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Crypto is dead. Long live crypto
You need to be a citizen in the winter if you want to be there in the summer
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In February, I wrote a piece titled “It’s time to pop the crypto bubble”, lambasting the state of the market and hoping to see a semblance of balance come to our industry. Three months later, I’m both shocked and pleased with what has been nothing short of a catastrophic correction, the likes of which I’ve never seen in my 10+ years in financial markets. Shocked at the speed and magnitude at which things have come crashing down. Pleased at the future prospects that lie in front of us.
At the time of writing this, ETH sits at ~$1,000, a far cry from the lofty high of $4,800 in September 2021 (that is a c.80% price drop for those wondering). This rapid price change has caused many people to profess the death of crypto - The truth is out, it was all one big ponzi scheme! For those new to crypto this can be terrifying to read, but for those of us who have seen a few cycles, this feels all too familiar.
The year was 2018, crypto had just died (for N’th time)
Let us rewind time and look back at the previous cycle. On January 14th 2018, ETH hit $1,400. Everyone was ecstatic, this was the (then) golden age of crypto. ETH had increased >150x in the span of 12-months. We were all geniuses and the first generation of ‘crypto millionaires’ were made… until they weren’t.
China, a long-time hater of crypto, decided in early 2018 to ban all foreign crypto exchanges. This was just one of many anti-crypto laws the PBOC (People’s Bank of China) passed over a few month span in an attempt to eliminate cryptocurrency trading and mining. At the time, China was responsible for >75% of all BTC mining activity, so the news sent shockwaves throughout the industry. “How can we survive if those miners go offline?”, “Where will the hashpower come from?”. In hindsight the answer was obvious - it will move elsewhere because mining is a fundamentally profitable business which can be run from anywhere in the world (see graph below) - but at the time we weren’t so lucid.
FUD set in and the dominoes began to fall. Institutional adoption of crypto is still shockingly low compared to other asset classes, estimated at 10-20%. This is one of crypto's biggest strengths (it is owned largely by retail investors), but also its greatest weakness. Retail investors are notoriously fickle and subject to rash decision making, meaning media cycles have an overweight impact on prices, in both directions. Fast forward to December 2018 and perennially negative news from largely uninformed people has taken its toll - ETH hits a new low of $80 on the 15th (a 95% reduction from the prior high).
Standing in the market at that point of time was grim. A 95% price contraction is guaranteed to have knock-on effects - people working in crypto returned to their Web2 jobs, and the speculators / investors largely left the market, sore from their losses and cursing the ‘bubble’ that came before them. And yet, against all logic, a core of die hard believers stayed. The people with ‘diamond hands’, or better still, truly understood the potential of blockchain technology and weren’t phased by the arbitrary price of a token. And boy, did they go on to build something great.
The best things are built during bear markets
Bear markets suck, but they provide unique opportunities for the dreamers amongst us.
The 2007/08 GFC was one of the worst financial market crashes in history. However, the companies that followed changed the world. Airbnb (2008), Uber (2009), Square (2008), Slack (2009), Pinterest (2009), the list goes on.
The 2017/18 crypto crash was similarly catastrophic from a value destruction perspective, and the companies which emerged from the ashes have gone on to become stalwarts in today’s crypto landscape. Some of the logos below are truly Web3 pioneers who have been responsible for millions of new users entering the industry - OpenSea has been instrumental in making ‘NFTs’ a household term, Uniswap accounts for >50% of all DEX liquidity and MakerDAO is a shining example of what DeFi can achieve. Necessity is the mother of invention, and we can thank the previous bear market for the creation of such foundational projects.
Going one layer deeper, into the blockchains themselves, we had severely limited options available to us last cycle. The below shows the top 10 blockchains on Coinmarketcap at the start of January 2018. I won't throw shade on these projects, but it is worth reflecting on where they stand today, what level of adoption they have seen (minimal), and the (limited) capabilities they offered builders at the time. By contrast, the builders & developers of today have a rich ecosystem of blockchains to build upon, offering real options for scalability, decentralisation and security - Solana was founded in 2020, Polygon in 2018, and Cosmos in 2019, let alone thinking about the emergence of L2s.
Observations on the macro backdrop
At this moment I'd like to pause and reflect on the fact that this crash is not constrained solely to crypto and we need to step away from the panic button. It is a universal sell-off in all risk-based assets driven by largely macroeconomic based factors rather than fundamentals. Many tech stocks are down over 80% from their peaks, and “this quarter is set to deliver the biggest combined loss for global bonds and stocks on record, in data going back to 1990” (Bloomberg). I don’t hear anyone screaming ‘Shopify is dead’ (its price is 80% down from the ATH), so can the crypto doomsayers please take a chill pill.
Going one layer deeper and trying to quantify the macro vs. ‘crypto is ded’ arguments, the below charts show a comparison of the 2022 vs. 2018 crash. Looking into relative performance over the past 12 months (which is an arbitrary date for comparison sake), as of today ETH is down 53%, which is roughly the same as the BVP Cloud Index (a basket of high-growth tech stocks such as Salesforce, Zoom, Shopify and others). The S&P over this time is down ~12% which is naturally a lower volatility benchmark.
