Chicken Little's lessons from the Crypto Crash of May 2021

Bitcoin dropped from $65,000 to $30,000 in recent weeks. What did I learn from this drop? 

A teachable moment

Messages from the recent crypto price movements

1. Crypto is both a risk asset and safety asset

2. Crypto is worse for the environment than I realized

3. Lessons that I did not learn

Alex Honnold risks death safely

1. Crypto is both a risky asset and safety asset

I have been buying crypto as a safety asset against the destruction of fiat currency. In 2016, I predicted that Central Banks could print as much as $100 trillion in new money. (See, "mother of all monetary bubbles.") We are well on our way to that 'crazy' prediction. Bitcoin is, in my view, a safety asset that will retain some value in a Depression caused by Central Bank overprinting. However, there is a huge speculative component to crypto also. In addition to devaluing fiat currencies, monetary printing contributes to asset price inflation - rising prices of stocks, houses, gold, lumber, and crypto.

So what caused the rise in demand for crypto? The first driver is a safety trade to protect some purchasing power in a depression. The second driver is a high risk way to make some cash in a short period of time.

What does this mean for the price of Bitcoin? Bad news on the economy and the stock market have two different impacts on Bitcoin. Liquidity concerns and forced selling put downward pressure on crypto. However, the worse the situation becomes, the more The Fed will print.

So bad news in the stock market is bad news for crypto speculation, but reinforces the need to protect oneself from the Fed. I do not know if we will exceed $65K on bitcoin anytime soon, but I expect a least a partial and significant recovery toward new highs.

A lot of crypto mining is powered by coal

2. Crypto is worse for the environment than I realized.

In my "Paradigm shift" post, I listed crypto as less destructive to the environment than gold mining. Depending on the percentage of crypto mining that is powered by renewable energy, that may or may not be true for new bitcoin vs. new gold.

However, once gold is mined it has no negative environmental impact. Crypto, on the other hand, continues to have negative impact even after a coin is mined.

Until we can power crypto mining with renewables, some investors, including ESG funds, will be uninterested.

The Child will grow up

3. The more things change, the more they stay the same.

What isn't new is that crypto has a ways to go to grow up. First, no one wants to have their retirement account in an asset that can lose half its value in a day. Second, the plumbing of crypto is not ready for prime time. Today, every major crypto exchange suffered outages.

All the other lessons about trading a volatile asset remain unchanged since the beginning of markets. Read Reminiscences of a Stock Operator if you have not. Reread it if you have. I love the story of the mink coat, and all the other lessons regarding the psychology of trading.

Bitcoin price     $30,000
Ethereum price $1,900
Cardano price $1.05

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