25 May 22 – In The Depths Of The NFT Bear Market
Survival tips and how to make it to the next spring
Everything is red – commodities, equities, cryptocurrencies, and of course NFT. Hard assets like gold and properties are doing well of course, along with the dollar, which has seen incredible strength as DXY (dollar index) continues to clock new highs.
Tech stocks and cryptocurrencies are probably the hardest hit sector. Since my last article two weeks ago suggesting that BTC will find support at $30K and ETH at $2K, we've seen met those prices and are holding at those levels. So where do we go from here? How long will this bear market last?
The Macro Landscape
Firstly, let's just recognise that the economy is in trouble. With record inflation hitting the US, countries still struggling post-covid, or those affected by the Russia-Ukraine war, it's not the best environment to be bullish about. Further, if we were to consider cryptocurrencies as a risk-on asset, NFTs will be even riskier, and these are things that people try to avoid during such times.
Yet, there lies an interesting proposition with crypto. Bitcoin, which started in the depths of the post subprime crisis in 2008, was meant to be censorshi-proof money. While it has seen undulating prices when measured in dollars, it has also steadily climbed over the past decade. If we were to consider Ray Dalio's view on debt cycles and how we are nearing the end of a big-debt cycle (usually 50 to 70 years long), and how the dollar might lose its reserve currency status, hey crypto might be an interesting proposition (most people believe the Chinese Yuan will be the next dollar).
Will we move away from a centralised currency, onto trustless digital currencies? I can't say for sure. But the use case of Bitcoin is getting stronger by the day, and of course Ethereum's adoption of as a smart contract tool has seeded its roots in many aspects of our lives. With ETH2 (Proof-of-Stake) on the cards, we might soon see massive adoption.
TLDR; the fate of crypto is as you deem it. If you see it as a risk asset, it is highly risky. If you see it as the future of money, then it's as promising as it can get, and you might consider BTFD. Perhaps the trick then is in risk management and diversifying your portfolio.
The 2018 crypto winter was the longest, lasting almost two years. Prior to that, BTC (and later ETH) had always corrected by over 60–70% only to recover back to the prices it crashed from and break new highs. Most people expect no difference from this crash, the only difference being how hard the crash is, and how long the crash is.
In the last winter, it was the post-ICO era, and interest was at all-time low. Yet, the strategy that proved useful for me was to have friends alongside that journey, and reminding each other to average in as and when we can and when ETH retested the lows. $200 was way overpriced but every dip to $100 was a nice opportunity, which on hindsight, all would have felt cheap.
This time, I feel that it can be different for a number of reasons.
Firstly, on-chain metrics are showing that there are more long-term BTC holders – people who have not sold their BTC in over a year. There are also more institutions publicly adopting it onto their balance sheets, notably Michael Saylor's Microstrategy and the El Salvador government. Further, the use of NFTs has attracted and pervaded so many companies, it can potentially draw in more capital from that end.
This is not to say that we can't go lower, but rather, we have more support and buyers than before. Also, the development in the NFT space is unlike that in the ICO space. The latter was more of venture capital, but the former is manifesting social capital, and that has greater implications across many aspects of our lives.
A shorter winter then perhaps? I wouldn't be too suprised if we were to recover quickly, and go on to make another massive bull cycle.
So Keep Buying NFTs?
While it's ok to keep averaging into crypto, it's perhaps not wise to do that for NFTs.
First and foremost, most NFTs are going to naught. Yes, zero.
If you don't understand what you're buying, or if you think that the community is great, let's just say that this great community can fade especially if they're only concerned about their financial incentives and will disappear if these incentives are gone. There are legitimate projects and builders leveraging on NFTs, and they might see some success – but there are many who will struggle with capital (especially if we were to have a prolonged bear market) and will cease to function.
Yes, you can argue that there are 95% of the world who have not been onboarded onto NFTs, and hence the potential of more capital entering the market – but this should not distract us from the fundamental value and utility that NFTs should have in the first place, and quite frankly, most are just copies of one another.
Having said that, there will be that few top-tier NFTs that will perform better than others. As you can already observe from the floor prices, top-tier NFTs like BAYC, Clone X, and Azuki have held their prices relatively well. This is not to say that these are the NFTs to buy, rather it's an observation that people consolidate their NFT portfolio into these resilient ones while dumping the rest of their NFTs.
Yes, bear markets present buying opportunities. It also sifts through the good apples from the bad ones, and to me, that is a healthy correction for the market. Buyers beware.
In the past two weeks, we've seen the crash of Terra and the FUD that killed Azuki, and these are definitely unpleasant positions to be caught in. Nothing is certain in this nascent market. This is why it's important to have a diversified approach rather than to go all-in on one of them.
Times are hard, and we can all be a little more empathetic. It wasn't anyone's fault that they picked these, and most of us would not have seen this coming, yet it did. Hang in there, and keep going. Meanwhile, record down the lessons and remember to set take-profits in the bull market. We'll have even more cycles to go, so let's take these into the next one.