The crypto asset class has burst: game over? With Bitcoin touching 3,248$ recently, one may wonder if the near 90% crash experienced from the all-time highs last December has invalidated the case for crypto assets.
A drawdown of this magnitude points to a bubble having obviously deflated, claim the long term sceptics. Current price adjustment would be, in their opinion, a reversion back to the true fundamentals of crypto assets, which should be valued “at best” as a commodity. But wait a minute. Bitcoin crashed 90% in 2011 and already died a 1st time. Except that it rallied 7287% afterwards until the next cyclical high is found.
Bitcoin crashed 92% in 2014 and died a second time. Once again, it rallied dramatically and price increased 1500% until a new cyclical top is found in 2017. Those examples show that “the bubble has popped theory” might actually be only half-correct. Yes, a 90% drawdown points to short term excesses being corrected.
Does it mean that the new (lower) price levels are reflective of the long term value of crypto assets? Probably not. Here is why. Crypto assets have a phenomenal and unusual volatility. Periods of massive gains are followed by periods of massive losses. This does not prevent the secular (upwards) trend to continue to develop. Those advances and set-backs are just magnified way beyond the volatility and drawdowns experienced on other traditional asset classes.
As long-term investors in Crypto assets, we understand that the ongoing 2018 bear market has taken its toll on investors’ psychology. We have been there in the past. A year later, the drop seems obvious, but was it really so obvious in 2017? Truth is… bubbles are easy to identify after the fact but nearly impossible to spot in advance.
Those avoiding the previous cyclical crypto bear markets avoided the roller coaster but missed x100 gains. Sort term vs long term. And no free lunch: high expected returns do not come without a high volatility. Now on fundamentals. Average mining costs are estimated to be in the 3,500 / 7,000 range, depending on the miners’ location and some other parameters. Transactions velocity has cooled down but absolute numbers remain robust. And major institutions are working to either use or invest in the technology, building the required infrastructure and custody offering needed to get the crypto asset class eligible to institutional investors.
Blockchain is rightly considered as the next major innovation wave, similar in scope to what brought the internet in the mid-90’s. There will be winner and there will be losers. Pets.com went bust. Amazon became the top US company by market cap.
Overall, early adopters, market participants and investors willing to weather the storm were highly rewarded.
So… game over? For short term investors not committed to the long term picture, this might be the case. For those having (unwisely) used leverage and being wiped out, the game is likely to be over. For long term investors like us, having smoothed the impact of the current bear market through a sound diversification of strategies, this is actually a very exciting time.
A time of opportunities. Weak hands will sell, long term investors will remain committed. Because they know that bull markets are born out of bear markets. Because valuation gets compelling after a 90% decline. Because adoption keeps growing and institutions are getting in. But of course, only time will tell.