Crypto's tulip moment is here

Musings: This feels very different from your everyday crypto chaos

In the 1600s, investors got caught up in the Dutch tulip hype. Tulipmania was likely one of the first market-FOMO bubbles and subsequent crashes. I believe that crypto is having such a moment and it will be a while before it recovers. Allow me to explain.

Most cryptos (not the shitcoins) promise to solve a current business problem or improve how things work today. They aim to build a better internet, a better business model, a better digital rights management platform, a better online hosting service, a better decentralized data storage system, a better personal identity management approach, a peer-to-peer way of exchanging value etc.

In order to succeed, they need to:

1. Build reliable, fast, efficient and secure technology systems

2. Attract investment (including human capital) to continue to build, test and launch #1

3. Grow customer interest and adoption to make it sustainable

4. Implement a pricing model that is acceptable to the masses

Today, crypto is facing its biggest challenge with respect to #2 and #3 above. Solving these issues is not going to be easy and will likely take months, maybe even years.

Remember trust (e.g. flying on a commercial airline) and mass adoption (e.g. iPhone) are the keys to success for any product. Without a significant ramp up in these two attributes, a product stays in the niche corner, with few buyers and even fewer investors.

Everything was going well for the crypto world until a few recent events that shook the confidence of HODLers and non-HODLers alike:

• In May, the UST stablecoin could not maintain its peg to the US$ and when it started unraveling, its sister crypto, LUNA also crashed. This called into question the reliability of other stablecoins like Tether, which experienced similar struggles of its own.

• In early June, crypto lender, Celsius put a freeze on all account withdrawals and transfers and is now facing bankruptcy.

• In mid June, Three Arrows Capital, or 3AC, a crypto-focused hedge fund, started experiencing a liquidity crisis after the slump in the crypto market. It is on the hook to repay more than $670 million in loans to Voyager Digital alone. Current indications are that it cannot make good on that loan and is facing bankruptcy.

• Voyager, Celsius, BlockFi and likely others, that we are not aware of, are busy securing "bailout" funds from venture firms and investment bankers, so that they can stay open for business and try to recover from their recent losses.

• Crypto miners are losing money on their mined cryptos because the cost of mining is currently higher than market prices for the same coin.

• Investment firms are selling their crypto holdings on any uptick and this is keeping prices pressured to the downside.

• El Salvador's BTC holdings (about 2,301 coins) are about 33% underwater and adoption of this digital currency by its citizens is inconsistent and on the decline.

• MicroStrategy, a publicly held software company, is also about 33% underwater with its 129,699 $BTC coins. They even took on debt in order to buy more BTC before it's recent crash and doubled down with more purchases this week. It will be interesting to see what they publish in their next quarterly earnings report on Aug 4th 2022.

• Hacks, ransomware attacks and other cyber crimes continue, with no end in sight. Criminals are finding gaps in these nascent technologies (eg. inter- blockchain bridges, access to private keys) and are exploiting them for monetary gain.

• And last, but not the least, $BTC's promise of being a reliable store of value in the face of inflation has not panned out. Inflation is rising all over the world, yet BTC lost about 2/3rd of its value from its YTD highs.

All this leads us back full circle to the realities that:

Net investment is leaving cryptos, leading to shutdowns, slowdowns, layoffs and even rescinding of job offers.

Retail investors and retail users are on the decline…once bitten, twice shy. They have seen the value of their cryto holdings drop like a stone and are loathe to risk more money.

Stock investors are already experiencing major drops in their equity portfolios since the US Fed announced their hawkish intentions to raise interest rates. And their underwater crypto holdings, to the tune of more than -$1T YTD, are another nail in the coffin.

Repeating what I said at the top of this post…in order to succeed, they need to:

1. Build reliable, fast, efficient and secure technology systems

2. Attract investment (including human capital) to continue to build, test and launch #1

3. Grow customer interest and adoption to make it sustainable

4. Implement a pricing model that is acceptable to the masses

While work on #1 and progress on #4 will continue, it will take years for crypto projects to earn back broader investor trust (#2). Mass adoption (#3) will take perhaps another decade, to come to fruition.

The crypto world always had its steady drip of hacks, cons, criminal “use-cases” and leveraged hyper speculation. What changed last month was the fact that some of the biggest names in the sector started blowing up. This type of Lehman Bros moment gives the common investor reason to pause and re-evaluate.

YOLO money might stay invested, but investors will think twice before adding more funds to a potential bonfire.

HODLers will continue to HODL, however my Uncle Joe and Aunt Sally cannot afford to risk anymore of their hard earned savings.

I don’t think the Bitcoin topic is going to come up at this year’s Thanksgiving table.

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Contrary to what you might think after reading this post, I am still long certain cryptos. My paid subscribers will soon receive an update on changes that I recently made to my crypto comeback portfolio, including what I plan to buy and hold going forward.

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