The crypto market is dark and full of terrors

The sharp drop in cryptocurrency prices has spurred fears that the notoriously volatile industry is about to go through another prolonged slump.

The market cycle has become such a predictable pattern — a steep decline in coin prices followed by a prolonged period of flat trading — that it even has a catchy name: crypto winter. “With this market drawdown, we are definitely in this similar territory of downturns we have seen in the past,” Chris McCann, a partner with Race Capital, told me.

Crypto has had dramatic ups and downs. The most recent crypto winter happened around 2018 when bitcoin rallied to about $20,000 before a roughly two-year slide that saw it fall to under $5,000.

• But crypto slumps have always been followed by sharp rallies, which drew more players and corporate investments to the space.
• A good example of that is Robinhood, which introduced crypto in 2018. That bet seemed to pay off when crypto trading revenue juiced its earnings just in time for its IPO last year. But lately, falling crypto volume has been a drag on the stock.
• At times, the crypto craze has led to quirky, even disastrous business maneuvers. The bitcoin rally in 2017 prompted the Long Island Iced Tea Corp. to rebrand itself as Long Blockchain. It ended up getting delisted from the Nasdaq last year.

Crypto has been sliding for about two months now. The total market value of all cryptocurrencies reached $3 trillion in November before heading south. It settled at around $1.6 trillion this week.

• The price of bitcoin has tumbled to around $36,000, after topping more than $67,000 late last year.
• Is the current slump a buy-on-the-dip opportunity like the pandemic price crash in March 2020 or the May 2021 crash that also wiped out $1 trillion in value? Or is it a prelude to a prolonged period of flat trading like the markets saw in 2018 and 2019?
• It’s pretty much impossible to tell with crypto, which has proven to be a particularly unpredictable market. “If I could foresee the future I'd be in Las Vegas,” said Rob Siegel, a management lecturer at the Stanford Graduate School of Business.

But key changes in crypto are worth noting. And they’re likely causing the heightened volatility.

• Crypto rallies have been driven mainly by speculation and low interest rates. “In a world of largely 0% interest rates, capital was chasing returns,” Siegel said. “Ergo, it flowed to riskier assets like crypto to get those returns.”
• With the Fed gearing up for a new round of interest rate hikes, “capital is flowing back to less-risky assets that will yield higher returns than they did previously,” Siegel told me.
• Despite crypto’s growth, the long-term value of crypto assets are still unclear. “The rise and fall of the crypto value in the near term tells us nothing of the long-term rise or fall of the asset class,” he said.
• Bank of America urged investors to embrace a long view on crypto. In a note titled, “Is another crypto winter here?” bank analysts wrote that “direct exposure in crypto coins or tokens” should be “attractive only for highly risk-tolerant and speculative investors.”
• These risk-tolerant investors now include big institutions. Chris Kline, co-founder and COO of Bitcoin IRA, noted that there are now more institutions dabbling in crypto, from major investment firms and hedge funds to companies like Tesla, Block, MicroStrategy and Coinbase that have billions of dollars in bitcoin on their balance sheets.
• “This sell-off is not the same as others,” Kline told me. “Unlike past rallies that were primarily retail, the inclusion of larger institutions can affect price moves differently. ... This is uncharted territory for crypto as we enter a new phase in its lifecycle with attraction from big players, hedge funds and even governments signaling that they are open to this asset class.”

That’s why they say “hold on for dear life.” For the crypto faithful, the sell-off is an accepted part of an industry where investors are encouraged to embrace the long view. “If you're going to invest in bitcoin, a short-time horizon is four years, a mid-time horizon is 10 years. The right time horizon is forever,” MicroStrategy CEO Michael Saylor told Bloomberg.

McCann of Race Capital argued that downturns are “usually the best time to build and invest because only the true believers can stick through this kind of volatility and focus on building.” “These times are what separates the wheat from the chaff,” he said.

— Benjamin Pimentel (email | twitter)

A version of this story first appeared on Protocol.com. Read it here.

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