Its almost a year now since crypto peaked. Seems like its been forever, especially for an industry as noisy as crypto. Since November 2021, its been nothing but downtrends. We’ve had crypto bankruptcies - Celsius, Voyager. We’ve had collapsing stable coins such as Terra Luna. The Merge got delayed a couple of times - not surprising. And the liquidations that have occurred have done nothing to help the market. At least some of the leverage is out of the system. If you are/were a long term crypto investor during this period, it has been nothing but pain. But thing is, this is all part of the cycle for crypto. If you take a look back at the trajectory of cryptocurrencies, there seems to be a pattern of boom and busts, commonly known as the bull an bear cycles.
The Bull Cycle
The way to think about these cycles is in terms of enthusiasm. This is when everyone gets into the new thing, in droves, driving the price high. Think of when some new shoes are out, or when the new iPhone has just launched. That’s what the bull cycle usually is. Applying basic economics, the more demand there is for something, the more people are willing to pay for it.
The classic example for us Kenyans involves matatus. I hail from Ngong, and if my route is the same as yours, we have manyangas that come out, all hype, from time to time. Commuting using these manyangas is usually the cool thing - at least for some, like me. But for this coolness, there’s usually a premium to the fare. Yes, there’s the comfortable seats, the rare stop by the police, the music. But you can get these luxuries elsewhere. The premium you’re paying is to be part of the cool club. And the more of you there are, the more premium the touts will charge. But as with every manyanga, there’s usually a shelf life before its out of style. The old thing.
This is the same for crypto. The bull cycle is when there is a lot of enthusiasm for crypto products, sometimes with no respect to the underlying fundamentals. This is mostly during the periods when people are making money. Among the few who do, some broadcast it. Those on the outside see this and want in, buying into the hype. They’ll be willing to pay the premium to get in, and the cycle continues until we have some absolutely insane prices.
The Bear Cycle
While there are some reasonable investments done by smart people during bull cycles, a lot of investing is done based on the assumption that prices will keep going up. A lot of people are driven by FOMO, and greed. But the market is usually self correcting. Usually. Whenever prices get too far ahead of the fundamentals, they usually fall, and fall hard. This can be seen in the current cycle we’re in. Bitcoin, as an example, fell from ~USD 60K to as low as USD 18K. As I’m currently writing this, its at around ~USD 23K. This is because the market was suffering from high levels of speculation, with a large percentage of buyers not fully aware of what they are buying.
During lockdown, there was a lot of money printing going on due to Central Bank policies, which created a surplus of money in the hands of the consumer. Top this up with the fact that the consumer was spending a lot of time at home, and the crypto craze built up. Since most people aren’t aware what they are buying, then the basis is usually centered on prices. There is little to no conviction on the asset. And this creates a highly erratic investor. The money printing started driving prices of household products up. These same people started cutting back. Some stated offloading their crypto, taking the profits. Eventually, the supply outstrips the demand. This - applying basic economics - causes prices to drop. When the prices don’t behave as projected, those fickle investors will only do one thing. Sell. This creates downward pressure on prices, which causes more people to try and cash in on their profits. And the cycle continues.
Take Advantage?
Due to the underperformance of crypto in bear markets, people tend to lose interest and pull out. Maybe there’s a new fad somewhere else where people can run to. This creates a period of time known as crypto winter, where prices remain depressed for a period of time. This creates a unique opportunity if you have high conviction on the future of crypto. It creates a situation where everything is selling at a bargain price! You look left, 60% off. Look right, 80% off. Everything is at least half price. That means you can get more crypto for each unit investment than you would have before. You have USD 20K? Well then now you can get 0.86 Bitcoin as compared to November, where you’d only get 0.33 Bitcoin. You can build up a bigger position a lot faster and a lot cheaper in a bear market than in a bull market.
Bear markets also allow you more time to do your research. Prices are low, and the amount of noise is low. You’re not trying to race a bunch of straight up gamblers, fearing that they’ll price you out before you make a decision. You have the time to really consider a project and its advantages, and the price you’re willing to pay for it. That, in any market, is a godsend, and will save you a lot of cash and pain. I’m personally using this time to understand how cryptocurrencies work, what stable coins are, and all the interesting things that can be done on the blockchain. Heck, I’m even now reading the fine print for the exchanges I use to fully understand the exposure I have - there’s some pretty interesting things in there.
Conclusion
People who bought crypto during the previous bear cycle, are still over 400% up. People who bought in the bull cycle during Covid, are anywhere between 30% and 60% down. If you’re in or wanting to get into crypto, there’s probably not a better time. A lot of people will say to wait it out. But my guess is that its basic human psychology, with the fear of losses reigning over anything else. But the losses you can experience now -when everything’s bad and gloomy, and prices are low - are a lot less than the losses you’ll experience if you enter at a time when prices are going up. And the upside is a lot bigger. This way, you get to buy at low prices, and enjoy the ride when the prices go up high, if the prices go up. There’s always the possibility they might not. Until next time!