Letter 18 - The Current Bear Market
On having conviction, and zooming out
Like it or not, believe it or not, we are going through an NFT bear market right now. Or at the very least I can say that we have been for the last couple of weeks - perhaps it’s over, perhaps.. it’s just begun. Who’s to say? Nobody knows what the future holds. Nobody can know. All we can do is look at some of the information available to us and try and make some educated guesses about what might happen - so that is exactly what I am about to do.
Be Fearful When Others Are Greedy and Greedy When Others Are Fearful - Warren Buffet
A month ago there was a lot of greed on the NFT streets. People were making 50-100% gains daily, and outsiders were seeing these tremendous gains and basically begging to get in on the action. I don’t think anyone that has been following the market for more than a couple of months is particularly surprised to see that prices have come crashing down. Most smart people in this space have been saying for weeks that the market was overheated/over saturated and that some sort of correction was inevitable.
It’s just that nobody knew when, or to what extent, things would correct. I myself thought we had reached a local “top” over two months ago. I thought it again seven weeks ago, then again a month ago, and then again two weeks ago. Eventually I had to be right, and eventually I was.
A lot of people came to me for advice a few weeks ago on what to buy, and if they should be buying. My advice was always roughly the same: the market has gone up a LOT lately, and this is unsustainable. Nobody knows where, when or how this will end. It might go up another 5x, it might come crashing down; but I believe strongly that in a year or two or five, investing in the right NFTs is going to outperform most other assets.
A year is a long time in the NFT space. It’s so long that a year ago I literally didn’t even know what an NFT was. Heck, nine months ago I didn’t even know what an NFT was. Now I have over 50k twitter followers and almost 7k newsletter subscribers who look to me for advice on NFTs.. Jesus, what is life. Seriously. This space moves fast. All this to say that most people, myself included, often get caught up in what is happening on extremely short term time frames and forget to zoom out as often we we ought to.
A lot of people who are new to NFTs might have hoped or, worse, expected, to buy something and realize a 2x or 5x or 20x gain within a couple of weeks. When this didn’t happen and when the floor price of the thing they bought dropped 20-50% from what they paid for it, they understandably started panicking. This resulted in more people listing things at lower prices and more panic in the streets. I believe most of the panic and fear comes from people who don’t have a strong conviction in what they are buying; who didn’t have a great reason for buying something other than FOMO or “my friend told me to”.
Now it is at this point that I must interject and say that I have literally told some of my friends/family members “trust me, just buy this NFT and hold it”. That can be an okay strategy but in that case you have to have trust and conviction in the person advising you. I will always recommend to people to do their own research but sometimes people don’t have the time or desire to do that and just want to diversify x% of their portfolio into NFTs and in those cases I think it’s fine to follow someone you trust. Basically though, I think you still need to have conviction in something or someone to back up your investments. Otherwise you are just going to panic and be fearful when the prices go down, and you won’t have anything of substance to give you reason to continue to hold through the downswings.
Where does my conviction come from?
I’m lucky. I basically feel that everything in my life has led me to being perfectly positioned to understand the NFT space. Living and breathing NFTs for months on end has resulted in a conviction so hardwired into my essence that it really is not something I can begin to imagine teaching someone. It sort of reminds me of a common question and answer from my poker days. Often people would ask me “should I quit my job/drop out of school and play professionally?” and the correct answer was always “if you have to ask, no”. If you know, you know. With NFTs, if you have the conviction, you have the conviction. You understand. You get it.
Now my conviction isn’t just some airy fairy thing that I just decided I wanted. It has come from months of looking at the data. I’ve tracked floor prices and unique owners across hundreds of projects. I have been looking at how many unique wallets are in this space. I have been in hundreds of discords and seen how many teams are working at creating projects/products with NFTs at the center of their operations, and how so much of what is being created would not be possible without NFTs. I continue to see all of this and more, and it is what continues to give me my conviction that NFTs are here to stay, and are only going to be bigger and better and more game changing than any of us can imagine in even our wildest dreams.
It’s so hard to actually “get it”. True Digital Ownership though, man. Once you get it, you will never look at the world the same way again. I still get a shiver down my spine and goosebumps when I think about the magic of NFTs. Right now I’m listening to some music on Spotify; the music isn’t an NFT, but one day, it will be. I’m sitting on a plane. My ticket wasn’t an NFT, but one day, perhaps it will be too. We’re a long way away from the world being full of NFTs, but it almost seems inevitable. Once transaction fees are sufficiently low/non-existent and the friction for users is effectively zero, the possibilities are limitless.
So many people conflate NFTs and art and think that the whole space is just going crazy spending stupid amounts of money on jpegs. Art is one, small, basic, simple use case of NFT technology. It is a brilliant and perfect use case, don’t get me wrong, and it will (and already is) revolutionize the entire art world. But it is a fraction of one percent of what NFTs will eventually be used for.
