Bitcoin and other cryptocurrencies are having a rough few weeks. Bitcoin is currently down over 18% in the last 30 days. CoinGecko’s tabulation of the total crypto market capitalization shows a spike since November 10, and steady declines since then. Minimum prices for some NFTs have also started to show signs of weakness.
For a truly staggering number of crypto newcomers, this may be a new experience. The last two years have seen incredible growth for platforms like Coinbase, where verified users jumped from 37 million in the second quarter of 2020 to 68 million in the second quarter of 2021, then up to 73 million in the third quarter.
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That likely translates to tens of millions of crypto holders who have never experienced a true crypto bear market, let alone a prolonged “crypto winter.” It’s not certain that we’re in either of those, but both are possibilities, and for new entrants, it’s worth doing a little psychological preparation.
First, some perspective. Bitcoin dropping towards $ 40,000 doesn’t exactly sound like the apocalypse to anyone who’s been in space for a long time. BTC first rose to that price just a year ago, in January 2021. It even fell well below that barrier in July, briefly breaking below $ 30,000. Over a longer period of time, BTC’s current 38% decline since a November peak isn’t even among the token’s biggest drops – as recently as 2018, BTC collapsed 84% in just a few weeks.
In short, those who bought at the most hype are probably feeling some pain right now, but many other forks – those who looked for good entry points to accumulate – are still big. That is perhaps the most important lesson in investing in cryptocurrencies: Because they are so accessible and liquid, these assets are subject to large and rapid changes in sentiment that lead to fragile highs. Even more so than stocks, Warren Buffett’s timeless advice applies: Be afraid when others are greedy and greedy when others are afraid.
The most recent sharp drop occurred in July, when the reduction exceeded 50%. The price rebounded comfortably from that drop, in part driven by major subsequent developments, such as adoption by El Salvador and Twitter. Something similar could reverse the current trend, although the broader conditions point in the wrong direction. Above all, the US Federal Reserve’s intention to tighten the money supply this year will be a drag on Bitcoin’s specific “inflation hedge” proposal, and will likely restrict seed 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 true for most of the last decade. Every cryptocurrency boom draws a large influx of speculators and venture capitalists, many of whom have only a vague understanding of the technology and why it matters. Many of these new entrants are burned by FOMO at the top. Just as often, they make fun of themselves by buying some token touted by the founders as “the next Bitcoin” that turns out to be a cheap sham or just a bad idea. In the current cycle in particular, the “decoupling” between crypto assets has accelerated, and the gap between good and bad bets has been huge.
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Some of the burnouts – like many rookies are burning right now – grab their ball and go home, bitter and resentful. But a large chunk of them actually stick around, learn from their mistakes, and ultimately end up even more deeply involved and engaged. Newly armed with understanding, they form an even stronger phalanx of users and advocates the next time price action draws widespread attention. This cycle obviously cannot go on forever. Over time, Bitcoin in particular will find a more stable “right” price. Maybe it’s around $ 50,000 and that’s already happened, although I personally don’t think so.
As I outlined in my 2022 predictions, the pace 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 people learning, using, and even developing encryption systems, will form a solid foundation for the next round of excitement and growth, whether it happens in three months or three years. Either scenario is possible right now. Place your portfolio, and your expectations, accordingly.