By Bret Swanson
Bitcoin and ether, the largest and most established cryptocurrencies, have plunged around 60 percent from their highs last November. Bitcoin now trades at around $29,000 and ether at $1,950. There is chaos and depression across the world of coins, tokens, and non-fungible tokens (NFTs)—so much that my college-age daughter called me last week to ask, “What’s up with the crypto crash? Is crypto over?”
Lots of crypto skeptics surely think and hope so. My own optimism for crypto, which has waxed and waned over the last decade, had more recently been rising. Market crashes induce fear and doubt but can also bring clarity. So my daughter’s question helped me organize and simplify my thoughts.
Crypto may be down, but so is the entire market. The S&P 500 is down nearly 17 percent, and the Nasdaq 28 percent. Some tech stocks are down 70–80 percent.
The broader economy is faltering in a way not seen since the 1970s, with spiking inflation and slow or even falling growth. There’s a big debate over whether the monetary and fiscal authorities should rapidly withdraw or unwind unprecedented stimulus—arguably the source of so much excess in the stock and crypto markets—to get inflation under control. Like in the 1970s, nearly all asset classes are getting hit. Bonds, like stocks, have been smashed as rates rise to offset inflation.
If one looks back just a couple years, crypto appears to be an overall success. In May 2017, bitcoin traded at around $1,800, close to where ether is now. Today, despite its dramatic fall, bitcoin is worth 16 times that much.
One of the arguments for bitcoin is that it’s like “digital gold,” a scarce store of value but with far greater flexibility than gold. From one point of view, the idea that bitcoin is an inflation hedge looks silly. Over the last six months, it plunged as measured inflation exploded. Using a wider lens, however, one could argue bitcoin expertly anticipated today’s inflation. Today’s bitcoin price is still nearly double that of November 8, 2020 (see the chart). Over the same period, gold, long a favorite signal of and hedge against inflation, has actually fallen a little more than 3 percent.
Yet another take: Crypto behaves most of all like equities, rising with the monetary-fiscal printing presses until inflation forces the Federal Reserve to remove the proverbial punch bowl. Peter Thiel recently argued for bitcoin as a substitute not for gold but for the S&P 500.
There’s yet another conundrum. One might argue that the current stagflation vindicates one of bitcoin creator Satoshi Nakamoto’s original visions for the currency—its raison d’être as a noninflationary regime and constraint on irresponsible policy. Could a crypto standard help avoid similar fiscal and monetary conflagrations in the future?
At the same time, bitcoin’s price volatility has so far prevented it from fulfilling Nakamoto’s other chief objective of bitcoin becoming a widely used “digital cash.” The hope for crypto as a currency requires some measure of consensus stability.
The focus here on bitcoin ignores the far broader cryptosphere known as Web3. Web3 describes the third generation of the web, which might unite the decentralized idealism of the first generation—browsers, websites, ungated peer-to-peer communication—with the performance and scale of the second generation—cloud, apps, and social media. It will also add a native transaction layer and censorship resistance that can bring rational economic models to individual users, creators, and decentralized communities. Andreessen Horowitz summarizes the case for Web3 in its brand new “State of Crypto” report, which details the growth of decentralized finance, decentralized autonomous organizations, NFTs, and the endless possibilities for gaming and virtual worlds. This is the optimistic view of the next 10 years.
Until then, many bad ideas and scams will be washed out with the tide of illiquidity. So will some good ideas that appeared too early or failed to gain traction before the crash.
In the stock market crash of 2000, thousands of dot-coms and other tech companies died. These were the companies building the physical networks of the internet and the first generation of businesses on the web. It was total carnage. Yet 22 years later, the internet is the globe’s most important economic and social platform. And the world’s most valuable businesses are internet companies and related tech giants, many of which were founded during that era or in the crash’s aftermath. Lots of ideas that failed the first time around worked spectacularly well 10 years later.
The power of the computing fundamentals and
the number of smart, well-funded people working to build Web3 suggest big
success on the other side of today’s disappointment.
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