Gaming. Movies. Music.
Healthcare. Real Estate. Education.
Transport. Logistics.
Finance.
Shopping. Food & Beverages.
Sports.
Collectibles. Books. Social Media.
Name a sector, and NFTs will be used in it. Some how, some way. The entire world is moving more and more into the digital space, and the digital space is moving more and more onto blockchains.
It’s just.. inevitable. Corporations can’t stop it. Governments can’t stop it. I’m not sure many people even want to stop it. You can’t fight progress.
I’ll step off my soap box now - let’s look at some numbers.
Stats don’t lie. The market has had a significant correction on all fronts - there are fewer unique wallets buying/selling NFTs than there were a couple of weeks ago, and the total number of sales both in quantity & USD value have both plummeted. Concerning? Perhaps. Calamitous? Unlikely. Even now we are seeing a daily volume of 20-30x times higher than what we saw a few months ago. If you look at the “crash” we had around April/May it is barely a blip in the grand scheme of things. At the time it felt pretty disastrous but anyone who bought then or held then is doing just fine now, and I truly believe the same will be the case for this current situation we are in.
Probably the best piece of advice I can give to anyone looking at the current market state and feeling fearful is to zoom out. Looking at your portfolio balance every day let alone every hour is going to drive you crazy and is likely not going to serve any benefit. The swings are huge in crypto and specifically in NFTs but if you have some conviction and belief in the long term prospects of this space then it is easy to hold through the bad times. I’ll leave you with two more graphs to ponder. These are both BTC/USD graphs. The first looks like a pretty big crash/correction/bear market. The second is zoomed out a tad…
Zoom out.
All of this is to say that I believe that we are still so god damn freaking early it is insane. That said, we can be early and the market can be overheated at the same time. What’s the true value of so many of these NFTs we are buying? That’s a hard question to answer. So much of the value is “what someone else is willing to pay for it”, and that’s always going to be an incredibly difficult thing to value. So much of the value in many projects is coming from things being status symbols; luxury brands. Again, hard to value, especially in the nascent days of many of these brands. I will say, though, that it seems unwise to ignore the power and potential of brands.
I don’t care at all about Rolex watches. Many people do. Many people are willing to pay tens or hundreds of thousands of dollars for a watch which, ultimately, serves no utilitarian benefit over a $50 watch other than being a status symbol. Maybe it’ll last a little longer, but people are paying for the look and for the thoughts other people will think of them when they see a Rolex on their wrist. Perhaps it grants them acceptance in a tier of society they wish to belong to, perhaps it gives them a feeling of belonging. Perhaps it makes them feel better about themself. I’m not one to judge - these are all things we as humans want.
I’m guilty of wanting the same, and of valuing some of my NFTs in the 5 or 6 figure range for many of the same reasons. I enjoy having the status of being a part of the Bored Ape Yacht Club. I like the feeling of the belonging, I like the societal benefits I feel it grants me - all the way down to the most basic of having more twitter followers because of #apefollowape. I think there’s immense value in these things. I may not want a fast car, a fancy watch, or expensive sneakers. Those things are not for me in this life. But I sure as heck don’t ever not want to be in the BAYC, and I am willing to value that membership at over $100,000. And, most importantly, I am not alone.
If there aren’t enough people willing to value the membership that highly, though, then the prices will fall. We are seeing that now. The floor price hit over 60 ETH at its peak and it’s now down 50% from there. Eventually we will get to a point where people are willing to pay more for membership into the club than what people are willing to sell for, and the price will then start to go up. Supply and demand at its finest. Where is that point? Nobody knows. Nobody can know. The market will decide.
What about all the new projects?
It’s fine and well to say that there is power and value in brands like the BAYC or Art Blocks, but what about that donkey cat seventy eight left facing sneaky stealth list of words that is dropping next week? Is there value in that? Again, nobody knows. Nobody can know. Nobody knew that Apes would be successful when they were launched, and nobody could have predicted how successful they have become. Anyone buying into the BAYC early was taking a risk, and it paid off. There were many projects before the BAYC that did not turn into brands and their values have plummeted or stagnated, or perhaps appreciated but not by nearly as much.
The NFT space is risky. The Crypto space is risky. High risk, high reward. This is again economics 101. If you’re buying into a new project, you’re taking a risk. A pretty big one. The upside is huge and I think it is worth risking some amount of money into the NFT space right now because of this. When you can potentially 100x+ your investment, the downside and “what’s the worst that could happen” being “you lose all your money” doesn’t actually seem so bad. I think I’ve heard people call this an asymmetrical bet. Sounds like fancy lingo but it also sounds like it describes what I am trying to talk about here.
