Recently, in personal communications and small Telegram groups, I’ve noticed signs of quiet desperation growing as dreams of a quick reversal to new all-time-highs fade.
Meanwhile, Twitter is noisy with technicians, and egos attached to price predictions. Predictions are made with seeming conviction, because if right, egos will claim clairvoyance.
Here’s the truth: no one knows how far we’ll fall.
Certainly, we can make educated guesses based on technical indicators, and even predict points of support based on our early explorations of crypto fundamentals, but these are all educated guesses. Our techniques will mature over time, but reflecting on my career in the equity markets, everything will remain an educated guess. We’re predicting the behavior of humans, after all.
Some concrete numbers. If 2018 truly echoes 2014, then we could very well be in for another ~50% drop from here.
Upset that I said that? Already typing FUD!!!! in the comments? Wait until the end; discussing that reaction is the entire point of this post.
Per CoinMarketCap, from December 2013 to January 2015, the aggregate network value of crypto dropped from $15.9B to $3.1B, representing an 80% drawdown. Since peaking in early January 2018, we’ve fallen from $835.5B to $252.8B in aggregate network value, representing a 70% drawdown.
If we endure another 50% drop from $252.8B, that would represent a total drawdown of 85% from the January 2018 peak. A little worse than the “Fall of 2014,” and from the graph below, 2018 does appear a little worse.
Bear markets like these become excruciatingly painful because they feel bottomless, and the math sneaks up on you. David Einhorn puts it well:
“What do you call a stock that’s down 90%? A stock that was down 80% and then got cut in half.”
I say this not to scare you, dear reader, but rather to highlight what one possible universe could look like.
And also to highlight, if that becomes our universe, it shouldn’t matter, so long as you develop equanimity around such a potential.
Benjamin Graham, author of The Intelligent Investor and teacher to Warren Buffett, has a wonderful parable that anthropomorphizes and transforms what can come off as cold and hard hitting markets into an endearing and fictional character, Mr. Market. I’ve found this parable to be useful in working towards personal market equanimity. As described by Buffett:
He [Ben Graham] said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.
Graham and Buffett are referring to the traditional capital markets, which are like moody middle aged men when compared with the mercurial pubescence of crypto.
To make light of the crypto markets, we as a community currently use memes and bickering to blow off steam. But the truth remains that many peoples’ moods are deeply, deeply affected by price.
While not something unique to crypto, it’s the violent nature of this brand new asset class and its nascent markets — the highness of the highs, and the lowness of the lows — that make such attachment to price performance dangerous. And as Matt McCall recently pointed out to me:
“Why would you hand your happiness to the market?”
To fully flesh out this idea, I think one more parable, this time from Buddhism, will help. I’m paraphrasing from memory, so forgive me if I’ve butchered it, but the abbreviated version runs something like this:
Buddha was happily going about his life when someone full of fury came to his doorstep. That person had a present he wanted to pass Buddha — anger. While the person kicked and screamed, doing his best to pass that present onward, Buddha made the conscious choice to not internalize that negative energy. It’s not that he wasn’t aware of the anger — he was acutely aware. But after calmly dealing with the matter, Buddha kindly sent the person on his way, and continued on happily (if the person didn’t go away, Buddha could always close his door).
Anyone, or anything, bringing a present to the doorstep of your consciousness does not have to be accepted inside. They can be dealt with on the periphery, leaving the inner walls of your consciousness, and thereby happiness, untouched.
Not accepting a present at your experiential doorstep doesn’t mean you can bury your head in the sand, pretending that crypto isn’t now down 70% and you’re half as “rich” as you were at the start of the year.
But instead that you have a choice about how to handle and interpret this present that Mr. (Crypto) Market is bringing you. Maybe it even allows you to stop caring about the price, and focus on the ideas behind crypto more. I’ve found the ideas in crypto are always up and to the right.
If instead the present trashes the inner walls of your consciousness, then you are handing your happiness directly to the market, one of the most mercurial beasts alive. And in my opinion, missing the more important points— our mission to decentralize data, wealth and power.
Remember too, you can ignore Mr. Market. As Buffett writes, “He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option...Mr. Market is there to serve you, not to guide you.” There is nothing that compels you to check the market every day, or multiple times a day, or multiple times an hour.
Maybe the markets will come back tomorrow. Maybe they won’t.
Mr. Market will take care of itself. And unlike the most uneducated of bears, I disagree that we’re trending towards zero. In the coming years we’ll see a new all time high beyond what January 2018 represented. For me, this is not a matter of if, but of when.
But trying to predict when, or craving for when, is a recipe for suffering in crypto. So don’t get attached to the timing of the prediction, or the prediction at all :-) Meanwhile, do your best to sit in the roller coaster with equanimity.
PS: Much of the above thinking (including the Buddhist parable) was introduced to me through a 10-day silent Vipassana sit when I was 19; these courses continue to be offered for free around the world. There are few things I recommend more.