A Few Notes for Crypto Winter First-Timers

I feel like a million years old writing in this tone - though everyone in crypto knows that a week in this industry is equivalent to a year in “normal” time so being inside crypto-lala-land long enough does warp your sense of time. (The last few years of insanity in the world itself doesn’t help too, of course.)

But it’s also true that I've been through 3 crypto bull/bear cycles at this point (I was in the ETH ICO in 14’ - divested most of it since then) and may have a useful perspective to some - not that these dips don't hurt, but I was relatively fortunate to have survived the last few ones through a combination of planning ahead and a few strokes of good luck. But I will say again what I say to almost everyone: crypto is a 3-4 year play at minimum, and you need to have the patience to wait at least that long. Life is short, yes; but at the same time it’s also very, very long.

  • The first few hype cycles (14-16') I literally wasn't aware of anything because crypto was just an obscure, zany idea back then and people held them largely for fun. There were no exchanges - or ones you’d want to trust your money with, anyway. (Mt. Gox, yikes.) The easiest way to get Bitcoin was to mine them yourself or find some guy on the internet who you could exchange it with a pizza or some other type of bartering deal. My wallet was worth so little at the time that I forgot about it and almost lost my private key, in fact. 🤣
  • The second one (16-18') I worked "regular" jobs and did dollar cost averaging so I didn't have to touch my investments for day-to-day needs. I cashed out only when I needed it, for emergencies and unexpected expenses. My decision to sell was need-based, rather than speculation-based, in other words. (This one did really pay off and I wish more people would do it, honestly.)
  • To prep for the "winter" today I've spent an excessive amount of time doing research on projects that are focused on utility and community-building…and re-allocated my portfolio accordingly. I may have made a few mistakes but after being burned a few times I think I’ve gotten better at picking assets that will survive for the longer-term. The market is still in free-fall so we'll see if that pays off.

As a general observation, I’ve seen lots of projects go through problems that many would consider catastrophic - but survived out of sheer perseverance. There were a few projects started with great ambitions but eventually found success by finding and refining their niche. Finding product-market-fit isn’t easy - these things do take time to figure out, even on a human level. (You can see glimpses of potential future successes when people “buy the dip” during downturns - a sign that enough people care about the project to help it stay afloat.)

I have never, however, seen a project start off as a money-making scheme then successfully “pivot” onto making something useful later. Like a song that people find catchy, projects usually start and end the same way; with the same chorus, and the same tone. If you’re still holding onto those hype coins, you may want to look at your portfolio a little closer this time because if the team isn’t actually working on anything serious there’s a good chance it will never come back up ever again. (Although I gotta say, the way Ethereum Classic was able to continue to scam people despite its protocol layer being completely compromised was impressive in its zombie-like way.)

I gained a lot of respect for the Ethereum team during the last few drops because they seemed unconcerned and continued to do what they love - building tech. That and they had the support of a development community that genuinely cared about the product enough to keep it afloat during the “hard times” - the #1 resource of any project, in my opinion. But the hype of 20-21’ really brought in a lot of grifters into the ETH ecosystem and the gas-fee problem really toxified the culture there, which I think its unfortunate. (Bitcoin leaned hard into the scarcity model and might be beyond repair at this point.) We'll see if the bear market + Consensys/ETH2 merge will fix that - at this point implementing the tech itself should be a pretty straightforward process - but culture is much harder to fix once it goes sour.

If people are hanging around each other solely because they think they might rich, when the money’s gone it doesn’t take very long before they start turning on each other. In both Bitcoin and Ethereum we saw the raw ugliness that came from the Proof-of-Work scarcity model - which incentivizes selfish and toxic behaviors in ways that even its founders couldn’t have anticipated. As Ethereum moves away from Proof-of-Work and into the worlds of Proof-of-Stake, is this the end of the Proof-of-Work era for crypto? Let us hope so. (The military dictatorship in El Salvador, which dared to make Bitcoin its reserve currency is in danger of defaulting now, by the way.)

For the record, I own 0 Bitcoin - I sold them off a few years ago after seeing how they’ve basically given up on making any meaningful improvements on the protocol itself - gated off by an off-chain governance process controlled by a small group of miners out there. If you’re comfortable with that setup by all means, but hope you at least understand what you’re getting yourself into.

What Comes Next? Interest Rates and Proof-of-Stake

In previous runs Bitcoin was largely unresponsive to the federal funds (interest) rate - but the chart suggests that the hype in 20-21' was fueled by fiat money acquired through low-interest loans. This is why stocks and crypto have, up until now, moved in parallel.
In previous runs Bitcoin was largely unresponsive to the federal funds (interest) rate - but the chart suggests that the hype in 20-21' was fueled by fiat money acquired through low-interest loans. This is why stocks and crypto have, up until now, moved in parallel.

Last time it was Crypto Kitties, this time it was Bored Apes - in a weird way the way we talk about crypto tech now hadn't really evolved much since the 16-17’ run: probably why 2021 became the era of the (adjective)-(animal) NFTs, rather than a triumph for the blockchain technology itself. Web3 was supposed to be about scalable partnerships, not about cattle auctions of imaginary animals - but somehow we all collectively missed the point of why the technology was created to begin with.

