Buck Jordan here.
This week, I want to talk about all things crypto. If you’ve been following the industry lately, you know it has been a rough few months.
Bitcoin and Ethereum prices have crashed 70% from their 2021 highs (though they’ve made some ground up the last few weeks), and NFT sales hit a 12-month low in June of this year as trading volume drops.
As a crypto investor, these signals are naturally reasons for concern. But as I’ve written before, we’re in the business of long-term investing and being patient with our capital.
The truly best startups take a decade or longer to build revolutionary new technologies like the internet, smartphones, and 3D printing. Eventual impact aside, these sorts of things can take even longer to develop and affect our daily lives. Downturns are a normal part of investing, and during a downturn is the most important time to keep a long-term perspective in mind.
While the price drops for Bitcoin, Ethereum, and other cryptocurrencies have been painful to experience, I think the current crypto crash is not a bad thing. In fact, I believe it’s actually a good thing for the sector and long-term investors.
Look, last year was clearly a crypto bubble. The prices of Bitcoin and Ethereum shot up by 300% to 400% from the start of 2021 to their peak prices. An NFT was bought for $69 million. People were taking out loans to buy more crypto and NFTs (please don’t do this).
All bubbles create excesses that take time to undo and sometimes can blow up dramatically.
The last few weeks have seen some of the excesses in crypto coming undone. Most notably, there was the spectacular collapse of $10 billion crypto hedge fund Three Arrows Capital and crypto firm Celsius locked up billions of customer deposits.
Bubbles create euphoria where bad decisions get made, bad businesses get built, and problems are patched over that later come back to bite. Three Arrows Capital and Celsius are the most prominent culprits of this in the latest crypto bubble.
So, why do I think the current crypto crash is a good thing? Well because bubbles are part-and-parcel of how new technologies develop, and the bursting of those bubbles is a key phase in this. Scholar Carlota Perez laid this out clearly in her 2002 book Technological Revolutions and Financial Capital.
The graphic below from the Economist lays out Perez’s framework well. New technologies go through four distinct phases: Irruption, Frenzy, Synergy, and Maturity.
The Irruption period is the initial launch of a new technology and the preliminary research. The release of the Bitcoin Whitepaper in 2008 kicked off the crypto industry, and the ball started rolling. The Frenzy period is when a bubble forms around a new technology. We had a mini-crypto bubble in 2017 and a much bigger bubble in 2021. Then you have a turning point where the bubble pops.
The good news is the bursting of a bubble doesn’t mean the end of that new technology. Instead, after the bubble bursts, innovators keep pushing the technology forward, new use cases for that technology are found, and, slowly but surely, excitement builds again for that technology. Then, we enter the Synergy and, eventually, Maturity phases.
I think 2021’s huge increases in crypto prices and the rush around NFTs was crypto’s Frenzy period. While it may not be the last Frenzy period, it was by far the biggest.
But the truth is, as I wrote a few weeks ago, there are a few areas where crypto offers the potential to truly transform the world.
With the bursting of the latest bubble and the failure of multiple companies, talent is being recycled from failed opportunities into more promising ones. Financial capital is being reallocated from speculation toward more productive uses. In fact, investment by crypto VCs crossed $18.3 billion in the first half of 2022 and is on track to pass 2021’s haul of $34 billion.
Not only that, big news broke this week that investment management firm BlackRock – which oversees an eye-popping $10 trillion in assets – is partnering with leading crypto exchange Coinbase. This will make it easier for institutional investors to buy crypto, further showing that, even in a downturn, smart investors are laying the foundation for future investment.
So, yes – crypto prices have crashed, companies have failed, and money has been lost. But great innovators are still pushing blockchain and crypto technology forward, well-run companies are still steadily acquiring new customers and increasing adoption, and savvy investors are still deploying dollars into compelling opportunities.
That’s why I’m as bullish on crypto as ever and will continue to seek out quality investment opportunities in the space. I advise you do the same.
Until next week!