🍻️ S3T Dec 8, 2023 - Special Edition: Crypto Year in Review & the Assets that Thrived in Tough Times

🔊 Listen to this edition on the S3T Podcast

I've been a student and observer of the crypto sector for years now because I recognize that the capabilities being built represent a new set of financial building blocks - new building blocks that are enabling the next chapter in financial innovation. The past 24 months have been tough. Scandals, economic challenges, loss of credibility and trust. But despite this, positive sentiment, and perhaps a bull market has returned. It's a perfect time to look back on the year, and especially to look back on which projects and assets demonstrated growth and strength even in these most difficult times.

🤑️ Right now, every crypto asset or project looks like gold.

Here in Q4, almost all crypto assets have spiked, and there is talk of crypto spring and the next crypto bull market. Bitcoin is back in 40Ks. Any day now the SEC might drop one or more approvals allowing traditional investment firms to offer crypto investments to their clients.

But wouldn't it be helpful to see which crypto assets exhibited resilience even in the hard times of the past 18 months? Which ones demonstrated staying power and even growth during the worst times?

Before the Bump: 12-month snapshot taken in Oct 2023

In mid-October, I did a review of the public price charts of the more popular digital assets. I broke them into 4 categories based on the appearance of their 1-year price chart (Oct 2022-Oct 2023) and their all-time price charts (ie the entire duration of their existence).

As always, the standard caveat applies: this is not financial advice. Investing is risky, and you need to work with a registered investment advisor with the appropriate expertise. Together you can tailor an investment plan to your specific goals, risk tolerance and other factors.

Crypto assets 2022-2023: 4 patterns observed

• UP - the price of this asset stayed on an unmistakably upward trend
• UP & DOWN - the price of this asset was volatile, up and down.
• DOWN - the price of this asset stayed on an unmistakably downward trend
• FLATLINED - the price of this asset looks like it just went not only down, but down and flatlined...as if dead.

My goal was to categorize assets based on a simple visual pattern that anyone would agree with if they looked at the same chart. These 4 patterns seemed to be the most likely to be agreed on by the widest audience, and the least likely to be subject to interpretation.

What the 4 patterns mean

• UP - the price of this asset stayed on an unmistakably upward trend even when most other assets were not. This says something about persistent investor faith, and or consistent usage from a community that finds value in it. This in turn says things about the leadership team and the developers maintaining and enhancing the platform. People held on to this asset and kept buying it either because they were investors who believed in it, or because they were users/customers engaging in transactions that boosted the demand and price for the asset.
• UP & DOWN - the price of this asset was volatile, up and down. This asset had good days/months and bad ones. These assets may be volatile due to lower market caps, or because they could have been the target of short-term opportunistic investors who favor volatile assets.
• DOWN - the price of this asset stayed on an unmistakably downward trend. This trend can suggest a couple of things - one, that the asset was overpriced and is finding its new level. This suggests that the assets leadership team is struggling to retain talent, deliver useful features, and attract/retain investors.
• FLATLINED - the price of this asset looks like it just went not only down, but down and flat...as if dead. This trend suggests that the asset has been abandoned by its end-user community, its tech talent, and its investors.

The assets and their patterns as of October 2023

UP in 2023

• Bitcoin
• Ethereum
• Optimism
• MakerDAO
• Stacks
• Render

UP & DOWN in 2023

• Chainlink (slightly positive)
• Solana (positive in past months up ~300% since Nov 2022)
• XRP - spikes due to positive verdict, unclear investor thesis
• Litecoin
• API3

DOWN in 2023

• Arbitrum
• Aptos
• Cosmos
• Polygon
• Uniswap*
• DeSo*

*(barely escaped being put in flatline category)

FLATLINED in 2023

• Filecoin
• Avalanche
• Cardano
• Skale
• Audius
• Sei

Keep in mind, here in December all or nearly all of these are sharply higher. But not all of them kept a stable or upward trajectory during the tough times of the past 18 months.

Themes that surfaced or strengthened in 2023

• The emergence of “blue chip” assets: BTC, ETH so far, thanks largely to Fidelity Investment Thesis papers. (See Fidelity Investment Thesis for Ethereum, and Fidelity Investment Thesis for Bitcoin (PDF)).
• Growing gap between assets that have or don’t have critical mass adoption or critical mass developer community. This gap might narrow if we are truly heading into a bull market.
• This crypto developer community shrunk in 2022 but is significantly larger than it was 2 years ago. This deep dive into the size of the crypto developer community shows 19.3K monthly active public developers in crypto - down 27% from Oct 2022 but still up 66% from Oct 2020.
• Investors are starting to learn how to evaluate crypto assets (More about this in the next section).

Questions crypto investors are learning to ask when considering crypto assets

Digital asset investors have not as a rule evaluated digital assets using traditional investment methods, but rather invested based on beliefs ("Bitcoin is the future") or based on superficial indicators like tweets, price spikes, or flimsy press releases about "exciting partnerships".

We can hope this era is over, but if traditional investing and human nature are indicators, sentiment-driven investment is here to stay.

That said, the crypto market delivered some pretty harsh lessons over the past 2 years, and most digital currencies - even with the recent spikes - are still way down from their hype-driven highs.

I believe more and more investors will follow the kind of thesis-driven approach that Fidelity and Messari.io are introducing, asking tougher questions before they commit funds to crypto investments.

