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Over the last year, the crypto industry as a whole lost more than 2 trillion dollars in value. The market leader: bitcoin, fell from around 69,000 dollars in November 2021 to less than 20,000 dollars where it is currently being traded at.
It has been a hell of a year and the whole crypto ecosystem has been impacted. It’s true that we are in rough territory. Uncertainty is at its highest. Market sentiment is at its lowest. Trust in the crypto market has been hit really hard. We see negative headlines everywhere, and it is hard to see the light at the end of the tunnel.
But it’s funny because we tend to forget that we’ve seen this media frenzy before. Actually, we’ve seen this frenzy in every bear market, and you know what? Headlines and charts look really similar to what they were in the last crashes. People hate it when the price goes down.
In those moments, maintaining a sane mind, taking some perspective from this day-to-day noise, and trying to see things from a higher level is the most valuable thing you can do.
So let’s dig in together…
Could the FTX collapse actually be a net positive for the industry?
Trust is a core element of fair and well-functioning markets. In light of the recent event, trust has been broken and this led everyone to start questioning everything.
On November 11, FTX, the second largest exchange in the world filed for bankruptcy leaving a mess of around 50$ billion dollars. According to some bankruptcy documents, up to one million customers could be impacted.
How did it happen? In short, FTX founder: Sam Bankman-Fried, known as “the most generous billionaire” (funny isn’t it), took billions of dollars of customer funds, illegally moved it into its other companies, played with it, and lied to its users. Fragile and unethical, FTX could not provide the deposited funds to customers when they needed them resulting in its collapse. A domino effect followed in the entire crypto ecosystem: BlockFi, Genesis, and others got impacted. Hedge funds got frozen. Some investors lost everything. Even suspicion of Binance being in trouble hit the market. What has happened is unprecedented in the crypto space.
Yes, the market still needs to breathe from all of this turmoil. We can still expect some negative events to unfold in the near future. However, I believe that in the long term, this black swan could be a net positive for the crypto industry.
-First, it has deleveraged the market. In any market, when irrational exuberance takes control of price movement, crashes tend to happen. Actors forget about utility and are just here for the quick shekels. It happened with the Tulip in 1636. It happened with the tech sectors in the 2000s. It happened with the banking sector in 2008. It happened with crypto. It will happen again. That’s just part of human nature. But those corrections are important for the long-term benefit of the ecosystem. They act like filters: establishing the true players and eliminating the greedy and overleveraged ones. This is bullish.
-Second, it highlights the importance of proper and fair regulation for this nascent industry. It is inevitable if we want to promote innovation in this space. This could bring another wave of adoption in the medium term, more on this later.
-Third, it showed the importance of securing your asset properly with the use of an appropriate wallet. While the popular “not your keys, not your coins” used by crypto fans is catchy, it holds some truth. One of the big value propositions of bitcoin is true ownership of your asset. You can only do this if you rely as little as possible on third parties and take self-custody of your asset that lives on the blockchain. While people that had all their money on FTX learned this the hard way, it has brought a wave of hype around hardware wallets.
“Wisdom is learning from other people’s mistakes”
It is often in the wake of the biggest threat that the greatest innovation happens. We need to realize that the majority of actors in this space are brilliant, long-term-oriented, and with a strong purpose. This is bullish.
Let’s hope that this crisis of trust act as a catalyst for a healthier industry with more cooperation between different chains, different protocols, and different bright individuals fighting for the same ideas.
“The enemies of my enemies are my friends”
On that note, I believe that it is important to acknowledge how early we are in the game.
Where do we come from?
Sometimes it is hard to realize that fourteen years ago, this industry didn’t even exist. We should all take a second to acknowledge how much this space grew in so little time. We should be proud of that. It has changed so many lives, impacted so many people, and helped so many communities.
For those unfamiliar, I will quickly run over the history of this technology and travel back in time to look at the emergence of a group of enlightened rebels: the cypherpunks.
At their core, the cypherpunks valued human freedom and the individual right to privacy. They had the conviction that innovation in cryptography could safeguard political and economic freedom better than any system of government would.
They understood that the rise of computers and of the internet could be a threat to human freedom: if the power to control the flow of information were given to large incompetent bureaucracies, they believed that we could end up in a state of censorship and surveillance.
Eric Hughes wrote this passage in his cypherpunk manifesto:
“Privacy is necessary for an open society in the electronic age. Privacy is not secrecy. A private matter is something one doesn’t want the whole world to know, but a secret matter is something one doesn’t want anybody to know. Privacy is the power to selectively reveal oneself to the world.”
A workable form of digital cash has always been on their minds and during the ’90s, much of their activity was associated with various schemes for digital cash systems: Hashcash, BitGold, or eCash.
None succeed until a certain Satoshi Nakamoto published a mysterious whitepaper in 2008. At the time, no one knew that he was reviving the lost vision of the cypherpunks.
This whitepaper was about Bitcoin: A Peer-to-peer way to transfer value without any trusted third parties (financial institutions) based on cryptographic proof of work.
For anyone interested in this history and the technology, I urge you to dig deeper into the cypherpunk history, and of course to read the bitcoin whitepaper (at least twice).
After many failed tentative at creating a digital cash system, they didn’t really believe in this new protocol. But for some reason, bitcoin was more resilient and got more attention. Over time, its adoption has followed a path typically followed by new technology commonly called: the Gartner hype cycle.
