First the economy overheats, then winter comes to Wall Street. January was especially horrible for the cutting-edge investor, and February might be even worse. At the end of last month, big tech stocks were down nearly 8%, according to the New York Stock Exchange’s FANG+ index — and that was before shares of Meta Platforms Inc. (the company formerly known as Facebook) fell off a cliff last week.
The crypto winter has been even colder. Since the start of the year, Bitcoin (BTC or XBT if you prefer the official ticker) has fallen by 12.5%; despite a rally on Friday, it is still down 40% from its all-time high of $67,734 in November 2021. If you bought Ethereum at the top ($4,799 on Nov. 9), you are down 38.5%. Only meme stocks such as GameStop Corp. (down 31% since the year began) and Robinhood Markets Inc. (down 78% over six months) have been hit as hard. Oh, and let’s not forget Facebook — down 34% over six months.
By contrast, it’s been a rip-roaring start to the year for retro investors. Oil (Brent Crude) was up in January (+19%) more than Bitcoin was down. Long coal was one of the trades of 2021: If you bought America’s biggest coal company, Peabody Energy Corp. (BTU), a year ago, you’re up 252%. So much for COP26 and the Green New Deal. The winning trade of the post-pandemic era would seem to be long in the past, short in the future.
You can tell it’s a bear market for crypto because the usual suspects have been tweeting about it. (They’re always mum on the way up.) It doesn’t get better than Courier Robin tweeting a Business Insider story with the headline: “Economist Paul Krugman says there are ‘uncomfortable parallels’ between the recent crypto slump and the subprime mortgage crisis.” Sorry, this doesn’t seem like the relevant historical analogy.
That’s not to say the crypto winter can’t deliver a bigger chill, if not the polar vortex or bomb cyclone of Robin and Krugman’s imaginings. How much lower could Bitcoin go? It is worth recalling that, after the price of Bitcoin peaked during its first bubble — at $1,137 on Nov. 29, 2013 — it dropped by 84% to $183 just over a year later, on Jan. 14, 2015.
This pattern was repeated four years later, when the price peaked at $19,041 on Dec. 17, 2017, and bottomed out a year later at $3,204 — a cumulative drop of 83%. Were this historical pattern to repeat itself exactly, the price would fall to a low of $11,515 this November, 83% below its peak in November of last year.
However, such a plunge seems unlikely for two reasons. First, Bitcoin is a much larger asset than in the 2010s, with its market cap peaking at just shy of a trillion dollars. The process of adoption by individuals and institutions, which I forecast in the updated edition of “Ascent of Money” in 2018, continues apace. First came the hedge funds. Then came the banks. Now the sovereign wealth funds, the pension funds and the big endowments are sniffing around. Sooner or later, a respectable central bank will admit that it has some Bitcoin in its reserves, and the financial journalists will pay less attention to El Salvador’s eccentric experiment to make Bitcoin legal tender, alongside the U.S. dollar.
Second, while Bitcoin remains a highly speculative investment, it is less speculative than it was a decade ago, based on measures of 30-day volatility and institutional adoption. Some institutional investors — such as the pension funds that have become limited partners in crypto hedge funds or venture funds — have long time-horizons, measured in years. The crypto newbies who bought at the top of the market will not doubt retreat to lick their wounds. But more sophisticated players will want to buy the dip.
What is going on here? Clearly, this is more than just a crypto winter. (sorry, couldn’t resist) would seem to be pandemic-related. After two years of Covid restrictions, people are eager for a return to the real world: real ballgames, real shopping, real travel, real gyms. There was no way companies such as DoorDash Inc. (-45% over six months), Zoom (-64%) or Peloton Interactive Inc. (-80%) could expect demand for their services not to decline as stir-crazy Americans adjusted their behavior from pandemic to endemic conditions.
At the same time, the tight U.S. labor market has presumably driven up costs for tech companies more than for most. Good luck hiring a top engineer in Silicon Valley these days. Rumor has it that practically every graduating computer science major at Stanford already has an offer from Meta. Finally, there’s a chance that people just aren’t that into the metaverse as envisioned by Mark Zuckerberg — or feel they already have it (it’s called the internet).
At the time the Facebook founder unveiled it, many thought it was a genius move to extricate his business from the approaching army of antitrust hipsters and aggrieved politicians. But I don’t think his plan was to ward off antitrust actions by ceasing to be profitable. No rebranding alters the reality that Facebook (ask any teenager), TikTok has eaten its lunch on viral video content, and the days of the Facebook-Google online ad's duopoly are over.
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