Aaaand…they’re back. It hasn’t been too long since they crashed, yet Bitcoin and Ethereum are shooting skyward with resounding force. On Tuesday, for instance, BTC prices shot up 8.85% and ETH prices shot up 33.76%. And just for good measure, Ripple rose 13%.
What happened? I remember crypto-bears telling me that Bitcoin and Ethereum are doomed. I remember them saying that the crypto bubble is finished, and that we need to stop talking about blockchain technology. Seriously, where did all those people go?
It’s true that Bitcoin, Ethereum, and Ripple collapsed between late June and mid-July. But even as our screens flashed red, I urged you all to remain calm. This is the most normal part of technological evolution.
It’s called a “shake-out.”
After getting really popular really quickly, technologies tend to crash. It’s a matter of human psychology, you see. There are several waves of investors that pile into a stock, and—with each new layer—fervor and optimism inch closer to a tipping point.
At that point, the optimism collapses, “shaking out” investors that weren’t seriously in it for the long haul. You know the type. The weekend investors who hear about Ethereum or Bitcoin but don’t do any research at all. They just throw money at them, hoping to get rich.
Bandwagoners…amateurs…but I don’t feel bad for them. The investors who are serious about making money from emerging technologies know this pattern. They’ve seen it 100 times just like I have, so they ride out the panic.
That makes sense, Gaurav, but can you rewind a little? What are the “different types of investors”? When do each of them get into the market? And how can I avoid getting burnt by the bandwagoners?
All good questions. Let me explain…
Market Cycles, Booms, and Busts
I’m not the only person who noticed this “shake-out.” Even as Ethereum was hitting a six-month low, one of its co-founders was tweeting his delight at the plunge:
The broader principle is well known. I call it the “shake-out,” Gartner Inc calls it the “Hype Cycle.” The name doesn’t matter. What’s important is that it is a standard trend, which means that it can be put under the microscope.
So don’t panic too much if the Bitcoin price and Ethereum price take a hit. They are market leaders in their particular corner of the technology sector, which means they are likely to come out of the slump with greater market share.
So, when the next bullish cycle arrives, you might find them attracting a larger percentage of the total cash flooding into the industry.
In any case, here’s what usually happens to emerging technologies:
- The first participants are the True Innovators. These folks actually build the technology, which makes them Ground Zero for any new investment. Think of Steve Wozniak or Timothy-Berners Lee. I’m talking about the technically gifted geniuses that all of us take for granted. They also walk around with “Cheetos” dust on their pants and are able to avoid sunlight for months at a time.
- Next are the Product Visionaries. These are the True Innovators’ best friends. They have enough technical knowledge to see a finished product where there is none, plus they can translate software genius into something that actually benefits the world. Think of Steve Jobs—he is the perfect example of a product guy. He took Woz’s genius and turned it into Apple Inc. (NASDAQ:AAPL).
- Then comes the Smart Money. Whereas the previous two levels were mostly reserved for startup founders, this level is the ground floor for investors. Wealthy venture capitalists usually hop in at this phase, because it’s their job to take a risk on unproven talent. But that also means they’ve become professionals at finding successful startups early in the game.
- The first round of bandwagoners. These are the copycat venture capital (VC) firms. They are trend-followers. Like leeches, they grab onto the best-performing startups before an initial public offering (IPO). They probably don’t even have a relationship with the company, or a deep understanding of what makes the company special. They just got in because the going was good. But when the going gets tough, these firms will be among the first to leave. In fact, they’ll probably be the first to exit after an IPO.
- IPO and keep the hype machine going. At this point, the technology is not getting any more money from VCs, so they go to the public instead. Meanwhile, stock prices continue to skyrocket. Some of the bandwagoners sell; the first signs of weakness are starting to show. Watch out at this point, because the crash is coming.
- Prices crash, the fittest survive. In this crash, the losers either vanish or are gobbled up by the winners. Market power consolidates in the hands of the winners, and those with any sense of the long game stick through for the real value generation.
So, in all likelihood, the strongest contenders in the cryptocurrency market will live to see many more days. We can haggle over the #3 and #4 positions in the list of the top cryptocurrencies, but the top two obviously go to Ethereum and Bitcoin. Which is why I’m not too worried where the Bitcoin price or the Ethereum price will end up in 2018.