Gaining Perspective While Losing Capital — William Mougayar's Blog

There is nothing better than a rude awakening to regain one’s sense of reality. I’m talking about the latest market meltdown that might have caught many by surprise.

What’s important is to gain a sense of perspective while trying to analyze what just happened. Taking it from the top, by now, we know what just happened: crypto’s market cap went from a peak of $2.5 Trillion on May 12 to about $1.3 Trillion on May 23, 11 days later. On the way up, the euphoria overtook the sense of reality. As we are down now, we must acquire some wisdom as we shed the reality distortion that accompanied the artificial part of rise that didn’t seem to be sustainable.

What can we learn, and what are my views about what just happened? The full impact and implications will only unravel over the next weeks and months ahead, but here are some thoughts.

The fundamentals behind the blockchain are intact. Due to the acceleration in rising prices, the narrative had gotten a little distorted along the way because there was some hype, and there were claims that were not going to be realized.

To start with, here’s how I look at the overall blockchain market in terms of segmentation. It might be overly simplistic, but simplicity brings clarity.

  • Infrastructure - All the so-called L1 layers, and some L2 peripheral technology.
  • DeFi - That segment is the locomotive pulling the financial revolution forward.
  • NFT’s - The 2nd largest emerging market, after DeFi.
  • Services - The oracles of the world, including any technologies that rely on blockchain infrastructure and serve the variety of apps or other market application segments. In other words, this is all blockchain middleware.
  • Apps - Where cryptocurrency is used, from financial applications, exchanges and in-app use cases.

We need to go back to a place where adoption metrics matter, if one cares to look at these metrics, and not just at the technical momentum of token prices.

  • If you’re an L1/infrastructure, the number of on-chain transactions, fees, and actual wallets / accounts matter. Speed doesn’t matter more than adoption. The faster car manufacturers are not the ones with the largest market share adoption.
  • If you’re in DeFi, TVL, volume of transactions, fees matter.
  • If you’re in NFT, since NFTs are goods, it’s an ecommerce story. Revenues matter.
  • If you’re a Services protocol or enabling technology, number of transactions / calls matter.
  • If you’re an App, transaction volumes, number of users and wallets matter.

One of the factors that made the current situation unsustainable was the fact that valuations were a bit unrealistic because the good and the less good were rising in unisson, without discrimination. High valuations were giving a false sense of security to some projects who were thinking, “look, our market cap is high, so we must be doing well”. Meanwhile, upon on-chain transaction volume inspections, it turns out the Emperor had no clothes!

How will we know if the correction is over, or if we have acquired some sense of wisdom?

If everything continues to move up or down in unison, that’s a bad sign. If significant developments from market leaders don’t move prices forward, that’s a bad sign. The herd mentality is an artifact of dumb investing or FOMO jitters. Sell-offs are never rational, but in the aftermath, there is always an opportunity to find value where value is to be found, and to avoid re-investing where the value doesn’t exist. For example, DeFi protocols might be a good place, because DeFi isn’t going away anytime soon. Rather, DeFi is just getting started. Total Value Locked will grow again, even if some of the yield farming might become harder to find and mine. Rising volumes will make-up for lower transactions fees as DeFi markets become more efficient.

No more meme or cute animal coins. Please. Social, cultural artifacts are dangerous ingredients to responsible value-based investing.

I’d like to see some of the zombie chains (ones with low to no on-chain transactions) not recover as well as the rest of the market. Further separation between winners and losers needs to happen. In the latest run-up, Ethereum has distanced itself from other “competing” Layer 1 protocols. As Ethereum cemented this lead, it increased its overall dominance, and got closer to Bitcoin on a relative basis, even if the proverbial flippening may have been postponed for a while.

The reality is that many projects’ treasuries are flush, and can show signs of life even without much to show for. Some protocol tokens have decades of runaway ahead of them, so they could continue faking a lot of activity, fooling supporters, and clouding the rest of the market.

Bitcoin mining is going to get more environmentally responsible, thanks to whistle-blower Elon Musk. The environmental responsibility narrative needs to gain even more awareness. Even if some Chinese miners are making progress in shedding the industry’s bad reputation around carbon emissions, the shift towards less reliance on Chinese mining is already underway, and is a good de-risking move for that whole sector.

The naysayers are going to repeat their refrains - that you can lose all your money in crypto, and that’s a risky market. Traditional finance is either scared, or in the avoidance phase. However, the demand for cryptocurrency and its many applications is not abating, despite the crypto markets tendency for sadomasochistic behavior. What doesn’t kill you makes you stronger comes to mind.

A market correction is always a good thing when it serves to reset expectations. Hopefully some weaker projects won’t recover as quickly as others, if money gets smarter along the way. If everything starts rising again in unison, it means dumb money is still in the system, so we must be prepared for more erratic behavior.

We will know over the next few weeks.