With more and more projects launching daily, it is not sustainable for all, or even most of them to return significant profits. Some will, many won’t. If you’re buying into a project purely to make a profit, consider that you’re competing against thousands of other people also buying into that project trying to make a profit. Think about where your edge might be coming from. To use yet another poker trope: “If you can’t spot the fish at the table, you are the fish”. Consider where on the informational totem pole you are. You just heard about this great project on twitter because your favourite influencer tweeted about it? They probably already filled their bags, and told their close friends, and perhaps a private discord, and they all got in before you. Maybe you’re paying for a private discord membership and are ahead of the curve for some drops - congrats, that’s probably gonna print you money for a while, but eventually that well will run dry too. You will always do better doing your own research, finding your own projects, and getting in early before your favourite influencer is telling the world about this amazing hidden gem of a project to their 80,000 followers.
Be smart with your money. Sometimes it’s fine to follow influencers - there’s tonnes of great alpha on twitter, but almost none of it is “free alpha”. You can make good money following certain people but it almost always comes with some sort of cost (however small). Whether you’re filling someone’s eth bags, or funding them with social currency - very little is free in this world, and certainly in this space. It’s fine to pay social currency or pump someone’s bags though if what you are getting out of the transaction is valuable and worthwhile. I just urge you to be conscientious about the decisions you are making, and to understand why you are making certain decisions.
A common saying during crypto bear markets is that it’s during the bear markets when the building actually happens. When the market is bullish there is lots of hype and attention and everyone and their mother wants in. A lot of people get involved just looking to make a quick buck, and a lot of people end up disappointed. Eventually the people who came just for the money will leave, with or without their money, and those that are here for the long haul will settle in and work on creating the infrastructure that the next bull run will launch off from.
In NFTs, everything is sped up. We’ve already seen a few cycles, although when we zoom out a few years from now it’s likely that we’ll consider everything from 2021 to be part of “the bull run”. What does this mean? It means that while prices are dropping and people are losing interest, if you really want to “make it”, you should be spending more time researching and investing in the space. Invest in yourself (by educating yourself), and then perhaps invest in others (by investing in their projects/NFTs). Take some time to join the discord channels of a dozen projects you find interesting and look at what is happening in them.
Is the team still posting regularly? Are they making announcements that you’re happy with? Are they delivering on their road map promises? Are they doing more than that? How is the community reacting? Is there a lot of activity, or has it become a ghost town? Is there a strong group of core supporters who aren’t bothered by the floor price, or is the only thing people are talking about the price? Do people care about what the project and community is going to be like in a couple of months, or do they only care about what the price is going to be in a couple of months? How many new members are joining each day? Is the project doing anything to stand out from the crowd? Why should you (or anyone) invest in this project and not another project?
These are all questions you should consider, and many of them you could even ask the team in their Discord. A competent team behind a solid project should be able to answer all your questions to your satisfaction. If they can’t, they don’t deserve your support, nor your money.
So am I buying or selling right now?
Mostly, neither. These last few weeks I have been holding and not doing a lot of buying, but I have certainly been in no rush to sell either. Most of my NFTs I purchased with a long term view and am happy to hold for well over a year and have no desire to sell after prices have dropped 50%.
The last few days though I started buying some things again. I personally feel like this bear market is unlikely to go too much lower. Whether we shoot back up, tread water for a while, or slowly trend upwards - I have no idea. Nobody knows. Nobody can know. We could even continue to bleed and crash and everything could continue to go much lower. My view is but one person’s opinion. The things I am buying, I am happy to hold for the long term. I am happy to hold if they crash another 90%. I believe that in a few years from now, any NFTs from flagship collections in 2021 are going to be worth significant multiples of what they’re currently worth, and I am happy to place my bets accordingly. My largest bet is still on Art Blocks. I’ll be releasing a new Letter on Art Blocks specifically sometime later this week, as an update to my previous one that was published 2.5 months ago. A lot has changed, a lot remains the same.
I have noticed a tremendous amount of people panicking and yelling doom and gloom on my twitter timeline over the last week. I’d be lying if I said that didn’t influence my decision to buy. Will my decision to buy now work out well?
Nobody knows.
Nobody can know.
The market will decide.
There is once again nothing on my radar, but that is about to change. I am currently on my flight home and intend to hit the ground running. This week I will be beginning a challenge where I will fund a new wallet with 1 ETH and try to run it up in the current market. It’ll be enlightening for me to consider what to buy/sell with a smaller bankroll than I have been trading with for the last few months, and I hope I can learn some things. I also hope others can learn some things from my challenge. I will be posting updates about it in my Discord channel, which you can join here.
We’re still early.
Disclaimer: The content covered in this newsletter is not to be considered as investment advice. I’m not a financial adviser. These are only my own opinions and ideas. You should always consult with a professional/licensed financial adviser before trading or investing in any cryptocurrency related product.
great insights. amazing how much you've learnt in the past 9-12 months.
i appreciate the alpha