EarlyBird Crypto Education Series Part 2: The Crypto Coaster

This reads in 5 minutes

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Anyone who has opened Twitter or read a news headline sometime between today and 10 years ago from today has probably noticed a trend when it comes to crypto. I’ll sum it up in one word: volatility.

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Just so we’re all on the same page

Volatility and risk are two separate (but often conflated) things. Volatility is a way of describing fluctuation in price. Something with a lot of volatility will experience big price swings — like the ebbs, flows, jerks, and occasionally queasy weightless moments of a rollercoaster ride. Risk, on the other hand, is a measure of the possibility of permanent loss. If we stick with our rollercoaster metaphor, risk is more akin to whether or not the ride passed certain regulatory/safety tests before accepting thrill-seeking passengers.

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While volatility can cause permanent loss, that’s generally more related to psychology than an asset’s underlying risk profile. When people who own an asset can’t stomach a big downturn and find themselves panic selling, that’s an example of volatility causing permanent loss. It happens in crypto, it happens in the stock market, heck, it happens a lot when people don’t understand what they’re buying.

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The point of this post

I’m not saying crypto isn’t risky (more on this later — risk is another funny thing that lots of people haven’t fully wrapped their heads around). I AM saying that a non-state monetary system that’s only 13 years old and is facing a degree of uncertainty around government regulation... is probably gonna be volatile.

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People call this stage, “The Wild West”. I think the California Gold Rush is a better analogy; you’ve got folks getting lucky and striking it rich (early crypto adopters), people selling picks and shovels (companies building wallets, exchanges, marketplaces, etc), lots of snake oil salesmen (scams everywhere), and a whole lot of people rushing into a somewhat uncertain situation (most new crypto investors).

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Crypto enthusiasts love to say “it’s still early!”

But it’s not as early as it once was. And you know what? That’s fine. Plenty of people moved to California after the gold rush and still made money.

The rest of this post will be a little walk down history lane as we take a look at some of the significant, volatility-contributing events of Crypto’s past. Let’s dive in...

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A Non-Exhaustive Timeline of Events

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2009 - The Genesis Block (the very first block on Bitcoin’s blockchain) is mined by Satoshi Nakamoto, the creator of Bitcoin. And Bitcoin’s value is a whopping $0.00000.

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2010 - The first economic transaction ever made in Bitcoin occurs: a man buys 2 pizzas for 10,000 Bitcoin. This is an epic lurch forward — it signals agreement between two people that Bitcoin has value. At the time, that value was about $0.004. Today, a hoard of 10,000 Bitcoin would be worth approximately $380 million dollars. I’d need to have a lot of toppings to pay $190 million for a large pizza.

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2011 - The first crypto bear market. In the summer of 2011, the price of Bitcoin spiked to $31.50, but by November, it had lost 93% of its value, settling down right around $2 per coin. Between 2011 and 2015 there were six occasions where Bitcoin lost more than 50% of its value.

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2012 - Bitcoin underwent its first “halving,” which basically means that the reward for “mining” Bitcoin gets cut in half. In 2012, the reward dropping from 50 BTC to 25 BTC (we’ll explain more about this in another post). The halving mechanism keeps Bitcoin on track to only produce 21 million coins by the year 2140. In the 4 years that followed, the price of a single Bitcoin rose from $12 to a whopping $650. This sorta thing happens when the demand for a scarce asset goes up.

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2013 - The Ethereum Whitepaper is released, announcing a future where not only currency, but also applications (yes, like the apps on your phone), could one day be decentralized and live on the blockchain. Oh yeah, and then there was this magnificent forum post that led to the timeless battle cry of crypto: HODL!!!

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2014 - The cryptocurrency exchange Mt. Gox lost an estimated 850,000 Bitcoin, worth a staggering $450 million through fraud, theft, and massive mismanagement. The company later filed for bankruptcy. It was not the first, and certainly not the last time an exchange would make a flub of epic proportions.

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2016- Bitcoin underwent its second halving, reducing its block reward from 25 BTC to 12.5 BTC. At every halving, the rate of creation of new Bitcoin goes down, which implies that coins are becoming more scarce. The BTC price rose from $650 to roughly $8000 over the subsequent four years.

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Ethereum also had major drama in 2016 — a “bug in the code” was exploited to steal over $30 million. Instead of letting that slide, a bunch of developers got together and agreed to “fork” the blockchain, which is sort of like creating an alternate timeline... in their new version of the blockchain, it was like the hack never happened.

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Since the majority of Ethereum participants all agreed to use this new chain, you could say they returned the funds (but not without going against some of the core principles of decentralization).

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2017 - Initial Coin Offerings (ICO), or the crypto equivalent of an IPO (but for a not-Bitcoin cryptocurrency), arrived on the scene. Just a year later, 800 projects would ICO, creating a market of “altcoins” valued at nearly $20 billion.  However, the hype was short-lived, as 86% of the biggest ICOs traded below their listing price and nearly a third lost almost all of their value.

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2018 - By the end of 2017, Bitcoin reached a high of $19,700. Nonetheless, Bitcoin prices fell rapidly during the dark days of the “Crypto Winter” that would transpire over the remainder of the year. Bitcoin plummeted to $3,700 by the end of the year. The new money that rushed in got badly burned. I remember hearing about grandmothers asking their grandkids if they should buy Bitcoin. It was weird. Bubbles are weird. You kind of have to go through one to know what they feel like. For long-time crypto enthusiasts with a passion for the vision and an understanding of the underlying technology... this was just another accumulation phase.

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2020 - Colloquially known as “DeFi Summer”. Ethereum’s vision starts to become realized as traditional financial services (namely lending and borrowing) start gaining traction through the growing popularity of DeFi apps (DeFi stands for “decentralized finance”). Some people made a TON of money doing a thing called “yield farming” where basically you take out a big loan in one cryptocurrency (at a certain interest rate), only to essentially lend that asset to another app where you’d earn a higher interest rate. It’s more complicated than that, but that’s the gist.

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2021 - From the end of 2020 through mid-2021 we saw the biggest run-up of crypto prices of all time. However, Bitcoin has had a rough ride since hitting a record high of near $69,000, and 2021 closed the year around $46,300.

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Ethereum also had a banner year, trading at $775 on January 1, 2021 and reaching $4,810 on November 9th. This was due in part to the growth of DeFi applications and the rise of that funny acronym that no one can seem to avoid these days: NFTs. (As of writing this, Ethereum’s price is back down to around $2,600 — nearly 50% off its all-time high).

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The lesson here

If we chart the history of these assets, 50%+ pullbacks have been the butter to the all-time highs’ bread. The folks who have been able to ride out the ups and downs over 3+ year timelines have seen some phenomenal returns! Fun fact: nobody who has held Bitcoin for over 3 years has ever lost money.

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While past performance isn’t predictive of future results (for Bitcoin to have a second decade that mirrored its first, the price would have to reach a whopping $4.5 million — like I said, it’s not as early as it once was), whatever the performance looks like going forward, it will not be without their share of volatility. And if you’re interested in investing in crypto on behalf of your child, we have to be okay with that.

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It’ll be fun to turn our attention to “risk” in the next post, where we’ll be exploring the underlying technology (THE BLOCKCHAIN) and the potential of government regulation.

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Read Part 3 now...

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