I won’t go into much detail because Vijay Boyapati describes it perfectly in “The Bullish Case for Bitcoin”. I encourage you to have a look at this as well.
Bitcoin has followed numerous of those waves of hype each dominated by different players. First, we had the cryptographers and geeks that discovered its potential from early on. Then we witnessed the surge of libertarian/ideologically driven investors. Retail, institutional investors, and even countries like El Salvador later followed.
Over those cycles of hype, different protocols with different objectives and trade-offs were created. New use cases were implemented. We’ve seen the rise of Defi, NFT, and the other disruptive applications that made up the crypto ecosystem of today.
Following this idea of hype cycle, we will likely see the new wave pushed by big institutional investors like pension funds and bigger nation-states allocating a small portion of their funds to this asset class. All they wait is clear and fair regulation and FTX could well be the catalyst that will accelerate this process.
But in the meantime, we should not forget that Bitcoin is still standing, still strong, and still relevant.
The fundamentals of bitcoin as still there
We have an obsession with the price of bitcoin and we often forgot the underlying value of this asset. Bitcoin is still what it is fourteen years ago when the whitepaper came out.
Here I will just present some features of bitcoin. I encourage everyone to further dig on their own.
From day zero, bitcoin allows to store and transact value in a peer-to-peer way without any need for a middleman to transact. In other words, we eliminated the need for trust. The value of bitcoin lies in the network that allows this to happen.
Another key element that distinguishes bitcoin from fiat currencies is its absolute scarcity. Each day that passes brings bitcoin closer to its total supply of 21 million. We know with certainty how many bitcoin would ever exist. On the other hand, nation-states have been persistent in injecting newly created money into the system to simulate short-term growth. While it is politically attractive, it causes big long-term consequences. More money doesn’t create more wealth in the system. More money erodes the wealth created by savers through their hard work. What has happened with Zimbabwe or Venezuela may well happen with the Euro or the Dollar.
Furthermore, the bitcoin network is also more secure than ever with a network hash rate that continues to hit all-time highs
Long-term holders are also still present. 66% of the supply hasn’t moved in the last years and active bitcoin addresses are increasing. This shows that the network is healthy, and adoption continues.
As stated previously, bitcoin’s value proposition is also true ownership of your asset. If you believe that your money in the banks today is yours, well… you are not totally right. Look at what happened in Cyprus in 2013 when banks lost billions, and hard-earned savings were confiscated to protect the banking systems. With the possibility of self-custody, bitcoin allows one’s to store value securely.
A quick look at where we are on the psychology of the masses:
The “Can you teach me how to buy bitcoin” crowd at the 60000 range has become the “Bitcoin is a Scam-Ponzi” right now.
Guess what, those people represent the crowd and they are often wrong. It’s funny because groups search for consensus and social approval, not truth. When people have been hurt by entering into the market at the wrong time, they will find confirmation from other peers to reinforce the fact that the market was wrong, not them. It is as if a collective soul blinds even the most intelligent man into confirming the belief that makes him comfortable. But those extremely negative sentiments are often bottom signals.
Let’s take a step back from that. Is bitcoin really being hit that badly?
Bitcoin and crypto vs the tech sector
Crypto has been in the spotlight when it comes to volatility. During each wave of capitulation, claims that “crypto is dead” are everywhere. But let’s compare crypto to the tech sector as a whole.
At the time of writing, bitcoin is sitting at around -75% with respect to its ATH.
And what about some other tech stocks?
Shopify: -78%
Meta: -65%
Amazon: -50%
Alphabet: -40%
Does that imply that the tech sector is dead as well?
“Perspective allows for better judgment”
Crypto is exactly where it should be: a nascent technology, more volatile than other tech assets, but certainly not dead.
Markets follow seasons and rhythms with waves of distribution and capitulation. While Crypto has followed its own ways in the past, its correlation with the tech sector has been growing.
Why? Well, as adoption grows, the main actors driving crypto prices are also driving the equity space. Those are the hedge funds and other institutional investors. Thus, the right time to accumulate crypto is when the conditions are good for the equity space (especially the tech sector).
With that in mind, it is important to realize that in the long run, it is the macro cycle that drives asset price.
So let’s briefly look at where we stand.
Don’t fight against the wind
Over the last decades, Central Banks have been pushing up equity prices with low inflation, low interest, and a high liquidity environment. Among other assets, the crypto space greatly benefited from that. But right now, things are different. In the wake of the pandemic, Central banks increased liquidity massively in the system and printed money like never before.
Let’s have a look at the Central Bank balance sheet:
With this increase in liquidity, all assets have been inflated: the NASDAQ or the SP500 have reached new all-time post-pandemic.
However, this increase in liquidity also brought massive inflation. The highest since 1982.
But Central Banks don’t like high inflation. As a result, they have been using their superpower here again, but this time by tightening their ship with higher interest rates.
Their goal: manage the inflation they created. This comes at a cost to the economy. It raises the opportunity cost of investing, decreases the different valuation metrics, and pours liquidity out of the system.
This crunch has affected all asset classes and crypto was not spared. In this environment, it seems improbable that we are going to see a big bullish trend forming. We still need some patience to rebuild foundational trust, digest the negative events, and wait for liquidity in the global economy.
We do not know for sure when things will change. But when it changes, you better be ready. Else, you could miss the opportunity of your lifetime.
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