It may be summer outside, but it’s a brutal winter in crypto land.
Bitcoin is experiencing its worst selloff since COVID began, altcoins have plunged even further, and stablecoins are grappling with a funding crisis. The stock market may have found a bottom, yet Bitcoin can’t seem to stay above $30,000 for long.
Crypto tends to go through boom and bust cycles every few years. Bitcoin itself has dealt with seven selloffs of 50% or more since 2010.
Even though this seems to be a pattern, it still may be a painful season.
Will crypto survive its summer winter?
Supply and demand
A few weeks ago, I talked about how 2022 has been the year of switching from exciting growth investments with promising futures to boring assets that can deliver cash flows today in a wobbly economy.
Crypto was one of the biggest victims of this market mood shift. The Fed started talking about hiking rates, and people started dumping growth-focused assets. Crypto sits on the extreme end of the growth spectrum. It’s a young market still finding its place in a largely centralized world. Like clockwork, Bitcoin peaked around $67,000 in November, then plunged almost 60%.
Crypto has been stuck in a selloff for six months now, but more recently it’s felt like the wheels have fallen off the bus. Terra, a stablecoin tied to the US dollar, lost its peg and its value fell to almost nothing, wiping out $45 billion in value. Tether, another stablecoin, briefly slipped off its peg. The failure in stablecoins raised an important question for crypto: how much can the ecosystem take when demand dries up?
On one hand, it’s smart to examine exactly what crypto’s center of gravity is. Crypto, unlike stocks and bonds, doesn’t have cash flows that you can use to mathematically back into an intrinsic value. When the buzz around crypto dies off – as it does from time to time – it’s hard to say what price some coins should be trading at.
Finding value
In the quest for defining crypto’s value, we may need to take some lessons from the tech bubble. Back then, the internet was a young yet promising technology, but the market around the tech got ahead of itself. Still, the ideas survived and tech companies are now some of the biggest and most profitable on the public markets. The internet may have radically changed society, but it wasn’t fully appreciated by investors until years after the tech bubble burst.
Crypto could be finding itself at the same juncture today. In crypto’s case, it’s less of a question of if there is value and more of what certain coins are worth in a rising-rate environment. Society is moving toward a decentralized future, and blockchain technology has already proven to be immensely useful.
While we may no longer see all crypto prices rise together, some discretion may be a good thing for the space. Crypto – just like other industries and markets – goes through ups and downs, yet innovation hasn’t died off. Andreessen Horowitz calls this the “price-innovation cycle” in which prices drive interest, interest drives ideas, ideas drive innovation, and innovation inspires investment. Prices have gone up and down, yet developer activity, social media buzz, and venture capital funding have grown consistently over time.
Besides, busts tend to indicate when the building happens. There’s a reason we say necessity is the mother of invention. Recessions can be painful, but they often spark innovation and boost productivity, leading to an even more resilient economy. Think about that, but on a smaller scale. In down times, capital becomes more selective and concentrated in proven projects, which strengthens the ecosystem for everyone.
Demand hasn’t totally dried up, either. Millennials and coming-of-age Gen Zers could be a real boon for crypto. More investors ages 18-34 plan to invest in crypto than domestic stocks over the next 12 months, according to our Retail Investor Beat survey of 1,000 investors conducted in March. Younger investors also see crypto as a transformative investing theme, and tend to be more open to the communal benefits of decentralization and shared ownership.
Surviving the winter
So, in the absence of cash flows, how can you measure which projects have enough backing to survive this winter?
Consider the utility. Finding a company with a useful product is a good start to picking a stock. Now, apply that same logic to crypto. There are tons of projects out there addressing real-world problems: payment protocols, peer-to-peer lending, creator ownership, and much more. While it still may be hard to calculate an intrinsic value, a project’s use cases could help keep it durable.
Study the ecosystem. While some projects have clear utility, others provide strong foundations for people to build on. Ethereum is a good example of a highly programmable blockchain network with lots of projects layered on top of it. Andreessen Horowitz estimates that Ethereum’s chain averages almost 4,000 active developers monthly, by far the most of any platform. Solana boasts the second-highest developer activity, even though it’s the ninth-largest coin by market cap.
Follow the money. When in doubt, watch what Wall Street is gravitating toward. Bitcoin has been the gateway for the masses into crypto, and old-school firms like Fidelity and Goldman Sachs have started offering Bitcoin exposure to their clients. Bitcoin’s protocol may not be wildly innovative, but its stability and popularity have made it the go-to coin for institutional and corporate adoption. Institutional backing can be a big competitive advantage, and it’s helped Bitcoin establish itself as the dominant coin in crypto.
Don’t get me wrong, Bitcoin — and crypto in general — are high-risk investments. You may even see less correlation between Bitcoin and tech stocks after this crypto winter since investors may be more discerning with growth-focused assets. Bitcoin doesn’t have cash flows like many stocks do, and that dynamic in itself could make some people nervous.
When you’re choosing what to do next in your crypto portfolio, remember that the best advice is to stay true to your goals, needs, and risk tolerance. If you believe in crypto and blockchain’s benefits and growth potential, it may be worth waiting to see how the crypto industry blossoms in the coming years.
*Data sourced through Bloomberg. Can be made available upon request.