Lessons from a REAL bear market: Crypto
Every once in a while it’s important to bring in some perspective from different worlds, and different ways of thinking. This week, we have the first RFG guest post written by longtime crypto connoisseur Kenny Spotz. Although I (RFG) do not invest in cryptocurrency, I think there is a lot to learn from the market, particularly now as the stock market is gyrating wildly. What are the thoughts that go through your mind in a bear market, and what is the world of crypto like after a year of declines?
You think this bear market is rough? Try crypto.
The Bitcoin bubble of 2017 has popped and the crypto market is undoubtedly in the middle of another brutal bear market with no end in sight. Bitcoin has seen this situation before and many supporters will argue that this is all part of a predictable pattern. But that’s hardly enough to solace investors who are currently experiencing an 85% drawdown from all-time-high prices (or >95% if they HODLed certain altcoins). And if you’re an outsider who isn’t interested in delicious schadenfreude? The market is, frankly, boring.
So why am I talking about it? First of all, there are lessons to be learned for all investors, particularly as the stock market has taken a dive recently. Second, as a crypto veteran from 2013, I’ve been here before and can’t help but look back at history. In this post I want to share some knowledge that I’ve picked up about this young market over five years of experience (through good and bad). My hope is that it can help anyone who may have already bought crypto or is still looking at it with some curiosity to educate themselves. Crypto is boring right now, but there is still plenty to learn, even for people who have no interest in the crypto market itself.
Lesson one: Acknowledge that the worst IS possible
You can definitely classify me as a “cryptocurrency supporter”. So, I admit, I hope the scenarios I put forward here do not come true. Nonetheless, they need to be addressed.
There is a big possibility ALL crypto fails.
Like, they go to 0 and never recover.
There are huge rewards to crypto investing but that comes with the equal gigantic risk that you may never get your investment back. And, if you look at the Bitcoin graph above, that kind of seems to be where we’re trending.
Basic trend analysis aside, at this point I don’t actually think we’re going to zero. The fundamentals of Bitcoin are unchanged since the point it hit $20k. But these fundamentals can change quickly. A correction isn’t always a healthy and it’s important to study the possibilities that could lead to the complete loss of your capital.
These are some of the potential catalysts I believe could fundamentally collapse the crypto market:
Cryptocurrencies Are Outlawed: This was actually one of the mainstream justifications for the collapse of the 2013 bubble. There were many over-hyped articles strongly suggesting that “China was banning Bitcoin”. Other factors played a part (the collapse of Mt. Gox a big one), but it did illustrate the fragility of crypto networks at this early stage of their development. There’s no doubt a complete illegalization of cryptocurrencies in the United States or China would be a knockout blow to the market.
Crippling Bugs: There is a well documented history of major bugs in the world of cryptocurrency. In the early days of Bitcoin one flaw in the code allowed for a near-infinite amount of coins to be minted. This summer, a similar flaw was discovered that could have caused huge issues if it has been utilized by an attacker. Ethereum has also had one of the most serious hacks to date, albeit it was a flaw in a platform built on top of the network as opposed to an issue with Ethereum itself. At the end of the day cryptocurrencies are coded by humans and humans make mistakes. Any highly valuable crypto is constantly at risk of having its cryptography undermined by a security flaw.
The Cryptography Fails: Even without an exploited bug, cryptocurrencies also have a very public weakness right in plain site. Take Bitcoin, for example. Every time a Bitcoin address is created it utilizes the SHA-256 cryptographic hash function to create both a public and private address. The public address can be shared, but the private address must be kept secret. The magic of the system is that how can then send and receive transactions without ever having to share your private key. However, if the SHA-256 cryptography were to ever be cracked, every Bitcoin private key would then be able to be revealed. Cracking SHA-256 has a very slim chance of happening, but it would likely destroy all consumer confidence in Bitcoin (and any other platform utilizing this has function).
51% Attack: Since the purpose of a cryptocurrency is usually decentralization, you can probably infer why a “51% attack” would be a bad thing. This term represents any situation where a single group controls over 50% of the “miners” that are running a cryptocurrency network. In this case the mining cartel is then able to do anything they want with the network as they alone control the ledger that lists all transactions.
People Lose Interest: This is not a problem that is unique to cryptocurrencies. Any asset or products is at risk of “going out of style”. But I do believe crypto has a higher likelihood due to the young nature of the market. While the long-term trend in consumer interest is up, there’s a definite possibility that we have reached a peak in the number of people worldwide that even care about “decentralized money”. Fiat currencies have a huge number of strengths and they are what the majority of the human population understands. If more new users cannot be attracted to researching, understanding, and utilizing cryptocurrencies, they will all die.
These are some of the most obvious catalysts but there are undoubtedly other Black Swan possibilities that have yet to be thought of. So, again, this technology is risky. But, if you’re not scared away yet and willing to embrace some risk, here are my other suggestions for making the most of a boring crypto bear market.
