Crypto Cycles

Like a lot of people during the pandemic, I picked up a few new hobbies.  One weekend back in 2021, after a long mountain bike ride with a couple of friends our post-ride conversation turned to cryptocurrency.  At first, I have to admit I found it a little hard to keep up with the discussion.  However, it peaked my interest.  It always helps to have friends who push you into learning new things.  In this case, it wasn’t them even pushing Crypto just the general excitement in their voices peaked my interest enough to go out and learn more about the topic.  So I started down a rabbit hole of research into block chain technology, “Token-omics”, Decentralized Finance and the current state of crypto.  I found some Crypto influencers on Twitter, joined a few groups on reddit to start engaging with, while keeping an active text thread going with my crypto buds.  After about a month or so, I parked a small, but not insignificant chunk of cash into a few crypto projects so that I would have some “skin in the game” and stay close to what was going on, while hoping to make a little return.  Well, it turned out 2021 was a great year to learn!  We saw a phenomenon of interest in crypto, which brought a $68k Bit-Coin ATH (All-Time High), a mainstream interest in NFT’s (Non-Fungible Tokens) and a professional basketball franchise renaming it’s arena in Miami to adopt the name of a large crypto exchange.  Remember FTX?  It was a thriving multi-trillion dollar (with a “T”) industry and I was like a trout in a river just going with the flow learning as much as I could.

At the root of all crypto currency is a desire for a new way of transacting value using decentralized technology as an alternative to the existing centralized fiat structure that is in place today and controlled mostly by big banks and the government.  So how do you even “crypto”?  That was the first question I had to answer.  Taking a dollar and converting it into a digital currency seems like it would be pretty straight forward, but understanding the technology behind the transaction is something that opened up a whole new world for me and gave me a deeper appreciation for what the crypto builders are seeking to accomplish.  I started out with three different projects, with three different goals.  Each goal had their own implementation strategies. 

Goals :

1. Invest fiat ($$$) into Bit-Coin – BTC (Bit-Coin ticker symbol) was and still is the most main stream coin, and at the time was valued at $32k.  Today, it has a market cap of almost $450 billion.  I considered this my conservative blue chip bet.  I had no idea that it would double in ten short months, only to ride the roller coaster all the way down to sub $20k  in 2022.  My goal for this project was to have a long term conservative (if that is even a thing in crypto) investment to hedge against more risky projects and alt-coins.  Bit-Coin was the gold standard of crypto and is considered a store of value like gold so the idea was that it would persevere in the long run.  So they say.  I went out to Coinbase, connected my bank account to the exchange and purchased some Bit-Coin for the first time.  Goal one complete.

1. Staking ETH – The Ethereum block-chain, is an open-source blockchain that is used as a platform for smart contracts.  Key word “platform”.  It’s native token ETH, is used as the base token for many projects that are built on the Ethereum chain.  In 2021, the Ethereum developers started to migrate the block-chain from the energy intensive “Proof of Work” mechanism of mining tokens to the more eco-friendly “Proof of Stake” mechanism.  Read more on staking protocols at this link Seeking Alpha.  In order, to incentivize token holders to participate in the upgraded block-chain, Ethereum based crypto exchanges were offering 8-12% APY on tokens “staked” on the new Ethereum 2.0 Proof of Stake network.  The catch was, you had to stake and leave your tokens there until the merge went live.  At the time, there was not a date for roll out, so while the APY was great there was risk with not knowing when your coin would be available for movement.  My goal for this project was betting on my belief that “Proof of Stake” was the future for all crypto mining protocols, while earning good interest on my coin.  For this approach, I looked into a few different exchanges and finally landed on Kraken since they looked to have the best APR for staking ETH at the time.  In September of 2022, the merge completed and my coins were unlocked.  Goal two complete.

