Crypto markets downturn

Written By wallet street

I came back from vacation and all of a sudden markets are on fire and not in a good way.  I’ve had several friends reach out to me about what’s going on in the crypto markets, like “I know you are on vacation, but add crypto volatility to the agenda” for our next catch up. (I feel so flattered that anyone out there cares what I think!) So here’s my two cents (or two satoshis if you want to get really nerdy) on the matter. 

Bitcoin is currently at ~$19K relative to ~30K 30 days ago. YIKES! That’s 35% down. That does not feel good when I look at my crypto accounts.  

But let’s take a step back and zoom out a little further. A year ago bitcoin was at ~$35K…so that’s 45% down. YIKES AGAIN! 

Ok, so lets zoom out even further…We see that 5 years ago bitcoin was at ~2.5K and 3 years ago at ~$10K, +712% and 85% respectively. 

So yes, in the short term, bitcoin has been extremely volatile. As I’ve mentioned before, it is not for the faint of heart. BUT, these short term gains were so unrealistic to begin with.

Look at this graph between 2020 and 2021 (+550% in 2 YEARS!)→ this is NOT normal returns.  (To compare the S&P between 1/1/2020 - 12/31/2021 gained 46%. Which by the way, 46% is really really good. And also unrealistic, which is why we’re seeing a correction in stock market too…)

If this is our benchmark, then everything, like plain old stocks and real estate, pales in comparison.  It’s also why dollar cost averaging can be so helpful…because you don’t have to worry so much about timing the market, and can just buy a little overtime so that it averages out to a positive investment.

But if we take a longer view, it’s still a very positive return. I mean 712% over 5 years is still bonkers. Imagine if you bought a house for 500K in 2017 and it was worth $3.56M today. You’d be like, WOW, that is amazing but also kinda insane…?! 

What’s happening right now is a long overdue correction with crypto. 2020-2022 was NOT normal and should not be considered the standard. People were throwing money left, right, and center and seeing what sticks.

Inflation has gone up, people are more money conscious, pandemic benefits have stopped, the 2017 tax cuts have finally settled in, and the Fed has finally realized they should probably raise rates…making it a confluence of factors thats creating a tightening in spending and a little more money discipline. 

This means that random crypto coins that were created by who knows (in industry lingo parlance, called “S@#% coins”) are getting recognized for the speculative investments that they are. In my mind, these long tail of cryptocurrencies were never going to be the future of crypto. They were just people profiteering off the moment.  

Currencies are the supreme example of network effects. They only work if a lot of people believe they work. So it’s not logical that we would end up with thousands, even 50 cryptocurrencies. 

Think about it today. We don’t use 50 different currencies to pay for stuff or save for stuff. In the US, we basically use 1: the US dollar. And globally, the majority of global investments by volume probably use like 7-10ish? And then there’s a long long tail of other smaller local currencies.  Which is why my bet (and what I’ve shared before) has always been to focus on the biggest currencies by volume and the longest established (bitcoin & ether)…because they have the most network effects and social trust baked in.   

Also, I never invested in stablecoins like terra (which recently imploded) or USDT (except for $50 just to see what it is like), because I don’t see the upside in holding value in those currencies. Those currencies peg to the dollar…but why not just hold actual dollars then? Because by holding those currencies, you’re holding the dollar + taking on the risk of a virtual currency… so you’re just adding risk. 

The only reason in my mind to use those currencies is if you’re trading into other currencies. So for example, you want to buy some low-volume cryptocurrency where it’s hard to trade directly from USD to that crypto. So instead, you go USD → USDT → cryptocoin (and cryptocoin → USDT → USD if you’re trying to trade out of it).  But in my mind, that’s a temporary conversion tool. Not something I want to hold on to forever. 

These are my thoughts. Let me know yours.

Money & Crypto

  • “Tech investors are prizing cash generation again” …I said this last week too: why are we saying cash generation is back in fashion? It should never have gone out of fashion! lol Making more than you spend (ie. generating cash) is a pretty basic tenet if you want to survive in business. I find it funny that people are actually surprised that start ups have to actually start making money in these current economic conditions and cannot just rely on neverending funding rounds as a source of income. (Economist)

  • Americans saving less (Economist). What’s truly bonkers to me about the chart above is the spike in savings rate during Covid…I wonder how much of these savings fueled the stock and crypto bonanza of the last 2 years that we’re now correcting for.

Etc.

Podcast Pick of the Week

  • 🎧 I discovered the podcast True Story, hosted by comedian greats Cheryl Hines and Tig Notaro. They discuss recent documentaries they’ve watched, as well as banter about everything and nothing, and it is a delight.

Disclaimer: All opinions are my own. The content on this site and on the podcast does not constitute financial, legal, accounting, tax, or investment advice.

wallet street
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