If we contrast this to the 2018 crash, and use the same trailing 12 month relative performance, indexed by the same time period since the previous ATH (221 days at present), we see a stark contrast. ETH was down 15% while the S&P500 was actually up 18% and the BVP Cloud Index up 76%. It is also interesting to highlight that ETH has fallen ~80% from its previous ATH, which corresponds to an 80% drop over the same time period in 2018. Distilling this down to a key hypothesis - The 2018 crash was largely driven by fears over the validity of crypto / blockchain as a sustainable industry vs. the 2022 crash has been largely driven by wider macroeconomic conditions. Anecdotal evidence also supports this - I don't think anywhere near as many people today are questioning if crypto / blockchain technology makes sense. Perhaps instead they have been questioning whether crypto prices make sense relative to other assets.
The case for Optimism
Packy McCormick wrote a great piece on Optimism which is worth a read for anyone struggling for positivity at this moment in time. However, rather than thinking about the theory, I’m looking to the practical.
I’ve previously written about the fundamentals of blockchain and the core use cases I believe can change the world, so this time, I'll highlight the quantitative aspects which underpin my conviction. I can’t stress enough that you truly need to believe the fundamentals of crypto if you want to be in this industry as more than a speculator. When your foundational beliefs in the ecosystem are solid, what happens on the surface (with prices) won't phase you.
Cycles are the norm, not the exception
Nothing goes up and to the right forever. I should finish this section here, because it is that simple and a fundamental concept of all markets - they move in cycles. Anyone who bought crypto on the premise of ‘number goes up’ should be questioning their investment rationale. I’m a fan of Ray Dalio and he captured it best :
“The swinging conditions from one extreme to another in a cycle is the norm, not the exception” - Ray Dalio
The typical equity market bull run lasts ~5-8 years and is followed by a bear market of 1-2 years. This pattern has repeated itself since the early 1900’s and while it is not a guarantee on the future, it is a good indicator of what we can expect, and I fully expect we will see another crypto bull run in the coming years.
Talent as a leading indicator
With any new technology or industry, it takes time to develop. Rome wasn’t built in a day, and the same can be said for what is happening crypto. Many people point towards the hype cycle methodology for the adoption of a new technology through phases, but I prefer to focus on talent - what are the best and brightest people working on, because that tends to be the next big thing. On a personal level, I’ve witnessed a flood of talented engineers, designers, investors and more, moving from web2 to web3 over the past few years. Mainstream media has also picked up on this trend with multiple stories written about top execs from big tech companies leaving their web2 jobs for the allure of crypto (CNBC, Bloomberg etc).
When we look at what is happening in the developer community, it is even more compelling, as these are the people literally building the world underneath us. The number of Web3 developers skyrocketed in the 2018 and 2022 bull-runs, and even more interestingly, stayed constant (and within the industry) during the last crypto winter - the builders aren’t leaving, they are nailing down the hatches and creating our future.
Capital as a catalyst for growth
Cash is king, and without it, building a global industry with mass market adoption is impossible. If talent is the leading indicator, capital is the close second, and crypto has been raking it in over the past 12 months - more than $25bn of VC & Private money went into the ecosystem in 2021, almost 2x the investment in all the previous years combined! It takes time for this money to filter down the chain and lead to real-world outcomes, however you can guarantee it is a net positive for crypto and will directly lead to many of the innovations and use cases of the future. It is also worth highlighting the delta in investment between 2021 and 2018 (close to 4x) which should insulate the industry during the winter and lead to greater growth in the long-term.
Parting thoughts on surviving the bear market
I’m personally optimistic about the future and believe this pull-back was well overdue. I hope this winter shakes out the tourists, the speculators and the non-believers, as well as all the crap that has floated to the surface in the past few years. There is a good chance many of the listed tokens will go to zero, we may lose a few of the L1’s, and the long tail of useless NFT collections will go the same direction. At the same time, I have no fear the crypto faithful will continue to build and we will emerge in a better shape than where we started. If the last cycle gave us AMMs, NFTs, scalable blockchains, main-stream consumer adoption, growth in the developer community and a ton of new capital, I can't wait to see what happens in the next one!
With that all being said, I want to close this piece with a few suggestions on how to get through this next cycle:
Return to the fundamentals - If your conviction isn’t sound, you probably shouldn't have invested in the first place (or be here now). Use the bear market to read, educate yourself & others.
Stop talking shit about price targets - No-one knows where the price is headed (both up and down). It never helped us in the past and it wont help in the future. The vast majority of ‘crypto ‘influencers’ are trash and should be completely ignored.
Stop blaming the Fed or Whales - It isn’t their fault. We have to accept the bed we lie in.
Don't buy into the negative news cycle - They sell clicks, and FUD is a money maker. Bitcoin has been declared ‘dead’ 400+ times, and you can guarantee they will say the same thing now.
Stop saying crypto is dead - It isn’t. See above.
Written by Joseph Pizzolato
😎 About the Author
I’m an Investor at Felix Capital, a London based early-stage and growth fund specialising in the intersection between consumers and technology. We have been fortunate to support the likes of Ledger, Sorare, Lightspark, Rally, Flooz and others, and actively looking for great crypto founders to invest in. For entrepreneurs looking for funding (or wanting to chat), you can reach me via email - Joseph@felixcap.com or Twitter @Jpizzolat0