Mandelbrot Markets

Mandelbrot Markets

Bitcoin has breached previous support levels and dropped to a new ~$3,500 low on 11/25/2018. As of writing this, Bitcoin is back above $4,000 and could find some temporary support before another definitive move in either direction.

This feels like the 8th inning of substantial selling. In its usual Mandelbrot-like fashion, it seems this market needed any reason to get to the historical 80–90% correction levels we’ve seen in past cycles. Bitcoin has now reached about an 82.5% drop from previous all-time highs. For reference, the 2014 bottom was met with an 86.7% correction. We believe the bottom is close and will be somewhere between $3,000-$3,500 to meet the historical percentage correction. When reached, it will likely be followed by a flattened accumulation period for a while. We have already begun accumulating.

Perspective and zooming out are always important. Here’s an article from the 2011 crash back when prices were in the teens and twenties. Click here.

Here’s a compiled list of “Bitcoin obituaries” where journalists, academics, and pundits have claimed Bitcoin’s demise more than 325 times and counting over the last decade.

Although we love active market analysis and making targeted, concentrated trades, we are primarily venture investors with majority long term positions. We treat Bitcoin as a generational venture bet and remain very bullish on the crypto space over the next 5-10 years and beyond. The best infrastructure and networks are being built as we write this, from custody to financial services, to new protocols. We’ve been fortunate enough to be on the frontlines with some of the highest quality, talented teams which will begin to release, distribute, and launch their products over the next few years. The best teams are in it for the long haul and realize bear markets are the best time for building. By launch, their products will enter a more mature market that has also hopefully cleansed itself of gimmicky projects and tourists. This bear market will act as a great leveler to not only get rid of the bad actors and short term players, but for new technology, development, and real world adoption to become the primary focus.

From a financial services perspective, we’re seeing a lot of infrastructure products with go-live dates put in place for 2019 such as Nasdaq, Fidelity, and NYSE’s Bakkt implementing Bitcoin futures. Wall Street’s interest in this space has not wavered despite recent price drops, as they have acknowledged that digital assets and cryptocurrencies are here to stay. The framework for much wider adoption is coming.

With that said, this “crypto winter” could easily last 12-18 more months before Bitcoin’s price gets back to $10,000+ levels. Even when price bottoms out, it will likely go sideways for quite some time. Even when these institutional products are launched, money flows and demand won’t come immediately. And even when this happens, overall sentiment will take time to repair and reset. Better regulatory frameworks and guidance are also required and even Goldman is having issues holding and storing crypto for its customers requesting it.

These institutional product releases don’t mean a price surge is to follow their launch date. With the infrastructure in place however, smart money will begin to accumulate in preparation for when sentiment turns around and adoption increases. It’s important to remember that Bitcoin is still the world’s best performing asset over the last 10 years, even during an unprecedented stock market rally.

Fred Wilson of Union Square Ventures sums up our similar thoughts on the long game here: What Bear Markets Look Like. The dot-com crash got rid of the hype (e.g. and allowed real value to come to the surface. Just a few years after that bubble burst, Google started to dominate search and Facebook started to dominate social media. The flavor-of-the-month, short term companies riding the hype had collapsed, opening the market up and grounding it in reality. True value creation in any market is only possible through creative destruction. Over time, we will see something similar happen in this space. Gimmicks and scams will still exist, but the market will generally mature as the technology becomes more used.

Specifically for Bitcoin, the more the usual suspects call for its death, the stronger it seems to come back in its true antifragile nature. As Fred Wilson points out, all the people now calling for Ethereum’s death is likely a contrarian signal that it’s close to the bottom. We've also been accumulating ETH as a secondary, long term core position because we only see developer participation and conviction increasing.

We believe that Bitcoin represents the best asymmetrical risk (although best risk-adjusted within crypto as well) and low time preference investments that anyone can make right now.

The underlying sociopolitical theme of populism is also upon us, where individuals are seeking change in the financial system through better transparency and decentralization. Many of the teams we’re invested in are committed to making this change a reality.