How We Got Here
“Only when the tide goes out do you discover who's been swimming naked.”—Warren Buffett
Last Cycle
First, some history.
ICO Craze
rise of altcoins
irresponsible investing
total market washout
Crypto markets all revolve around the four-year bitcoin halving cycle. Every four years, the amount of bitcoin that miners receive for their efforts processing transactions and adding them to the blockchain gets cut in half. It’s called the halving and it’s a monetary policy built into bitcoin that’s entirely predictable.
Markets operate in cycles around the halving. Last cycle, we saw bitcoin adoption really gain traction. More exchanges meant more bitcoiners, more bitcoin wallet products, more news stories, and so on.
More on market cycles:
But, amidst all this bitcoin adoption, we saw the rise of altcoins. It was unlike the earlier market cycle where there were only a handful of true altcoins that investors could buy and sell. In 2017, there were thousands.
The vast majority of altcoin projects were raising money via “initial coin offerings” where they would provide new investors with tokens as if they were a share in the project. Most of these projects were either illegitimate or sprinting far beyond their means and, when the markets ultimately corrected, altcoins suffered.
Last cycle set the stage for this current cycle. Even more adoption, even more exchanges, even more crypto projects and altcoins. New ones everywhere taking advantage of newer entrants into the space who didn’t see what happened last time or who naively thought “this time is different.”
Important Reminder:
Self-Custody Your Bitcoin
What’s that? How do you do it? Start here:
Terra/Luna
altcoin project
token + stablecoin
In May of this year, Terra blew up. Bitcoin. and crypto markets were still holding higher levels of price support but Terra opened a massive can of worms.
$40+ billion was wiped off the table in a matter of days. Terraform Labs was a newer crypto project that really started taking off in January. The biggest crypto-focused hedge funds and exchanges invested in or offered trading of their stablecoin and token. In May though, the stablecoin broke its peg to the US dollar and the dam broke. Panic rocked markets as Terra collapsed.
Contagion
Terra was the first domino.
Celsius
3AC
Voyager
BlockFi
FTX
To name a few…
More on the mid-year fallout:
After Terra, it was clear that many so-called “players” in the crypto industry were either exposed to Terra directly or were actively speculating on other high risk altcoins and investments. It was more akin to gambling than anything else.
To go one step further, when the likes of FTX were revealed to be insolvent, it was clear that, not only were they overleveraged and trading high risk assets, but they were doing so with customer and investor funds.
More on FTX’s downfall:
November
It’s been a wild month.
FTX took a hammer to a relatively calm market. Bitcoin was trading near its previous market cycle high of $20,000.
Our biggest concerns in bitcoin and crypto markets before November were arguably three things, some of which is everything we’ve already touched on:
more contagion
ethereum’s future
bitcoin miner troubles
On top of the ongoing fallout due to irresponsible businesses and bad actors across the crypto industry, ethereum had recently undergone a merge to proof of stake. September marked “the merge” and I was worried about it.
Ethereum, the second largest cryptocurrency in the world behind only bitcoin, was now far more centralized and less privacy-focused than before. Some of the largest exchanges and traditional financial players were setting themselves up to have immense influence over the ethereum network.
More on the merge:
All of this remains the case now and it still concerns me. So much so that I plan to convert a large majority of any remaining ETH holdings of mine to bitcoin after January. More to come on that front in the coming weeks.
Then, the slow and steady downtick in bitcoin price appeared to be taking a tole on large bitcoin miners. At the end of October, Core Scientific, the world’s largest cryptocurrency miner saw its stock price drop 80% in a single day.
It was clear that any centralized players, even those involved in bitcoin, were potential candidates for contagion.
Many miners in particular were using their machines as collateral to raise funds. “Miner capitulation” became a common headline phrase and everyone looked on to see just how overleveraged everyone else was when it came time to pay the bills.
Then, FTX happened.
Read more:
Next Week
The monthly close is coming.
That also means I’m sending paid subscribers the monthly report and there’s a lot more to unpack, especially when it comes to looking ahead to December and 2023.
Upgrade now to get the report:
Also in the report:
my ETH to BTC plan
key self-custody reminders
Bear markets are for building—building knowledge, strategies, and privacy and security best practices.
The market may be bearish but we’re mid-cycle and there’s still plenty to do for us bitcoiners out here. Building or reestablishing our HODLing strategies is more important now than ever before.
I am not an investment or financial advisor. All opinions expressed are mine alone. Read the full DISCLAIMER on the About page.
HODL on Garth.