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Playing the Long Game With Cryptocurrencies
FinTech, Blockchain, Financial Services
Let’s get this out of the way right here at the beginning: As we enter the final month of 2018, there is no reason to be optimistic about the prospects of Bitcoin, at least if for some reason you’re still holding out hope for a turnaround in 2018.
If your confidence in Bitcoin was already shaken by its dreadful performance this year, the final weeks of November might have done enough to drive you over the edge. That’s because Bitcoin dropped by 14 percent this past Monday, lost nearly a third of its value in seven days and suffered one of the worst weekly selloffs in its history.
From bad to worse is an understatement.
(And we’re going to focus on Bitcoin for the purposes of this piece since it is the largest cryptocurrency by market value – and it’s been well established that as Bitcoin goes, so goes all other digital tokens.)
And yet, here’s where we come at you with a but: There’s no argument that this year has been terrible for Bitcoin, but this year is almost over. Okay, that admittedly doesn’t serve as much of a pep talk, but (there it is again!) hear us out:
If Shakespeare is indeed correct that past is prologue, then we have an obvious bubble/bust/recovery scenario from our recent past that can serve as a source of optimism for the possibility of a Bitcoin recovery. We’re of course talking about the dotcom crash and the eventual rebound of internet stocks.
This is the exact scenario laid out by Fred Wilson, co-founder of the New York City-based Union Square Ventures, an early investor in Bitcoin and someone who lived through the peaks and valleys as an investor during the boom and bust of the dotcom era in the late ’90s and early 2000s. Writing on his blog this week, Wilson drew parallels between the dotcom bubble and what we’re seeing today in the crypto space.
Wilson points to the internet’s eventual recovery, giving hope to the possibility that the crypto market will see a similar bounce-back. However, Wilson concedes that any recovery for Bitcoin and other digital coins will only come after investors suffer more pain.
“So while crypto asset prices are down 80-95% in USD terms over the last year, they could and probably will go lower,” Wilson writes. “Amazon was down 80% a year into the post-bubble bear market and it got cut in half again before it made a bottom almost two years after it peaked.”
Wilson uses Amazon as the best-case scenario for the cryptocurrency sector. He notes how Amazon peaked at $90/share at the height of the internet bubble in 1999, but then about “two years later, at the trough, you could briefly buy Amazon at $6/share.”
Granted, pointing to Amazon’s meteoric rise in the years after the dotcom bust – it has, of course, proven to be one of the most successful stocks in the world, returning more than 100,000% from its $18 initial public offering price – perhaps sounds overly optimistic. After all, using Amazon as an indicator of what could happen to Bitcoin is like telling a struggling young basketball player that everything worked out fine for Michael Jordan.
However, Wilson is actually being realistic about the challenges facing Bitcoin and other cryptocurrencies: While he thinks “some” or “possibly a number” of crypto assets will flourish after the downturn the way Amazon grew exponentially after the dotcom crash, he also believes “things will get worse before they get better” for the space.
The hard truth for Bitcoin and other digital coins as we look toward 2019 and beyond is that its recovery and growth is not going to happen on the backs (or bank accounts) of retail investors alone.
“For this next push, we are going to need that institutional money to come in finally,” Ryan Rabaglia, a Hong Kong-based head trader at cryptocurrency dealing firm OSL, told Bloomberg. “To lend that support and help with growth.”
It’s hard to say when – or if – that institutional money will eventually come in. There are obvious reasons for why institutional investors remain on the sidelines: The extreme volatility year-to-year, the massive losses in 2018, the lack of clarity around what crypto coins are supposed to be (is it a currency? is it a commodity?), the ominous warnings from highly influential investors, and perhaps most crucially, the lack of any global regulatory framework protecting investors.
But there has actually been some good news on the institutional front in 2018: There were 90 cryptocurrency hedge funds launched in the first three quarters of this year, according to Crypto Fund Research, on pace for a record-high 120 new funds by the end of 2018. Meanwhile, Fidelity Investments this year launched a new unit to manage cryptocurrency assets for hedge funds, family offices and market intermediaries, noting “there is a gap in support” for institutional investors interested in digital assets when compared to the retail market.
“Those who stayed were rewarded, although it took a long time for that to happen,” Wilson writes about the dotcom crash and recovery. “We didn’t see meaningful paydays in the Internet sector until the 2007-2008 period and the big paydays didn’t start coming until 2010 and beyond.”
Those who maintain confidence in the possibilities for Bitcoin and other cryptocurrencies are going to have to play a similar long game that Wilson and other investors did during the dotcom era. The payoff could eventually happen, but for now it’s going to hurt.
Photo: Getty iStock