Speculative frenzy vs fundamental boom

Abraham George Crypto Musings

If you believe cryptos are a scam, you should stop reading any further. We are going through some very testing times on cryptos and I wish to draw some parallels with other markets and how those markets played out during similar times.

Let’s back up a bit. Bitcoin the world’s most popular cryptocurrency, went on an incredible run from about $10,000 in Oct 2020 to its peak of about $65,000 in April 2021.

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The move was not only in Bitcoin. The second largest crypto Ethereum, climbed from about $400 in Oct to around $4500 in early May. That’s a gain of around $1000 in about half an year. The entire crypto market was on fire. The combined value of all cryptos reached as high as $2.5 trio on May 11 of this year.

But then starting in mid-May they all fell out of bed. Currently the crypto universe has a combined value of about $ 1.25 trillion, which is almost half of what was valued at just two months ago.

The million dollar question, is the crypto bull market over or have we reached to maximum pull back for the next bull run?

Whenever a new asset class gets to the attention of the masses it goes through three phases. The first phase is what you can call the “speculative frenzy” This is when an innovation catches the hearts and minds of a lot of people. And it really drives prices higher regardless of the fundamentals of the underlying business or technology. This phase is largely driven by the fear of missing out but invariably prices crash in this phase.

However when you have a real innovation, prices come roaring back in a big way. During this period the boom is based on real revenue and earnings. It reignites excitement of the technology and attracts another wave on investment. Most importantly the ‘fundamental boom’ typically leads to huge multi decade trends as new technologies take hold, real businesses get built, and fortunes get made. This is exactly what we have in cryptos today.

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It is a pattern that was there in other asset classes too. Actually the green energy boom came a little early. In 2006 and 2007, solar and wind were nowhere near mass adoption. But a speculative frenzy took the sector to dizzy heights. The S&P global clean energy index tripled before collapsing.

Compare that with the situation in the same part of the market today. Renewable energy is booming again. But it’s not going up on purely speculation. Renewable energy is now cost effective. It’s becoming a huge part of our energy production. Therefore it has already tripled off its bottom again. This move up is more sustainable. Above all, you have government legislation working on your side and working with you.

If you are not convinced, think of the Internet. In the late 1990’s people thought Internet was the future and it surely was. The frenzy at that time was unbelievable. People bought up anything that had a ‘dot com’ attached to it . In many cases you bought something in the morning and it was up 100 pct by evening. But most investors lost money during the ‘speculative frenzy’ period from 1999 to 2000. Once that was over, real businesses started to emerge on the Internet with real earnings and disruptive business models. The ‘fundamental boom’ that followed continued to drive technology stocks higher and higher for the last 20 years and will continue to do so with small caps taking a bigger lead.

Think the same is being played in cryptos. The Bitcoin frenzy in 2017 helped attract capital to develop the infrastructure for cryptocurrencies. Now, that’s allowing the industry to disrupt massive established businesses. Just as during the Internet disruption in 2000, we do not clearly know as of now which companies will emerge as the clear winners. I am sure all won’t but I believe one of the winners will be XRP. So my money is on it.

If the booming price of Bitcoin is based on true fundamentals why has the prices of cryptos pulled back so much. Simple answer: that’s the nature of the beast. If you believe in the long-term implications of this technology, volatility is something you just need to get used to. To be honest, the volatility we are seeing today is not out of the ordinary.

Before Bitcoin reached its first big peak at $20,000 in Dec 2017 it went through six separate corrections of 30% to 40 % along the way. If you have any doubts look up the charts. It is no different this time. When any asset is doubling in no time, you have to be prepared for the downside volatility as well. The pullback that we are seeing recently is par for the course.

This is an unstoppable technology that will change the way we will function in the future and I hesitate to make any price predictions. All we need to do is stay invested in a way, that the volatility in the investment will not disturb your daily activities and your other investments.

Stay invested!

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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.