Some ideas in Web3 that I think still has some long-term potential: "useful" Proof-of-Work [Gridcoin, Golem], Proof-of-Storage [STORJ, Filecoin], the metaverse [MANA, Sandbox, Tezos], DAOs, Proof-of-Identity [Civic], decentralized video [Livepeer, THETA], and of course, NFTs - after it becomes more “useful” to everyone. What these projects all have in common, though, is that they’re not quite production ready and are all in their alpha/beta stages right now. Great potential and great upside? Yes - still, yes. Are we there yet? No - not even close.

Despite the hype, the tech behind crypto and Web3 systems haven’t evolved that much in the last few years - mostly because Web3’s biggest issue right now isn’t technical, it’s organizational/cultural: for the blockchain to have any use, the community needs to convince everyday businesses and people to adopt practices like ledger validations, using wallets for building social profiles, trackable and authoritative reputation/action/credit scores, etc. - all which are doable now on a technical level, but needs the cooperation of multiple organizations working in tandem with each other.

Since crypto doesn’t deal with physical assets directly, it needs to validate itself through the utility of a service that is actually tangible to the average person out there. Most of that involves bridging social/cultural/industrial divides that Web2 companies never dared to cross. There’s a lot to be unlearned first before we can move onto the next phases of the crypto experiment itself.

For now, though, there’s one obvious “utility” that I’ve been saving for last - interest rates from staking rewards. What makes this crypto cycle different from the others is that fiat systems and many government institutions around the globe are in big trouble this year: Bitcoin/crypto was “invented” sometime after 08’ as a direct response to the economic crisis then - but has largely existed in a 0% interest rate environment up until now. When interest rates start going up in fiat - possibly to 1970s levels, even - we have no idea how the coins themselves are going to respond.

As the federal reserve continues to increase interest rates in response to inflation (they have no choice at this point), the general public’s attention will undoubtedly shift from a speculative mindset to a savings-based one - as it typically happens during recessionary times. Mortgage and loan rates have undoubtedly risen, but the banks have been slow to offer higher savings rates to people as a whole. Who’s actually paying out interest rates right now? Crypto.

If the banks continue to drag its feet, coins that offer staking rewards (Tezos, Ethereum [2.0], Algorand, even Cardano) actually have a real competitive advantage to what fiat is offering right now. One number is higher than the other number - it’s pretty straightforward and an easier sell than trying to get people to buy animal jpgs, honestly. If crypto adapts faster than the banks do this year, this may actually when people finally begin to see the “utility” behind the technology itself.

A Fork-in-the-Road - Which Do You Choose?


22’ is likely going to be an insane year for more reasons than one: we’re going to face economic, social, and political turmoil all at the same time, with crypto mixed into that chaos somewhere in the middle. But a reminder that money is relative - a market crash isn’t necessarily a bad thing if the result is cheaper goods on your money, and visa versa.

The truth is that most people have been losing money every year even during these “good times” - the feeling of numbers getting higher in your bank account means nothing if the goods you pay for is rising higher than what you earn. So we already know that holding fiat is already a loss, and the one thing that made it worth it - stocks and housing - is about to tumble now, too. Crypto doesn’t need to be perfect, in other words: all it needs to do is prove itself better than fiat, which, in theory, shouldn’t be too hard to do as the Bernie Madoff 2.0s start emerging in the wake of a growth market gone sour.

Whether or not crypto will go up or down during the recession this year has been a long-standing debate within the crypto community, and only time will tell which way it will go. But there’s basically two different ways to look at it -

When the economy goes into a recession, so will crypto, because:

  • Buyers of crypto and stocks are more overlapped than not, and the two asset classes have historically always moved in parallel.
  • The idea that Bitcoin/crypto is a hedge against inflation has not panned out as hoped.
  • During recessions when budgets become tighter, people are less likely to put money into speculative assets, like crypto.
  • Crypto existed in a 0% interest rate environment for the most part and if you take that away, so will the momentum behind it as well.

Or - when the economy goes into a recession, crypto will go up, because:

  • Total crypto adoption is ~10% of the world, at best. Still lots of room to grow.
  • Crypto adoption tends to be higher in countries with severe inflation - the loss of confidence in the banking and financial systems (which is happening already) often forces people to consider alternatives.
  • Staking rewards currently offer more interest than the banks and will be very appealing to some people as they shop around for competitive interest rates.
  • Bitcoin was created in 08’ financial crisis as a response to the problems leading up to it, so the emotional response to the next downturn will likely be more pro-crypto than not.

So there’s a fork in the road here, and people HODLing crypto right now will have to make a choice regarding which path they want to take. I suggest that people take a hard look at their portfolio in the upcoming months and think about what they’re comfortable with and how they think things will unfold over the course of the next few years.

The good news is that regardless of what happens, the inflation-fueled 1970s era was known for a lot of structural uncertainty but it was also the period of good music/art and great social change - something that I think will be a boon to the long-term health of the NFT markets as a whole. I get that we live in a very anti-social era right now, but at the end of the day, crypto is money, and money is about people. You can’t make real money unless you make some effort at understanding how people think.

There’s plenty of reasons to think that the industry will do well in the long run, but it will take a lot of work to get there. If the community puts in the work, it will succeed because the opportunity is still definitely there - if not, it will fail. It’s pretty simple, really.

Good luck and good fortune, folks. If you need me, I’ll be working on my next project, Teia Surf, in building the types of incentive structures that had always been the dream of Web3. As a lot of the veterans of the crypto industry would say - the best time to build, is now. 🤞🍀

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