We are in the 3rd worst bear market in crypto history
Hope everyone is doing well. I wanted to start a newsletter that discussed the cryptoasset space from a markets perspective. While there are many newsletters that delve into the technical underpinnings of cryptoassets and give highlights of early-stage projects, I realize that I have never come across a newsletter that consistently discusses cryptoassets from a macro markets perspective. Hopefully, these newsletters will help you better understand the market dynamics that drive cryptoassets.
As of early August 2019, cryptoassets are in the 3rd worst bear market in their history as an asset class. Bitcoin has dropped from a high of $20,036 in December 2017 to $6,481 today, a 68% drop. As Bitcoin acts as the “safe haven” cryptoasset, most other cryptoassets have lost 90%+ of their value during this bear market. What prompted this bear market, why has it continued to persist, and what might reverse the trend?
Anyone who has dealt with financial markets understands that fear and greed drive markets, often causing overreactions both on the upside and downside. In 2017, Bitcoin saw an increase of 1,611%. Ether, the second largest cryptoasset, saw an increase of 9,181%. These are mind boggling numbers. There are very few assets in history that have risen to such heights so quickly.
Furthermore, retail investors were the ones who drove the prices so high, meaning that it was more likely your son or daughter who was bidding prices higher rather than your banker or asset manager. In other words, non-professionals from around the world jumped into cryptoassets with emotional fervor. All one needs is an internet connection to buy these assets, which means anyone who had the impulse to participate in the craziness could satisfy their desires in an incredibly easy manner.
What drove the euphoria that blew off the bull market
Yet, as we all know, this emotional euphoria could not last forever. The euphoria, like other market-driven euphorias of the past, was based on narratives and themes that remained in the realm of theory. There were many narratives that acted as sirens for new entrants: decentralized applications would consume the world, endowments would allocate a portion of their portfolio to this emerging asset class, large corporations such as Amazon were going to accept cryptoassets as payment for goods, and Bitcoin would effectively compete with the unsound fiat money that has been manipulated by central bankers ever since Nixon removed the gold standard in 1971. While all these narratives may come true in the future, investors were discounting their probabilities incorrectly because of their desire to participate in massive wealth creation.
There is a common thread as to why these narratives did not come to fruition in 2017. There was no infrastructure to support the transition of these stories into reality. The technology that supports decentralized applications was too slow and costly, there were no qualified custodians or other service providers to cater to the needs of institutional allocators such as endowments, there is no easy way for merchants to accept a large number of transactions in cryptoassets, and adoption of cryptoassets is not nearly high enough for people to question en masse the economic dominance of central banks.
Yet this year, there have been leaps and strides in making the narratives of yesteryear a reality. Infrastructure across the board is being rapidly developed and implemented. In newsletter #2, I will discuss the infrastructure that is being built which will allow for the advent of the cryptoasset economy.