Two worlds of crypto

“You and me, we come from different worlds.”

Only Wanna Be with You, Hootie & the Blowfish

In the crypto world right now, there is devastation over the past month.


These charts are devastating — and the losses are even greater if you go back to November.  But, the last month has eliminated hundreds of billions in paper wealth.  The mentality of a bear market has taken hold.  One of the best tweets I read about crypto described as, “Unregulated finance on top of shi**** tech.”

Undoubtedly, in many areas, this sentiment is taking hold.  There are certainly many initiatives which are being quietly tabled and abandoned as the world goes from high to low on crypto.  In addition, there is no data that we have hit a low, or that these numbers can’t drop even further.  Unlike stock, which entitle someone to a cash flow of an entity, tokens must either be used or sold to someone else in the future, ideally at a higher price.  So, many of the tokens do not have a natural floor (such as when the yield gets high on a stock).

The other piece here that will hurt crypto is that many projects will be exposed as either having design flaws or outside flaws.  Stable coins exemplify this.  Luna (in the chart above) was supposed to always be worth $1 through algorithmic buying and selling — much like how a back can meet liquidity needs of its customers, with only a percentage of deposits in cash.  Luna worked until there was a run on its assets, and it was unable to defend its peg, and the stable coin collapsed as there were insufficient reserves behind it.

There has been the start of runs on Tether too.  While Tether has to date been able to redeem at par and defend its peg, it has never allowed a full audit of its assets, making it potentially vulnerable to a run as well.

There will undoubtedly be other hype-coins that collapse as the excitement leaves the market through either fraud, design issues, or just loss of enthusiasm of its founding team.

So, where does this go?  Well, may people think it leads to the end of crypto.  This has been called multiple times, and all calls of death have proven premature to date.  My view is that it will lead to projects that make use of crypto for what it is uniquely good at — and not just what it can do.  It’ll probably lead to more regulation too, which will kill some ideas, but likely prove generally positive over time, as financial regulation has mostly stopped concepts like bank runs that existed before financial regulation.

The other point is that now is a buying opportunity.  Everyone says, “buy low, sell high,” but it’s psychologically easier to do the opposite.  When things are high, everyone has been making money and it’s easy to, “come in now.”  And, when everything is low, “everyone has been losing money and it feels good to cut your losses.”

If you come from a world where you’ve always hated crypto, now probably feels like a good time.  However, if you come from a world that believes in the underlying properties and that an internet-native financial system makes sense for the internet, then now is a time to buy.