFT project; DeFi blockchain Solana raising $314 million; BitDAO’s $230 million; Goldman Sachs partnering with digital asset investment firm Galaxy Digital; BBVA opening bitcoin trading and custody services in Switzerland; State Street’s new cryptocurrency division; Visa and PayPal joining a $300 million fund raised by Blockchain Capital; hardware wallet Ledger’s $380 million raise. 

And that was before Thursday’s news that venture capital behemoth Andreessen Horowitz had raised a whopping $2.2 billion for its third crypto fund

In a similar vein, during a panel discussion I moderated at a conference hosted by the Association for Digital Asset Market Tuesday, both Thejas Nalval, co-founder and chief investment officer at Parataxis Capital, and Brad Koeppen, head of trading at CMT Digital, cited serious incoming interest in bitcoin from investors with long time horizons, such as family offices and university endowments. These investors are now educated about the volatility, they said, and have figured out how to structure it into their portfolios. 

The more that “old money” comes in, the more it will – eventually – foster some degree of stability. Also, the availability of futures and more sophisticated derivative products allows these institutions to better hedge risk, which, in turn, tends to moderate price movements over time. 

Still, the roller coaster continues. If you’re looking for a steady-as-she-goes investment, get yourself some T-bills. For the time being, crypto investing will require a strong stomach.

Off the charts: Speaking of volatility

The middle of May saw a spike in options volatility – a measure of expectations for price turbulence that determines the cost of buying the kind of price protection that options provide – to very high levels. At-the-money (ATM) one-month volatility surged to 150% on an annualized basis. 

Then, on May 24, after the measure had eased to 123%, still well above the historical average of about 75%, CoinDesk’s Omkar Godbole spotted an interesting trend. Options traders were taking advantage of the higher prices for their derivatives to offer more puts – an options contract that gives the buyers the right to sell an asset at a given price in the future. This was a sign they were more relaxed about the prospect of turbulence where prices were dropping and they would be on the hook for it. 

With that past in mind, I thought it would be interesting to look at what happened to volatility in recent days, following the second-leg sell-off in bitcoin that culminated Tuesday in the spot price dropping below $30,000 for the first time since late January. Here’s what CoinDesk Research’s Shuai Hao whipped up for me, using data from Skew.


That third-highest peak you see on the right side of the chart is that surge in annualized ATM implied volatility to 150% seen in May. The latest activity shows a smaller spike to around 110% earlier this week, which seems to have quickly subsided back below 100% as the bitcoin price recovered Wednesday and Thursday. 

So, although we’re still above the 75% average, this suggests that expectations for big price swings haven’t been as drastically affected by the latest price declines as they were in May. It also suggests that options traders who sold those puts back then, while no doubt unhappy the spot price fell as low as it did, aren’t suffering extreme losses.

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The conversation: Black Swan wars

The bitter falling out between influential theorist Nassim Taleb, he of “The Black Swan” fame, and his former colleague Saifedean Ammous, for whom Taleb wrote a foreword to the first edition of Ammous’s “Bitcoin Standard” during a happier time in their relationship, just got worse. That’s because Taleb this week landed a six-page paper in which he explained in highly critical terms why he had gone back on his earlier enthusiasm for bitcoin and now, essentially, considers it useless. Ammous’s response to the paper said it all.

Taleb’s attack, in which he essentially argued that bitcoin should be currently priced at zero because of a supposed expectation that at some point in the future there will be no miners mining it, stirred rebuttals from many bitcoiners. Here’s an interesting rhetorical takedown of Taleb’s logic by University of Wyoming philosophy professor Bradley Rettler:

But perhaps more intriguing than the predictable backlash from bitcoiners was this critique (and the responses it elicited) from someone with a truly balanced – in parts quite critical – view of bitcoin: Cato Institute monetary historian George Selgin.

It’s clear, though, that some people were swayed by Taleb’s argument, and they, too, tended to come from the anti-bitcoin category. Here’s Joe Kelly, whose profile describes him as a “Bitcoin heretic.”

Relevant reads: Venture investors

As we mentioned up top, there’s been an inordinate amount of long-term investment in crypto from big-name players of late, both in venture deals and in in-house development. It stands in striking contrast to the doldrums in the crypto market. The stories highlighted from CoinDesk here are merely from Thursday, but these kinds of announcements have been coming for weeks.

  • So, earlier in the day, venture capital giant Andreessen Horowitz, also known as a16z, announced it had raised $2.2 billion for its third crypto fund. As Zack Seward reports, the news suggests this is a good time to be raising crypto funds.
  • Shortly after the a16z news, Tanzeel Akhtar reported that Citigroup’s wealth management division had launched a “digital assets group” to service clients “interested in all aspects of the digital asset space” such as cryptocurrencies, non-fungible tokens (NFT), stablecoins and central bank digital currencies.
  • Meanwhile, blockchain forensics firm Chainalysis announced that it had closed yet another $100 million round of financing, this one putting the firm at a valuation of $4.2 billion. As Zack Seward reported, this follows a separate $100 million Series D financing round in May and brings the firm’s total fundraising tally to $365 million.

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