This crypto winter will be long, cold and harsh

Bitcoin and other cryptocurrency assets are notoriously volatile, routinely suffering large drops of 50% or more. This doesn’t seem to bother the diehard believers in crypto too much, who have become used to declines of this magnitude. They simply use the declines to buy more. Even so, there are still a lot of people in the space who remember “crypto winter”, the period between early 2018 and mid-2020 when prices went down and stayed down, and much of the innovation in crypto came to a halt.

So, the question is: what do we make of the recent gyrations in the space? Does this mark the beginning of a new, long winter after a short spring or is it just a pause that refreshes? Although the selloff in crypto may not be as big as others in its history, it feels worse because the market has grown so big — to the trillions of dollars in size. The damage in crypto has been broad, with hundreds of coins having plunged by some 90%. Bitcoin, the biggest and most well-known of the cryptocurrencies, hasn’t done as badly, but is still down a painful 56% from the peak.

At the top of the bull market last year, there was a lot of hubris, laser eyes, CryptoPunk avatars and rude behaviour to go along with over-the-top bitcoin conferences. All of it was a sign of the tough times to come. Untold numbers of crypto sceptics ended up at the bottom of a Twitter dogpile for suggesting the bull market had bubble-like characteristics. A speaker at a recent conference I hosted was a former ethereum miner. He talked about crypto winter, and in the midst of the carnage, he bet pretty much every last dollar he had that crypto would rebound, buying more and more GPUs to mine ethereum when prices rose. They eventually did, but tellingly, he is no longer in the ethereum mining business, repurposing his equipment into cloud storage.

Most smart people agree the blockchain technology underpinning cryptocurrencies has huge potential, though we don’t really know what it will look like 10 years from now. The venture capitalists believe it, and they’ve been making numerous Web3 (decentralised Internet) investments and receiving tokens in return. Vast fortunes have been made in non-fungible tokens, or NFTs. But the value of all these assets has been decimated over the last few months.

Normal

If you think about the normal cycle of tech investing, the dot-com bust that started in 2000 and ended in late 2002 deterred venture capital investment for almost a decade, to the point where their best ideas were FarmVille and weird cleantech ventures. The big VC firms raised a lot of money for crypto in the last year, and the returns are going to be abysmal for a long time. That is normal. Whenever an asset generates no cash flow and no earnings, valuation is all based on confidence. Sometimes we feel good about these assets and other times we feel bad. You are seeing this play out right now in the stock market. The stocks that have been hit the hardest are the ones without any fundamental underpinnings. This is what makes investing in crypto so risky.

In previous crypto bear markets, people wondered if bitcoin would rebound. Now, they wonder out loud about the future of blockchain in general. There should be no question about the unlimited potential of this technology. If you own a basket of crypto today, like I do, it will probably be worth much more in the future. But how much more and when is the question that nobody can answer. Crypto will have another winter, but out of that neglect will grow another bull market, led by a handful of cryptocurrencies that will grow to far beyond what exists today.

Sometimes confidence disappears for a while, but it always comes back. Maybe instead of Web3 and NFTs, it will be a different technology that captures the imagination. It is worth pointing out, though, that many survivors of the dot-com bust went on to be spectacular winners, including Amazon, Facebook and Google — and even eBay. The capital markets are a giant sorting machine, filtering out the bad ideas and rewarding the good ones. So, when people ask whether crypto will come back, the answer is yes, absolutely it will come back, but 98% of it won’t.  — (c) 2022 Bloomberg LP