Bitcoin is Crashing!

Published in

Coinmonks

6 min readJun 19, 2022

The onset of the Crypto winter and thoughts for the long-term investor.

Bill Gates in a recent interview demolished the idea of Cryptocurrencies and he was quite direct. In his opinion, Crypto assets, like Bitcoin, are based on the greater fool’s theory. This implies that some greater fool will always buy your Bitcoin, someday, at a higher price.

The Crypto assets are crumbling so the naysayers are having a field day. Bitcoin has gone below 20K wiping out 70% of the investor wealth since the recent top.

The fall was exacerbated by Celsius, a crypto lending firm pausing all withdrawals. This sparked fears of a possible contagion effect that will transpire to other firms in this space. There was also Terra, a so-called stable coin that crashed on liquidity concerns. Some Hedge Funds like Three Arrow Capital are on the verge of bankruptcy as the value of their overall assets has dropped significantly with the Bitcoin slide.

In Feb, I had written an article on how Crypto Currencies like Bitcoin are extremely volatile assets that are subject to wild fluctuations. I had also spoken about the Crypto winter and how it has the potential to wipe out most of the value of the Bitcoin. I had predicted that Bitcoin might see 14K levels in the medium term.

Going forward, the crash happened surprisingly fast. But then, that is how Cryptos like all emerging investments will behave. You need to be ready for roller coaster rides where you will see your fortunes go up and down.

In spite of what the pessimists say and despite the recent crash, Cryptos in my view remain asset classes that will gain traction in the long term. I am not a Bitcoin maximalist but if you are able to stomach this volatility, Cryptos are an asset class where a small percentage of your portfolios should reside.

There are several reasons why I believe so:

1. Emerging assets classes are always volatile

Investments and Asset Classes where the uncertainty is high are always volatile. Bitcoin advocates like Michael Saylor of Micro strategies talk about the astounding losses that Amazon stock suffered in the early 2000s. Yet people who remained committed to the stock made a fortune and those initial losses didn’t matter.

Volatility is high initially because people are still not sure whether the emerging asset class will survive let alone flourish. People with conviction who can bear the ups and downs stand a chance to make a fortune. The trader mentality of timing the markets doesn’t always work in these asset classes. If you would have exited a Facebook, Apple, or Infosys stock when these stocks crashed in their initial days, you would have missed the biggest money-making opportunities.

2. The Death of the 60:40 portfolio

With inflation running at record highs, institutions are finding it hard to deliver returns on the traditional 60:40 portfolio. Bonds are getting replaced by other asset classes including sector-specific equities. Eventually, cryptos will also make their way into traditional portfolios. Fidelity, one of the largest fund houses, has already advised investors to allocate a portion of their retirement savings to cryptos. They were already ramping up their Crypto investment advisory even before the onset of the Crypto winter.

With inflation hovering at 9% levels it is but natural for institutions to migrate into asset classes that can deliver exponential returns. Bond-heavy portfolios can only deliver negative real returns in the foreseeable future.

3. Web 3.0

Web 3.0 is evolving rapidly and can potentially alter the way we use the internet in the future. Web 3.0 provides an escape from the control of the platforms that dominate today’s internet space. It opens up possibilities for decentralization and one of the most profound outcomes could be the development of Defi (Decentralised Finance). This would enable direct peer-to-peer interaction and make financial transactions possible without the need for intermediaries. Many Defi applications are being built on the Ethereum network and hence Cryptocurrencies like Ether will find prominence in this new architecture.

So while Warren Buffett may say that Cryptos have no intrinsic value, the Crypto Currencies of the future will find value as a default medium of exchange on Web 3.0.

4. Power of the Network

The existing monetary system is based on Fiat Currencies, like the USD, which are driven top-down by a Central authority. Bitcoin on the other hand is different. It is based on the power of the Network. In short the bigger the network the more acceptable it becomes. Bitcoin and other major Cryptos have network effects based on belief, protocol, and the platform. Bandwagon network effects also set in as people want to adopt this technology early so that they can benefit the most.

As a result, there are about 106 million Bitcoin owners and this number is growing and so are the daily transactions. The network is still small and should potentially reach all people who use cash which means most of the population of the world. As technology evolves and applications on Web 3.0 increase, the number is bound to increase. With a limited supply of 21 million Bitcoins, a sizeable increase in the network is only bound to catapult the price in the long term.

5. The Regulatory overhang

The US is currently working on putting in place regulations around the Crypto space. While this may take time, it would be a step in the right direction. Once there is clarity on regulation, taxation, and governance a lot of investors will jump in putting major Cryptos into a new trajectory. The EU is also working on the MiCA, the bill that seeks to regulate the Crypto space.

The regulations that are under discussion should also bring clarity to Stable coins and NFTs. The use of Stable coins may be limited so as to avoid these substituting the fiat currencies like the USD and Euro. Bitcoin mining is another area where the government could crack down because of environmental concerns. This may further accelerate the move away from “Proof of Work,” which is currently used to regulate new supply.

Conclusion

When the price of the Cryptos is high there is always news about Bitcoin hitting a million dollars. Bitcoin evangelists are all over the media blowing their trumpets. On the contrary, when the price is crashing, there is news of Bitcoin going down to zero. The critics talk about the asset having no real value.

For the long-term investor who has conviction in this space, the important thing is to allocate a small portion of her portfolio to these assets. She has to keep nerves of steel as there could be huge ups and downs. She has to avoid getting into the temptation of timing the market.

This is a space that is at the vanguard of future technologies. This is a space that is here to stay.

This article is not a piece of investment advice. It is based on my own analysis and views on this topic. You should consult your financial adviser before making any investment decisions.