Lesson two: In the depths of despair there are opportunities
Let me take you back to the summer of 2014. I was a newbie crypto investor that had bought BTC in October of 2013. The first month saw that investment 4x. The months after that saw those profits slowly erode away as I waited, convinced a rally would happen.
It never came.
By the summer I was demoralized and fed up with the market. I continued to follow crypto news out of the corner of my eye, but I had lost much of the curious enthusiasm I felt at the end of 2013. I didn’t sell my stash, but I definitely wasn’t looking for any new investments either.
It was around this time that I saw an announcement for a new cryptocurrency on Reddit. This one was different than normal. It was being launched via a “crowdsale” where you sent Bitcoin in to receive a set amount of the new token. Specifically, one Bitcoin (trading at roughly $650 at the time) would net you 2000 of the new coin. There was a lot of buzz about this announcement but, after being jaded by losing money all year, I passed on taking any time to dive in and research why so many people in the community were talking about it.
That coin was called Ether and my laziness meant I missed out on the launch of the Ethereum network. The original $650 investment would be worth $170,000 at today’s prices ( $2.8 million at all-time-high).
The lesson here is not that every crypto opportunity is a bargain in a bear market. There were plenty of scam projects being launched at the same time and I thankfully avoided them as well. However, the reality is that if (again, BIG if) the crypto market recovers to new all-time-highs there is a very good chance that a project built during this lull in hype will play a huge role in sparking the next wave of interest. Even after the initial coin offering it wasn’t until 2015 that the Ethereum network actually launched. There was plenty of time for me to learn and buy in, but as prices continued to drift down or sideways, my attention went elsewhere.
If you want to get a better entry than that next wave of interested people, you need to fight your emotions and pay attention even when it seems like cryptocurrency is in a “boring” place. So where should you look for crypto news? While I used to frequent Reddit, of late I spend most of my time browsing for good info on Twitter. I recently put together a list of the 100 best crypto twitter accounts to follow and believe it is an excellent resource for anyone that wants to cultivate a feed of intelligent discussion on the topic. Reddit /r/cryptocurrency, /r/bitcoinmarkets, and /r/bitcoin are all still decent places to look, but if I had to use one platform to learn about the market it would be Twitter.
Of course, everyone learns in their own way and you may find that you prefer other platforms for news and education. That’s completely fine. The key is that you are actively searching and looking for good opportunities while the majority of investors have given up and begun looking elsewhere.
Lesson three: Understand the market deeply before you invest… if you invest
A well worn joke about cryptocurrency is that it is a solution looking for a problem. In many ways this is true, especially for citizens of developed countries with access to stable fiat currencies. You’ll be hard pressed to find an enthusiastic crypto supporter that doesn’t continue to utilize Dollars and Euros for the vast majority of their day-to-day spending. The main use case at this point appears to be pure speculation.
Nonetheless, this hasn’t stopped curious people from diving in and experimenting with the technology from a purely educational point of view. One could argue that this quest to understand the mechanics of cryptocurrencies was what gave them value in the first place. In the beginning, there was only Bitcoin, and it was worthless. But that didn’t stop people from setting up computers to mine or sending thousands of bitcoins back and forth without any thought towards future value. The point of it was to test a concept, not to get rich.
So, if you’re really curious about cryptocurrencies, the best thing you can do is use them. Here are the four steps I suggest:
Set up a personal wallet: This should not be a wallet hosted by an exchange or third party like Coinbase. It should be a wallet created on your own without any trusted third party to manage it for you.
Find yourself some coins: Any coin will do, most of them function in fairly similar fashion. The coin should be compatible with your wallet, but beyond that it’s fair game. Get the coins in any way you see fit, whether that’s earning them, getting them for free via a faucet, or buying them via an exchange.
Send your coins to the wallet: It sounds basic but this process has unforeseen pitfalls along the way. This blog isn’t written to hold your hand, there are already plenty that have been published. Discovering them is part of the learning process.
Use the coins in your wallet for something: Pay for traditional goods and services. Give them to a charity. Send them to a new exchange and purchase a different altcoin. Pay your friend back for a beer. Whatever you choose, just do something.
You can, of course, also choose the traditional path of mining coins which will set up a new wallet automatically and also fund it, but be prepared to do some more advanced research beforehand. Mining most valuable coins takes a large amount of computer power and electricity so it’s not an easy (or cheap) task.
Going through this crash course will put your knowledge of the technology above 99% of the global population. And the best part? Since you are doing it in a bear market, everything should be much easier. During bull markets things get congested. Exchanges lock down new account registration due to too much demand and transaction confirmation times take longer because of network congestion. If (again, BIG if) another bull market comes along, you will be happy to have the basics under your belt to help you avoid costly mistakes and make the most of it.
And if it never happens? You learned a new technology and are out whatever small amount of time or money you committed to earning coins.
Not a bad trade-off, in my opinion.
Kenny has written about cryptocurrency for Bitcoin Magazine, CoinTelegraph, and VICE Motherboard. He is a digital marketer by trade. His current favorite side project is CryptocurrencyPosters.com.