One year ago today on December 31st, 2017, I wrote a post titled “Thoughts going into 2018 & why we may see 50 before we see 5000.”
I wasn’t surprised to get lots of downvotes. At the time, many folks around here were predicting 5k an Ether by 2019. The idea of double-digit Eth seemed absurd. Even I didn't think it would happen, just that it was far likelier than many were thinking.
Greed is a blinding force...but so is fear. Just as we tend to be irrationally exuberant during boom periods, we tend to be irrationally gloomy during busts.
So just as I tried to instill a bit of realism/pessimism when we were at the height of the bull market, I’ll do my best today to instill some realism/optimism in the midst of crypto winter.
The first thing to understand is that boom and bust cycles are a fact of life in any technological revolution, whether the railroad, the Internet, or crypto.
For instance, from the peak of the dotcom boom in 1999 to the bottom of the bust, Amazon stock dropped 93.4%. By comparison, Ether dropped 93.8% from its high to its low in 2018. Yes, apples and oranges, but the underlying psychology and market forces are the same.
If anything, you’d expect crypto to be more volatile than Internet stocks in the dot-com boom, as it’s not just a new technology but a new asset class. Amazon stock was still equity in a company. Crypto is an asset class the world has never seen before. Indeed, Bitcoin has endured multiple falls of over 80% in its 10-year history. So far, this bear market has actually been less severe in terms of percentage drops than some prior.
Understanding how these boom and bust cycles work is key to staying level-headed during both booms and busts. Here’s, to the best of my understanding, the way these cycles work . . .
In boom periods, irrational exuberance and greed steer the ship as everyone buys into wildly optimistic stories about how the new technology is changing the world right here, right now. Ordinary folks feel like brilliant investors; they can throw darts blindfolded and almost always hit a winning trade. Everyone and their dog is looking for “the next Yahoo” or “the next Bitcoin.” You can turn on CNBC to get ‘expert picks’ on the next hot IPO or the best altcoin to buy. Some folks even quit their jobs and become day traders.
During fear phases, the green becomes red and the champagne turns into blood. FOMO buying is replaced by panic selling as weak hands who were planning to get rich quick run for the exit. Regulators crack down, scaling woes come to the surface, and ICO treasuries get depleted. In the words of Buffet, as the tide goes down, you see who’s been swimming naked.
Good news is ignored and bad news is overplayed. The world once again pens Bitcoin’s obituary and FUD on Ethereum. Casual investors feel like they were duped. They feel angry, sad, and dumb. Prices plummet taking down both quality assets like Amazon and Ethereum and shitty (or early) ones like Pets.com and Bitconnect. Value shifts from weak hands to the strong. Winter is longer than summer but the builders keep building, the innovators keep innovating. The seeds of tomorrow’s good news take root and patiently await the bloom of the coming Spring.
Remember, Mr. Market is a manic depressive. Don’t take him too seriously, especially in an immature market like crypto.
I know people who last December were saying “Ahh if only I had bought Ether when it was 100” or “oh man I wish I had bought Bitcoin when it was 5k” who won’t touch crypto now with a 10-foot pole.
Such is human psychology. We are social animals inclined to do what others do and believe what others believe. If others are buying, we want to buy. If others are selling, we want to sell. As Buffet said, “be fearful when others are greedy and greedy when others are fearful.”
Anyway, aside from this natural boom and bust cycle, there are other forces at play. There is a global tightening of liquidity right now due to central banks raising interest rates and ending QE. Put simply, there is less money to go around. This will hurt any young, speculative asset like Ethereum.
Compared to Bitcoin, Ethereum is even younger, more complex, more experimental (and ambitious), and thus more volatile. From January 1st, 2017 to the peak of the last bull market, Ether went up by almost 180x, while Bitcoin went up 20x. So it’s no surprise Ether has fallen further.
It’s human nature to overestimate the impact of revolutionary technologies in the short term but underestimate their impact in the long run. This is why Amazon stock fell from over $100 to around six bucks during the dot-com bust but then gradually rose to the quadruple digits over the next 15 years.
If Ethereum succeeds, it will rise from the ashes of this bear market and follow a similar-ish trajectory. History doesn’t repeat, but it does rhyme.
In my view, nothing fundamental has changed. Regulatory, scaling and ICO woes were not much of a surprise. Sure, some frustrating setbacks in terms of the project roadmap, but nothing existential.
The big-picture today looks brighter to me than ever before. I’ll write another post on this sometime soon, as this one is already getting long. But to wrap up, let me offer my two cents on how to stay sane (and solvent) during these boom and bust cycles.
First off, don’t invest more than you can afford to lose both financially *and* psychologically. Like if your losses are keeping you up at night, you’ve probably put in too much.
In the event of another major run-up, consider taking some profits for peace of mind. If there are any changes in fundamentals, revise your views, but otherwise don’t pay much heed to the whims of Mr. Market. Be financially and psychologically prepared for dramatic price moves in either direction.
I think a good rule of thumb for 95% of crypto investors is that barring any change in fundamentals, don’t sell at a loss *or* buy at a loss. The former is obvious e.g., don’t sell at 75 if you bought at 100. The latter means that if you sell at 150, don’t buy back in at 200.
This rule forces you to only sell as much crypto as you’re willing to lose and to not make impulsive FOMO buys. Obviously, traders will violate this rule with stop losses but I believe that very few people are psychologically cut out to be good traders (at least without years of practice), myself included. I believe 95%+ of people should focus on investing rather than trading and simply DCA in and shoot to do so during times when things have sold off and fear exceeds greed.
If you want to go more in-depth, read and listen to thoughtful crypto investors like Ari Paul, Chris Dixon, and Chris Burniske. They're not always right (nobody is), but they are smart. If you‘re an Ethereum maximalist, stay open-minded to other views. Qiao Wang has some excellent commentary on the tradeoffs between Ethereum and other cryptos from an investment perspective. Ideally, diversify both within crypto and outside of crypto in other asset classes. I’m personally most bullish on Ether long-term, but this is a probabilistic bet and I try to hedge this bet with a few other cryptos that have different tradeoffs.
A bear market is a great time to turn off GDAX, delete Blockfolio and focus on investing in your skills, knowledge, mental and physical health and relationships. Get outside, get some sunshine and move around. You’ll not just be happier but in a better position to make good decisions in the markets and more importantly, to not make bad, costly ones
Do your best to stay in the game but if you get wiped out, try to learn from it, be patient with yourself, and remember there are bigger games in town than making money from crypto. Not to mention, many successful investors and traders got wiped out early on. The key thing is to try to learn. I've made a lot of stupid decisions, but hopefully I'm wiser today than I was yesterday, and I'll be wiser tomorrow than I am today.
Remember that nothing is guaranteed. Any asset that has the potential to 100x also has the potential to go to zero. Without risk, there is no reward.
That said, these are still early days and the future of crypto looks as bright today as it ever has.
If Ether hits 10 or 50k someday, many folks will say “ahh if only I had bought when it was 100.” But you and I know that this is BS. The reality is that 99% of those folks would have freaked out and sold during a bear market.
I think there will be more bleeding ahead and it *could* be a long while before the market makes a convincing recovery. Much of this depends on factors beyond crypto, like macro forces in the economy, when we enter a recession, what type of recession it is etc.
Crypto winter is an opportunity to exercise our patience, cultivate our resilience and for money to flow from the weak hands to the strong.
Stay hungry, stay foolish, and remember that it is always darkest before dawn.
Oh and happy New Year!
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