Why Crypto Will Crash Again
Don't expect a supercycle
Note: this post does not have anything to do with the price drop yesterday. I think that was just a blip.
I want to take a moment to explain that crypto will crash again. It is inevitable. Prices will not go up forever.
Yes, even though I believe crypto represents a new asset class - the foundation of the internet economy! - that is ~85% likely to become a genuinely important economic advancement... crypto will still crash.
There are two main reasons why: human psychology and market structure after a sustained bull market.
What I describe below is essentially Ray Dalio's economic cycles (explained here in a really good 30-minute video), but operating on a hyper-shortened time frame because crypto is global, easy to access, and memetic.
Here's how a cycle starts:
People start learning about something new. Not many people care about it, only true believers.
Gradually, new things start to be built, or outside catalysts result in increased attention on the industry.
At this point, while new money does move into the space to push prices up, prices are typically moving because 'smart money' already in crypto realizes a shift is occurring and begins to increase their allocations to the sector.
Take Q4 2023 for example: BTC ran up from ~25k to ~42k, mostly due to people who already invest in crypto increasing their allocation in anticipation of the likely ETF approval.
When all-time highs (ATHs) are hit, more general uninformed people begin to invest in crypto. This is where things start to get shakier from a market structure perspective. The marginal buyer (the average new buyer) is less informed and is likely learning about crypto from worse information sources.
Here is where the unavoidable human psychology element kicks in - when times are 'good' for too long (or if it happens too fast!), people will always start doing stupid things with their money.
In crypto, that means:
People begin to buy way more than they can afford to lose. Fear of missing out (FOMO) becomes incredibly strong. In all aspects of life, you tend to make mistakes when you rush.
People will take out second mortgages on their house (or other forms of debt) to buy crypto.
Venture Capitalists will invest in companies at incredibly high valuations based on very little. 'Smart money' is not immune to bad decisions.
So many new coins are launched, diluting attention. Shiny new object/hot ball of money rotating.
These behaviors are simply inevitable if the price of an asset or asset class rises too fast, or for too long.
These behaviors have to correct at some point, and they do. When you've invested more than you can afford to lose, it doesn't take much (an unexpected car breakdown for example, or just a small price drop in the market) for you to start to panic and for the good times not to feel so good anymore.
There are structural factors at play as well. The low for BTC in the last few years was ~14k. Let's pretend BTC reaches 200k. That is a lot of profit. If prices rise significantly, especially if it happens quickly, sophisticated investors will take profit.
Institutional investors are practically required to take profit, especially with significant gains. VCs have to show realized positive returns to their LPs, hedge funds need to show realized profit, and all people may need to sell some assets to cover tax liabilities.
The combination of these two factors - many people being in profit recognizing gains, plus human psychology ensuring that people always get too far ahead of their skis - guarantees that at some point the vibe will shift from 'euphoria' to 'actually I'm getting a bit nervous'. And then it cascades.
This is the natural market cycle. It is similar to the traditional business cycle, and is actually a good thing. Market crashes clear bad investment and ultimately result in a healthier economy.
All of this is to say - it doesn't say much about crypto fundamentally to say that it will rise and crash again violently. It's the market cycle, sped up due to the globally liquid and memetic nature of crypto.
Yes, things are different this time! Bitcoin is either on the brink of or already is genuinely politically relevant. Crypto is becoming genuinely useful for some people.
But human psychology remains the same. People will always get too far ahead of themselves and make bad decisions when times are good for too long.
I am as excited as ever about the future of crypto. But don't expect a supercycle.
Footnote - okay, but what if things actually are a little different for BTC this time? MAYBE because of institutional/government adoption and a sustained ETF bid, BTC only experiences drawdowns of 40-50% in the future instead of 90%+. I would expect most of broader crypto (“alts”) to face another 90%+ drop.