1. De-Fi Playground – My last goal was to learn more about this entire universe of Decentralized Finance.  According to Investopedia, De-Fi is an emerging technology which uses secured digital ledgers to remove 3rd party and centralized institutions from financial transactions.  De-Fi challenges the centralized financial system controlled by banks and government by empowering individuals with peer-to-peer digital exchanges.  This space is heavily unregulated and there are hundreds of De-Fi projects out there, and learning more about them meant that I would need to pay to play.  At the time, projects like Wonderland, Terra Luna and abracadabra.money had some exciting things happening and Crypto Twitter had an endless stream of information to help someone like me learn how these projects worked.  So I bought some stable coins (crypto currency coins pegged to the US dollar), converted them to several De-Fi projects and started to play in the wacky world of Decentralized Finance.  Goal three “In Progress”.

What did I learn?

Like most innovative and game changing technologies, at first the value of these innovations and the general benefit usually out pace need for a regulatory focus.  Eventually, as the interest, participation and general usage grows, a surface area of opportunity for bad actors to exploit the system reveals itself.  This generally leads to a appetite for some form of protection, which turns into regulatory focus and governing structures.   I think that is where we are today, however in 2021, the Crypto space was growing unprecedently and there was a lot of money to be made.  So naturally, brilliant technical opportunist started to find ways to exploit the technology for their own good.  Taking full advantage Twitter to hype up De-Fi projects and garner a cult like following, more and more participation in these projects led to more digital currency being staked in these projects.  This is called Total Locked Value (TLV) which is essentially like a deposit of money into the banking system, but in this case was actual crypto currency.  The longer the user stakes their coin the higher APY % they get in return.  The red flags were all over the place.  In some cases, there were projects generating north of 1000% APR for “staking” you tokens.  This meant that the longer you staked your coin, the more coin you would get in return.  Anyone, who has been around for the last two economic recessions and market crashes knows that a 1000% APR smelled of a bubble waiting to bust.  It simply was too good to be true.  It seemed as if the entire crypto market was being Gas-Lit to think there was no bottom and that this particular cycle, crypto would replace traditional finance for good. 

As I dove into the deep end of De-Fi, at least as deep as I could go.  An overwhelming theme of complexity and fragmentation was present.  Transacting in the Crypto space was not easy.  Sure there were main stream exchanges like Coinbase and Robinhood where you could easily purchase Bit-Coin as a pure investment, store it on their exchange and just watch it oscillate each day with the daily crypto narrative.  But in order to start getting involved with De-Fi, you had to take possession of the tokens and know how to move them around.  This meant using an array of distributed tools online to swap, exchange, convert and stake your coin.  All of this technology behind the scenes made up an elaborate ecosystem of capabilities all fully integrated on the back-end with robust platforms with public REST API’s, but highly fragmented on the front end.  This is where a significant opportunity exists in my opinion.  A lot of De-Fi projects have decent Websites, but limited mobile capabilities.  Also, making a transaction to get from fiat (dollar) to a stable coin, to a De-Fi token using a swap felt a little reminiscent to configuring an software application.  This can be unnerving when you are moving hundreds or in some cases thousands of dollars worth of tokens around.  Understanding the tools to trace the transactions and understand where the coin lives at rest is very technical and will need to be something that is made more user friendly in the future.

Where will this thing go?

So here we are in 2023 and the world looks different than it did back then.  Crypto has now made it into the main stream vernacular and for not good reasons.  In the last twelve months, this space has been riddled with scandal, fraud and in general a loss of public credibility.  This public black-eye has contributed to a reduction of over half a trillion dollars in market cap in the last year and a half.  However, there are still builders in this space and there is still the general problem of figuring out a better way to provide financial power to the world outside of  traditional finance.  The convergence of technology with finance is inevitable and as we saw with the .com bubble back in the early 2000’s, many companies and projects failed, only to strengthen the overall infrastructure of the internet to become what it is today as the great information highway of our times.  I am wondering if crypto is in the same cycle.  I’m still excited about this industry and there is no denying the progress made toward accelerating the capabilities for peer-to-peer finance over the last several years.  From an investment perspective, I’m still long on ETH and BTC, but there was definitely a lot of alt-coin casualties along the way for me.  Was it worth it?  Maybe.  I don’t think we are done yet.  I think we are just getting started and I’m ready to see what the next cycle will produce.