TLDR: In times of market crashes and long boring stretches – as we are currently in – some people start doubting crypto. ‘Is it a Ponzi after all, is it all going to zero?’ To put things into perspective, let’s have a look at some examples of bad price action of the past, both inside and outside of crypto – and how prices recovered.
There is something funny about the price sensitivity of crypto holders. During downturns or periods of sideways price action, investors can get very irritable and even desperate. Depending on their character, different X influencers will talk down on each other’s projects, instead of just going outside and touching grass.
What causes this nervousness? Is it a deep down feeling that it’s in the end all a ponzi? Why else would we get anxious by a 20% drop in price over the course of a week? After all, the price is still up hundreds of percent from only a few years ago.
A more healthy frame of mind would of course be to hold on to the investor’s maxim of the ages; buy low, sell high. If prices drop, this means you can buy at a discount. Simple as that – unless the drop comes at the tail end of a raging bull market with a blow-off top.
Let’s have a look at some examples.
The BTC Covid Crash
In March 2020, the COVID-19 pandemic had just begun, sparking widespread panic and uncertainty in financial markets. Stock markets took a nosedive and – as always – Bitcoin nosedived even faster.
On March 12 of that year, Bitcoin’s price plummeted dramatically, losing 50% of its value in just 24 hours. The chart pattern is the visualisation of panic.
The price drop triggered a massive liquidation cascade on the then popular exchange, BitMEX. Within minutes, $750 million worth of Bitcoin was liquidated, causing a rapid crash down to below 4k.
But what is the point of this story? Within two months, Bitcoin fully recovered and within six months went on to reach new all-time highs. Buying when others are forced sellers is often a good idea. It’s easier said than done, though, I grant you that.
To set the stage for this frame of mind, let’s look at some cases of commodities that have historically seen sharp price drops – and recovered. First, oil in 2020, then silver in 1980.
The Oil price Drop During Global Lockdowns in 2020
In April 2020, a few weeks after global lockdowns had been ordained, the prices of US crude oil went negative. People would literally pay you money if you would take their barrels from them. The reason? The sudden global lockdowns caused a huge oversupply. And unlike crypto, storing larger amounts of oil takes up more storage space. For huge oil producers, the fresh oil they produced became a liability instead of an asset.
But did this mean that oil had suddenly become worthless? Was the oil industry all a big Ponzi after all? Of course not. It was only temporarily worthless, at least in the eyes of the producers who needed to pay for storage space. Of course, everybody else still valued their gasoline and plastic bags.
Ergo: a low price can be an indication of a sudden and temporary unbalance in supply and demand – not some intrinsic and long-lasting issue with the underlying commodity. In other words, buyers of oil in April 2020 got themselves a good deal. Of course, we’re not talking about physical barrels here. Instead, a less extreme version of the trade could have been expressed in different ways, such as buying oil companies’ stocks, which had taken a less extreme nosedive.
The Silver Pump and Dump of 1980
In 1980, silver prices pumped by an astonishing 700% within 12 months, possibly never seen before for such a centuries-old commodity. The pump was caused by speculation, quite openly so.
What happened? Superwealthy investors called the Hunt brothers believed that silver prices were being kept artificially low, so they leveraged their vast wealth (along with borrowed funds) to try to drive up the price. They started purchasing large amounts of silver and entered into contracts to acquire even more in the future. This caused a short squeeze.
In the end, their huge bet didn’t work out for them and they had to sell at a loss. They faced regulatory pushback and had over-levered themselves. Forced sellers now, silver prices fell with percentages that feel familiar to present-day crypto investors: more than 80% in mere weeks.
The silver price hasn’t yet taken out the high of 1980 but has come close. Currently, it’s within striking distance, at 30 dollars.
The point here is, as with the COVID oil example, that the peak (and crash) were both the result of anomalous market circumstances, in this case, speculation. When the price crashed hard, no one thought: ‘silver is going to zero!’ Because there’s simply a demand for silver. It’s an industrial material.
Usage Sets a Floor for Crypto
Let’s turn our attention back to crypto. As long as there’s a natural demand for crypto, there’s no reason to worry that ‘it will all go to zero’. The usage sets the floor.
See, Bitcoin has a non-zero price, because people have collectively decided it does. They have put their money where their mouth is and have invested. One of the main reasons they do so is they want a form of saving outside of the standard banking system and central banks.
The question then becomes: does this reason stay valid? Well, in an age where distrust of institutions is on the rise and in an age of massive government debt and money printing, why would current investors in BTC and crypto suddenly flip bearish on crypto and bullish on ‘government paper shitcoins’?
For Ethereum and alternative layer 1’s, their raison d’etre is that people want to build financial applications on decentralized rails. To send stablecoins across the globe, you could use Ethereum, in which case you will need to pay transaction fees in Ethereum. This creates demand and this sets a floor. Hence, Ethereum won’t go to zero.
Given all this, why do even experienced Bitcoin holders sometimes feel a tinge, a slight unease, when prices drop, or fail to go higher?
I suppose it’s partly an issue of staying power. Bitcoin has only been able to prove itself since 2009. An asset like gold has existed literally hundreds of times longer. The stock market has existed for multiple centuries. Bitcoin isn’t quite there yet. With every year it survives and thrives, its staying power gains credibility. But this won’t be overnight.
Another potential reason for creeping doubts might be social in nature. Peer pressure, if you will. The Bitcoin and/or crypto community is still relatively small. It wouldn’t surprise me if 80% of the population still thinks this is all a Ponzi. Especially in bear markets people often aren’t shy to rub it in. This is social pressure, plain and simple, that’s not easy to shake off.
Conclusion
In times of price trouble, go back to basics. Look at some adoption metrics. Remind yourself why crypto has a use case in a world in which trust and efficiency are lacking. And finally, remind yourself that even rock-solid assets such as silver have seen pumps and dumps – which didn’t affect their long-term price trajectory in the least.
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
