The Shocking Endurance of the Crypto Market

This morning, hedge fund manager John Paulson gifted us with a lovely rendition of a classic tune: “Crypto Is Fundamentally Worthless.” Personally, I find it hard to top JPMorgan Chase CEO Jamie Dimon’s version, but it’s nice to revisit the classics.

They don’t play that song much on the radio anymore in large part because crypto markets have begun to shake off their well-earned reputation for volatility. The current market – whether you’re still a bull or think we’re in a trap – certainly hasn’t conformed to the historical pattern.

That pattern, basically, has been waves of hype leading to frenzied FOMO buying, then a vicious blow-off top followed by a dormant period. After the bull runs of 2017 and (if you know where to zoom in on the chart) 2013, crypto took dives on the order of 50%, and then bumbled along a rough bottom. Bitcoin, which for most of its existence has closely mirrored the broader crypto market, traded near or below $10,000 for 32 months after the January 2018 crash. It was a cold and loveless winter, let me tell you.

Based on that pattern, I confidently predicted back in 2020 that the then-new crypto bull market would top out with bitcoin somewhere north of $30,000 and then, as it had several times before, retrace to around the previous 2019 high of $20,000.

I was wildly wrong on both counts.

First, of course, bitcoin went to $63,000 back in April, which I think it’s fair to say surprised even vigorous short-term bulls.

But the real shock has been the market’s behavior since then. The bull run itself ran a robust seven months from October to April, a bit shorter than the run in 2017, which ran from April to January 2018 before collapsing. After the delirious peak this April, it started to look like the script would play out, with BTC crashing nearly 50% in 10 days in May. Things stabilized, but they stabilized at various times in 2018 on the way to a long, slow slump.

But then in late July, bitcoin and markets bounced back, climbing 60% through August. That brings us to nearly a full year of basically positive crypto markets, minus a couple of dips and pauses. That’s a first. Obviously, price is not a measure of utility, but this endurance makes it a lot harder to take Paulson’s purely dismissive stance.

This could, of course, be a classic “bull trap” or “dead cat bounce.” The dramatic crash that history predicts may still be still coming. The likelihood of that depends on the conditions that have led to the current strong run.

That partly includes broader asset market conditions: The Dow Jones Industrial Average has also gone bonkers over the last year and a half, at least in part thanks to the investing classes being trapped at home, both bored and not spending money. So I’d say about half of the future of bitcoin and crypto prices depends on broader economic sentiment. The Delta variant of the coronavirus is the biggest looming shadow, though the devastation in countries without vaccine access is going to have a deeper impact eventually. The prospect of inflation, though fading, is still also a worry for some.

But what changed in the crypto markets themselves, and are those changes enough to sustain current crypto price levels?

At a very high level, the past six months have been jam-packed with transformative milestones for crypto, above all bitcoin adoption in El Salvador and the U.S. infrastructure bill taxation fight. Those are legitimizing crypto, whether or not they have direct market impacts.

More directly, the ongoing and truly mind-boggling frenzy around non-fungible tokens (NFT) is going to keep attention around crypto for at least a few more months – though the direct benefit is to Ethereum. The NFT trend is drawing a whole new group of people into crypto overall at a time when the market should, according to history, be flagging.

That may be the most striking and promising aspect of this unprecedented crypto market – it’s being sustained, not by speculation, but by actual use. Speculation in NFTs is, of course, widespread, and you might think they’re fatally silly, but there’s some form of actual there there.

That’s ultimately what’s needed to avoid another crypto winter: sustainable, continuing and, most important, revenue-generating use cases. As wild as it may seem, it’s possible that blockchain .JPEGs will be what helps us make it out alive.