We’ve always been told to stay away from bubbles. But in crypto a good bubble is just part of the process.
When I first got into crypto, the one thing skeptics loved to throw at our feet was the Dutch tulip mania of 1637. Put simply, this was a bizarre three month period where the futures market for tulip bulbs – then a recently imported and much coveted luxury item – went into overdrive, leading to a tenfold increase in prices, followed by a similarly rapid collapse.
As a story, it neatly encapsulates everything that’s wrong with rampant speculation: outsize greed leading to the abandonment of caution and then the impoverishment of everyone who came late to the party i.e the regular schmoes like you and me.
It is also, in the way of stories, a bit too neat. For one, the actual event is much contested and recent analysis seems to suggest that barely any money ever actually changed hands. For another, it grossly simplifies the dynamics and effects of a bubble – and as crypto eyes off its fourth bubble in ten years, perhaps it’s time to revisit the idea that bubbles are necessarily a bad thing.
If you’ve been investing in crypto for longer than a couple of years, you’ve probably seen some variant of this chart.
If you haven’t seen it before, well, tattoo it on your brain, because it tells you almost everything you need to know about crypto market cycles. Overlay it on a bitcoin chart from 2013/14 or 2017/18 and it maps perfectly.
Bubbles can be tremendously profitable events, so long as you do two things: buy early; and sell near the top. However, this can be easier said than done when you’re in the middle of a bubble and euphoria has kicked in and people are buying literal lambos and your personal wealth is going up at a pace you never dreamed possible. And then: boom. Welcome to the bagholder club. Hope you didn’t quit your day job.
In crypto, bubbles aren’t so much a bug as they are a feature of the market. There have already been three distinct bitcoin bubbles – 2011, 2013 and 2017 – and there are plenty of signs suggesting another may be in the process of forming. There’s plenty of debate as to why this is, but the combination of a scarce resource and the speed with which both ideas and money can move online probably explains a fair amount.
But this is where that dotted line in the chart comes into play. Bubbles typically don’t give up all of their gains when they pop. Rather they tend to revert to the general trend – in this case, up. When people think about the 2017 bubble, they tend to think about the people who bought bitcoin at US$20k and how they’re probably still crying big salty tears to this day.
But in reality, there have only been around 100 days in bitcoin’s entire 4288 day history where you could have bought bitcoin and be underwater right now. This means that buying bitcoin has been profitable for a full 97.6% of the time that it’s been in existence. Bubble or not, that sounds like a pretty solid investment to me.
DeFi Bear Trap
Last time I wrote about the DeFi frenzy, I claimed that it was showing no signs of slowing down. Pretty much the next day, it came to a screeching, bloody halt. The past month has been a brutal one for the DeFi space, with many coins coming down 70, 80 or even 90 per cent from their highs.
So, this begs the question: has the DeFi bubble burst? Or is this just the first sell-off, soon to be followed by a ruthless bear trap? (To put it another way, is it June 2017 or January 2018?)
It’s impossible to know for sure (although this thread makes for reassuring reading) and that distinction makes a hell of a difference. But as long as you follow the classic rules – put your money in solid projects, commit to a longer time frame and don’t invest more than you can afford to lose – you’ll be poised to capture upside whenever and however it comes.
But, in all seriousness, if your net wealth ever does double in a single day, just sell everything because, boy, that bubble is about to go thermonuclear on yo’ ass.
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