How to survive crypto winters and other bear markets

The crowd is delusional. What to do about it.

This is not the first nor will it be the last crypto bear market. Early-stage asset classes go through periods of booms and busts (see Technological Revolutions and Financial Capital by Carlota Perez and the Gartner Hype Cycle). This bear market is harder to avoid as crypto has entered the popular narrative and mainstream media. Everyone seems to have a strong opinion on crypto these days. Most focus on the price. It’s hard not to, but it’s distracting and we risk missing the point. Bear markets sharpen the mind and we can learn a lot from them.

I’ve been in crypto long enough to have witnessed a few cycles. Through those times, I’ve learned much about myself and others. Bear markets hurt, but something about this one gives me comfort. Maybe it’s because I’ve lived through a few and have come to expect it. I’m excited about crypto as ever before. Why you ask?

Price, especially for such a speculative and early-stage asset class, is not the primary barometer of the health of the industry. We haven’t even developed good frameworks to value crypto assets. The issue is that there’s a price for crypto assets flashing 24/7. Crypto never sleeps. It constantly tempts you to have an opinion on whether prices will go up or down and trade. Studies have found that the less you check your portfolio the better off you are in the long run. Easier said than done. “When moon?”

Crypto prices defied the laws of gravity for some time last year and are entering back into normal orbit. It’s unclear if prices have cratered. The anchoring effect is when you hold on to a price of something because you’ve seen it before. That’s very real in crypto. Bitcoin teased with $20,000 and Ethereum over $1,000. “When moon again?”

Not the right question. Throw away that price and go back to the drawing board to develop a view on why it should be worth something. Question even the most basic assumptions and be open about many scenarios. Think in terms of probabilities, not binary outcomes. There’s still a non-zero chance that Bitcoin goes to $0 and a possibility it reaches $250,000. If you’re comfortable holding an investment in the long run, it’s a good sign and it will prepare you to weather the inherent volatility of an emerging asset class in price discovery mode.

Crypto has certainly thickened my stomach lining over the years. I come from the world of venture capital where you hold on to an investment for 10 years or more. I was not prepared to have a near term opinion on the price of crypto assets. My thesis was (and still is) long term. But crypto prices are hard to ignore and it constantly temps you to take action. It’s an emotional roller coaster. It plays tricks on your mind. Sometimes the best action is no action at all.

Crypto is a new asset class — early-stage venture with liquidity. That changes the paradigm of how we invest. Early-stage bets are risky and go through price discovery but we’re not used to seeing it in private companies because there’s not a liquid 24/7 market like in crypto.

I’ve learned that not having a view on a price at which you want to sell your investment can be dangerous and make you more vulnerable to act on impulse. We take pride in “HODL-ing,” but secretly remorse over not selling at the peak of the market. Wishful thinking.

Timing the market is an unrealistic endeavor. My approach is to develop a thesis and cost average my way into the investment by buying (and selling) in increments over time. Bear markets sharpen the mind. If you don’t have a clear, well-developed thesis, a wild price swing will have the rug pulled out from under you.

Crypto will always tempt you with easy gains, FOMO, technical analysis, timing wizardry and other fallacies. Develop a view. The best way to do that is by keeping an open mind and constantly absorbing knowledge from others. Crypto is an open-source community built on the ethos of collaboration and open access. Take advantage of it.

I’m lucky to be witnessing this movement. It is perhaps the most fascinating socio-economic transformation of our time. It still amazes me that, for the first time ever, we have a system that works without a “trusted” middleman. The novelty of bitcoin is an elegant coordination mechanism that’s never been possible before (solving Byzantine Generals’ Problem). It’s a new chapter in game theory.

This open, permission-less system works without having to trust market participants and does not rely on middlemen. It can disrupt old industries, and perhaps more excitingly, unlock new possibilities like scarce digital assets or programmatic universal basic income (UBI). There are many use cases we haven’t envisioned yet and I’m excited to see more projects building the future that could transform many ways in which we live.

By far the best return of investing in this market has been the intellectual stimulation I’ve derived from working with an incredibly talented and diverse group of people. I can’t think of an industry that is attracting this amount of talent.

Human capital formation is a better barometer than the price of where crypto is today and where it is headed — and it’s stronger than ever. We have more projects today innovating, building and shipping at a faster rate. Many are well-capitalized to survive this market. Talent from Silicon Valley, Wall Street and ivory towers of academia are entering the space at a growing rate. It has captured the mindshare of a generation.

So next time someone asks you about crypto prices, don’t be annoyed by it. No one wants to be reminded we are in a bear market. Many come for the easy gains and end up staying for the long haul when they realize that there’s so much more to it than a monetary gain. If crypto is to rebound and thrive, we need more people to participate and get involved. Speculation and market cycles are important as they invite new market participants to enter the space.

Volatility is inherent in any emerging market. Don’t throw in the towel. Buckle up and focus on what matters most: learning. It’s a worthwhile endeavor. There’s infinite return there.

So remember, keep an open mind. Don’t drink too much Kool-Aid. Play devil’s advocate and don’t dismiss critiques. Crypto has a lot of them — a reflection of its potential. It’s easy to become fanatical. Think in terms of probabilities. There is still a very real probability crypto goes to zero. The longer it survives, the stronger it gets (see Lindy effect) but there are still many risks and unknowns. Constantly question your beliefs. At this rate of innovation and new information, if you’re not calibrating your assumptions frequently then you’re doing something wrong. I’m not suggesting you should necessarily act on new information, but don’t dismiss it. Be open-minded. Strong beliefs held weakly.

Good luck.

Onwards and upwards.