“At times, crypto has looked like a combination of Beanie Babies, dot-com stocks and the Velvet Underground: It is manic, it is money, and all the cool people are into it.”
– The Wall Street Journal‘s “The Crypto Party Is Over”
The dark winter of crypto is here. Yet somehow the news for digital currency keeps getting worse.
This past weekend may be the straw that broke the crypto camel’s back.
Bitcoin (BTC) fell as low as $17,628 on Saturday night before rebounding.
That means Bitcoin had fallen close to 75% from its all-time high of nearly $70,000 last November.
Yes, Bitcoin rebounded on Monday to around $21,000.
Still, Bitcoin is trading below its “realized price” of $23,038 – the average paid by buyers for coins in circulation.
Over $600 million worth of leveraged positions had to be liquidated this weekend.
And the worst is yet to come…
The Collapse of the Crypto Universe
The crypto carnage has not been limited to Bitcoin.
Ethereum (ETH) – the second most popular token – dropped as low as $900 over the weekend.
Its price has fallen by about 80% since its peak late last year.
As I wrote two weeks ago, stablecoin TerraUSD and its sister token Luna collapsed as their algorithms were overwhelmed by a virtual bank run.
MicroStrategy (Nasdaq: MSTR) – which spent $4 billion on Bitcoin – has tumbled almost 70% this year.
Coinbase (Nasdaq: COIN) – the blue chip crypto broker – trades around $51. Compare that with its high of $429.54 on the day of its market debut, April 14, 2021.
The list goes on.
As one observer wrote, “It’s a bloodbath out there. Hunker down. Make sure you can last.”
The Peak of Cryptomania
Cryptomania probably hit its peak between late 2021 and early 2022.
In December 2021, the Staples Center in Los Angeles was rebranded Crypto.com Arena after a $700 million naming rights deal.
On Super Bowl Sunday, NBA star LeBron James inspired millions to buy crypto in a Crypto.com ad with the advice “Fortune favors the brave.”
On April 6, 2022, Miami Mayor Francis Suarez presided over the unveiling of an 11-foot long, 3,000-pound, techno-styled black bull to rival New York’s famous bull on Wall Street.
Crypto bulls are in complete denial.
Michael Saylor, CEO of MicroStrategy, is talking about his evaporating book when he says, “I am more bullish than ever on Bitcoin.”
Keeping Crypto in Perspective
Here’s the good news.
Sure, the crypto world gets a lot of press.
But in financial and economic terms, its bark has been far larger than its bite.
At its peak in November, the crypto universe was worth about $3.2 trillion.
That made all cryptos together slightly more valuable than Apple (Nasdaq: AAPL) at its peak (around $3 trillion).
Today, crypto’s total market cap has fallen to about $900 billion.
All this means is that cryptos don’t pose any systemic risk.
They may bankrupt a few dozen YouTube crypto maniacs. But their collapse won’t take down the global financial system.
How All Financial Manias Unfold
Every time I write critically of Bitcoin, I get the same responses…
“Oh, you don’t understand! You’re ‘behind.'”
“You just don’t get it, do you?”
To which my response is…
“No… It’s you who doesn’t understand.”
I’ve studied dozens of financial manias in the past.
And once you study history – which I bet my critics above have not – you learn to recognize the various stages of financial mania… and their inevitable outcomes.
Stage 1: A New Technology Appears, Shifting the Current Paradigm
The new “financial technology” of printing money backed by empty promises of wealth was behind the Mississippi bubble in 1720s France.
A new transportation technology was behind the railroad mania in the 1840s.
Ditto for the dot-com mania of the 1990s.
Stage 2: The Object of the Mania Becomes a Movement
Almost invariably, larger-than-life, charismatic characters appear who attract a cultlike following.
Nonbelievers are ridiculed and dismissed as out of touch.
For the Mississippi bubble, it was Scotsman John Law.
In the railway bubble of the 1840s in the U.K., it was George Hudson.
For crypto, it’s a pantheon of super-geeks like Do Kwon of Terra and Luna or Vitalik Buterin of Ethereum.
Stage 3: A Speculative Mania Ensues
Rising prices mint paper (or digital) millionaires. Soon the great unwashed get in on the action.
They take the maniacal Saylor’s advice and mortgage their houses to buy Bitcoin.
Stage 4: Markets Collapse
Investors lose fortunes. Many are overleveraged and out of luck. They end up broke.
Stage 5: Investors Look for Someone to Blame
Authorities search for scapegoats.
John Law fled to Venice. Hudson was put on trial.
We are at Stage 4 right now with crypto.
The collapse has started. But the complete wipeout has yet to come.
Stage 5 is still ahead of us.
But if I’m Kwon or Saylor, I’m watching my back.
The Eventual End of the Bitcoin Era
Here’s how I expect the Bitcoin saga to unfold.
Bitcoin will see $3,000 far sooner than 2030, when Ark Invest founder Cathie Wood predicted it would reach $1 million.
After dropping to $3,000, the value of Bitcoin will steadily approach zero.
Investors will then get bored and move on to the next thing.
And Bitcoin will eventually disappear into the investment ether – relegated to yet another chapter in this history of financial manias.
If you’re an average Bitcoin investor, you’ve probably lost money.
Sell your crypto holdings to a Bitcoin bull as soon as you can.
But you better hurry.
Bitcoin bulls are on the verge of extinction. So bag one while you still can.