The Tough Questions to Ask

The tough line of questioning shared below rolls up to one big question: Are there reasons to believe that the digital currency itself will grow in value over time?

• Does the world need this solution? Is it being adopted? Will the currency reach sustained critical mass usage? (Some projects don't seem to offer unique or even viable solutions to real-world problems).
• Is the solution maturing? Is there a sufficiently talented and consistent team working on it and growing its maturity? Is the leadership team demonstrating reliability and ethics?
• Do any of the working mechanisms of the platform, transactions, org structure, and financial management point to any reasonable likelihood of value increase for those holding the currency? Or will the value accrue to some other beneficiary?
• Even if usage increases, will insiders will sell their stakes as soon as retail investors flood in, and then sink the prices? For an example of this, look at the trendline of most of the crypto-currencies that go live on crypto exchanges: big spike in the first 36 hours followed by months of downward trend.
• What other factors may cause the price to deteriorate over time even if the usage of the platform goes up?
• What is in place to ward off negative outcomes?

Getting clear answers to these kinds of questions has been notoriously difficult, and the noise chamber on TwitterX and the online tech press doesn't help.

Very Typical Example of Misleading Press/Social Media posts (not naming names to protect the guilty): One oracle sector crypto project announced a working relationship with an impressive international finance entity. Over the summer more PR pieces went out. Reading the pieces one gets the impression we're on the brink of a huge breakthrough where traditional finance finally capitulates to decentralized finance. A few months later a muted press release came out from the international finance group. This mentioned the crypto project but indicated that the "partnership" had been a temporary experiment/demo, and made no mention of any investments or commitments.

In Oct the same crypto company shared another press release saying that an international bank had partnered with them. But a close read of the piece suggests that this is just another experiment/demo. So is this really the merging of tradfi and defi (as the enthusiastic buzz pieces implied?) or was this a series of exploratory exercises that ended with no clear commitments?

This kind of "fog" complicates an investor's ability to form a clear thesis about the potential of specific assets. It also creates an optics problem for those who are diligently trying to build a more equitable inclusive modern financial system. For every one of these quiet builders, there are several noisemakers pedaling dubious schemes.

🔮 Looking forward: 2024 and beyond

Several things to watch for in 2024:

• Anticipated ETF Approvals from the SEC will in theory bring a flood of new investments into Bitcoin, Ethereum and possibly other assets. Also in play here is the incumbent finance sector's fear of disruption - on display in this week's bizarre Warren-Dimon theatrics in the Senate.
• The Bitcoin halving in April 2024: Halving is Bitcoin's built-in inflation control mechanism that reduces miner rewards by half every four years. It has - in the Bitcoin community - been associated with bull market runs.
• Market exuberance in Anticipation of a new crypto bull run - a sustained period of upward trends in prices.
• New Advisors - in 2024 a large new cohort of Registered Investment Advisors (RIAs) will likely be advising clients on crypto investments for the first time. This likelihood is based on initial communication that is going out now from large investment banks - basically "prepping" their client base to be ready to allocate funds to riskier assets. For a flavor, see the materials that Fidelity has published for investors and investment advisors here.

Together these factors will prompt thoughtful investors to ask their advisors pointed questions (like the list shared above) - and be very wary of advice or "opportunities" that lack specifics and use over-hyped language.

In addition: Thoughtful investors will consider what to do when the market or asset prices plunge. This is not a possibility, it's an inevitability. (Do you put in your entire allocation all at once, or do you put some in now, and be ready to put more in if more attractive (lower) prices present themselves?)

📚️ Do your own research and get educated

As always, do your own research, and work with qualified advisor with experience in crypto. Here are a few ways to educate yourself.

• Coindesk's DACS provides an excellent overview of the wide array of crypto assets categories by industry sector. Can help answer the question "Why does this asset exist? What current or future need is it meeting?"
• Messario.io - charts and research on individual assets. Really good end-of-year overviews as well.
• Crypto Fundraising Tracker - tracks crypto fundraising rounds, including amounts raised and firms making the investments.
• Historic Crypto Market Cap movement. It's helpful to track the relative rankings of crypto assets as they move up and down the market cap rankings list. CoinMarketCap has an easy to use URL that let's you quickly see how specific assets have moved up to down in a given period of time. Use this URL structure: https://coinmarketcap.com/historical/20230311/ and change the date at the end of the URL to see the top 200 assets by market rank for that specific date. You can open 2 or more browser windows then check multiple specific dates (say the beginning of the last 6 quarters) and notice how specific assets have moved up or down during that time. 

As the adoption of crypto and blockchain-based architectures grows, more and more companies will be drawn into discussions and decisions about how and when to add these assets to their holdings or leverage these technologies in their business strategies. Taking time to get educated - together with your leadership and engineering teams - can make a significant positive difference in your eventual outcomes.

Opinions expressed are those of the individuals and do not reflect the official positions of companies or organizations those individuals may be affiliated with. Not financial advice. Authors or guests may hold assets discussed.

This week's Cover Image: Dalle3 Drawing from Prompt: "In the style of cute Japanese anime draw a picture of a bull dressed for work, saying goodbye to a tired bear wearing pajamas and getting into bed just as the sun - a bright shiny bitcoin - comes up over the horizon."

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