Bitcoin and other cryptocurrencies have had a particularly difficult few weeks. Over the previous 30 days, Bitcoin has lost more than 18% of its value. The total crypto market cap, according to CoinGecko, peaked on November 10 and has been steadily declining since then. Some NFTs’ floor pricing have also begun to show signs of deterioration.
This may be something of a novel experience for a large percentage of crypto newbies. Platforms like Coinbase have witnessed amazing growth in the last two years, with verified users increasing from 37 million in the second quarter of 2020 to 68 million in the second quarter of 2021, and then to 73 million in Q3.
That amounts to tens of millions of crypto investors who have never seen a true crypto bear market, let alone a long “crypto winter.” It’s not definite that we’ll experience any of them, but both are possibilities – and newcomers should prepare psychologically.
Let’s start with some context. For anyone who has been following Bitcoin for a long time, a decline to $40,000 does not seem like the end of the world. BTC reached that level for the first time only a year ago, in January 2021. Even as recently as July, it fell considerably below that threshold, briefly falling below $30,000.
BTC’s latest 38 percent drop from a November high doesn’t even come close to ranking among the token’s worst crashes: In just a few weeks in 2018, BTC plummeted by 84 percent.
In summary, individuals who bought at the height of the excitement are likely to be hurting right now, while many other investors – those who sought out solid entry opportunities to accumulate – are still doing well. The most significant lesson in crypto investing is that, since they are so accessible and liquid, they are prone to large, rapid changes in sentiment, resulting in fragile blowoff tops. Warren Buffett’s timeless advice applies even more than in equities: be frightened when others are greedy, and greedy when others are fearful.
The most recent dramatic drop occurred in July, when the market dropped by more than 50%. Following important developments like as El Salvador’s adoption and Twitter’s popularity, the price quickly recovered. Though larger conditions point in the wrong direction, something similar could revers the current trend. Above all, the Federal Reserve’s intention to tighten the money supply this year will be a drag on Bitcoin’s “inflation hedge” thesis, as well as tightening startup funding and other speculative investments in general.However, the cyclical nature of bitcoin acceptance, interest, and markets appears to be unaffected. For the past decade, this pattern has been consistent. Every fresh crypto boom brings a flood of new speculators and venture capitalists, many of whom have just a rudimentary knowledge of the technology and why it’s significant. FOMOing into a top burns a lot of these new recruits. They also outsmart themselves by purchasing a token marketed by the founders as “the next Bitcoin,” which turns out to be a cheap hoax or simply a terrible idea. The “decoupling” of crypto assets has escalated in this cycle, and the margin between good and bad investments has been enormous.
Those who are burned — and there are a lot of novices being burned right now – take their ball and go home, angry and resentful. However, a significant number of them stay, learn from their mistakes, and eventually become even more involved and devoted. With their newfound knowledge, they’ll be able to assemble an even stronger phalanx of users and supporters the next time pricing action grabs the public’s attention. Obviously, this loop cannot continue indefinitely.
Bitcoin, in particular, will eventually find a more stable “proper” price. Maybe it’s around $50,000, and it’s already happened — though I doubt it.Regardless of price action, the pace of new ideas, integrations, and adoption (particularly by nation-states) is likely to continue strong, as I predicted in my 2022 forecasts. This, combined with the millions of new people learning about, using, and even inventing crypto systems, will lay a solid basis for the next wave of enthusiasm and growth, whether it comes in three months or three years. Right now, either outcome is feasible. As a result, you should adjust your portfolio – and your expectations – accordingly.