How Crypto Might Fleece 'Normies'... Again

Irrational Exuberance Incoming?

A lot has changed since the days of NFTs, DeFi, Web3 and the insane crypto bull market of 2020-21. A lot has changed since the subsequent collapse of 2022, when prices cratered as the Terra/Luna ‘stablecoin’, FTX exchange, and crypto-banks Celcius, Voyager and BlockFi all blew up within months of each other.

After years of lawsuits, the US securities regulator was forced to approve bitcoin exchange traded funds (ETFs) this January, allowing anyone with a US brokerage account to trade bitcoin cheaply and easily, like any other stock. The new ETFs from the likes of Blackrock and Fidelity have attracted $11 billion in net new capital over just a few months, beating all expectations.

As a result, bitcoin is up 35% in three months, 70% in six months, and the paper value of all crypto assets isn’t far from the all time high of 2.9 trillion dollars. Still, this ‘cycle’ and this market feels different in many ways.

For one, commentators covering the market are much more knowledgeable. Lots of journalists and opinion writers understand crypto deeply now, particularly at specialized publications like Bloomberg and the FT. 

These journalists covered the lockdown-induced mania of 2020-21 and some have been around since the initial coin offering craze of 2017-18 or earlier. They’ve seen so much technobabble, vaporware and fraud that their coverage of the space is dismissive and mocking.

The general public is also more skeptical. The 6-12% of adults in advanced economies that traded coins during COVID largely lost money. We’re talking about tens of millions of people that were burned as BTC and ETH fell 75%+ from the highs and ‘shitcoins’ crashed 90% or more. These investors learned hard lessons and are less credulous when they hear about ‘blockchain AI’ or whatever the latest fad is.

Industry discourse has also changed. In 2020-21, the relatively more serious and respectable Ethereum blockchain dominated the conversation. These days, most of the buzz is on Solana, the low-fee blockchain that fraudster Sam Bankman-Fried of FTX loved. There’s less talk about banking the unbanked, disintermediating wall street and building a decentralized financial system. The hype is mainly about meme-coins — tokens like Dogecoin that have no actual or alleged intrinsic value — except they have new names now like ‘Dog wif hat’ and ‘Shark cat’. 

Crypto twitter is jaded. All it really recommends is that you buy good meme-coins and tokens with good ‘narratives’ now, while they’re cheap, to sell them later in the ‘cycle’ once parabolic price increases lure the masses of unsophisticated investors and their savings back onto the Coinbase app. The tsunami of FOMO buyers is supposed to cash out your portfolio of ‘shitcoins’ at astronomically higher prices, before the inevitable crash that will be someone else’s problem. It’s cynical, cynical stuff.

In any case, there aren’t many ‘normies’ (re)entering the market just yet and ‘retail’ interest in crypto remains low. The new money that has entered the space is mostly institutional, from large funds buying bitcoin ETFs. That could all change if bitcoin prices go significantly higher though, which I think they might do sometime in the next year or two, as central banks lower interest rates.

For Bitcoin to take another significant leg up, there have to be major new sources of demand, big new institutional buyers, and there are several plausible candidates. 

One is big US institutional investors that don’t have crypto exposure yet. If American pension funds, insurance companies or investment funds start slinging 1% of their portfolios into bitcoin, that could generate net new demand for years. There’s limited evidence of this happening so far, but things could change.

Another candidate is institutions from all the other countries that are approving crypto ETFs. South Korea looks like it might get a Bitcoin ETF soon. So does Australia. The UK is set to launch some kind of exchange traded bitcoin product this quarter. And Hong Kong just launched ETFs, though with tiny initial volumes.

A third candidate is central banks and governments. President Bukele of El Salvador recently published a wallet address showing that he or his country owns 5,740 bitcoin valued at ~$350 million. It’s not totally crazy to think that a large central bank (possibly in the Gulf or BRICS) could follow this precedent and start buying BTC to diversify their reserves away from the dollar.

Lastly, there’s public companies. US software company Microstrategy has been taking out debt to buy bitcoin since 2020 and now holds 1% of the supply (valued at $13 billion). The stock is up an amazing 10x in five years. It’s not unthinkable that another company with a comparable balance sheet copies this (crazy, but in hindsight successful) levered bet on bitcoin.

So… what happens if any of these potential buyers show up and push bitcoin to 80, 90 or 100,000 dollars per coin? Possibly nothing. But it could also catalyze (yet another) bout of irrational exuberance, another self-reinforcing speculative bubble. It could trigger what the cynics are hoping for: a biblical flood of unsophisticated retail investors FOMOing into worthless tokens at all time high prices — like sheep to the slaughter.

Regulators aren’t paying enough attention to the prospect of a new crypto mania in the next couple of years. Despite some progress, token listing standards on centralized exchanges are still too vague and permissive. 

But more importantly, authorities worldwide have failed to regulate on-chain crypto. Once someone buys solana on an exchange and sends it to a self-hosted wallet, they can do anything with it, regardless of local laws, because that’s what blockchains are designed for – to resist government censorship. 

And unlike 2020-21, Solana is infinitely cheaper than Ethereum and self-hosted wallets are now much more user friendly after three additional years of development. Combined, these two factors may result in a far greater share of activity happening on-chain, where it can’t really be regulated. 

If prices explode upwards on some bullish news, retail investors might forget the lessons of the last boom and bust and enter the market at peak prices, only to get fleeced yet again.