Markets are living entities that operate of their own will, pulled directionally based on the short and long-term desires and biases of individuals, culminating in narratives driven by collective forces. Of this, I am sure. An investor like myself, who has lived through only a cycle or two can recognize this. So why do markets in downward motion cause such widespread fear and disbelief? Isn’t this supposed to happen, and haven’t we been through this many times before?
My father is an economics professor who teaches behavioral finance, and one of his courses is subtitled “Why this time is never different.” I think he’ll appreciate my sentiment for this post. The core thesis of his course, taught through a litany of Shakespeare’s plays (much the Thespian, he is), is that human behavior and irrationality lead the perpetual motion machine that is the economy into largely predictable cycles. The catalysts and narratives that drive market sentiments may vary over time, but their impacts will look similar when you zoom out wide enough.
I’m reminded of these lessons while judging my own portfolio and investments, particularly with respect to crypto. The collapse of the Terra ecosystem is yet another reminder that a Ponzi flywheel can only spin capital around the centrifuge so long. The tech onslaught in public markets riding on the fear of war in Ukraine, inflation, and various other factors is a reminder that although company fundamentals might be sound, the S&P500 is as affected by global narratives as much as anything else.
The writing on the wall for a company’s collapse or a market downturn always seems to stare you in the face in retrospect. For Terra, it was strikingly obvious that until a certain level of speculative velocity for Luna could be achieved (or at least some form of fundamental intrinsically tied to the value accrual potential aside from speculation), the whole system could unravel if a large-enough participant decided to unwind their positions with haste. Luna, and it’s algorithmic stablecoin TerraUSD, was something I had some conviction in. Did I understand its Ponzinomic nature? Of course. Had I already seen other investments disappear in similar algo-currency experiments, like Olympus? Yes. So why did this time look any different?
Again, the benefit of hindsight aids in the recognition of where miscalculations occurred, and where greed had taken rule over logic. I remain humbled, and thankfully, solvent. I took a hit, as did many others. But rather than keep my head down, shy away from the topic, and ultimately try to move beyond it – I’d rather ingrain these lessons learned into my hippocampus. This blog has always sought to highlight interesting mechanisms told through my personal learning experiences, rather than lecture from a place of authority. So here is where my head is at on the market downturn, in light of what (little) I’ve already experienced.
As an individual, markets are out of your control. Attempting to time the market is a fool’s errand on an individual basis – unless you’re a hedge fund or prop shop turning cash hand over fist on the fees you’re generating managing other people’s money, it’s futile to try and make technical or narrative-based judgements on the direction of a market fueled by nothing close to a fundamental thesis. My strategy is, and has always been, to accumulate assets into a well-diversified portfolio that maintains solvency in down times and liquidity in up times.
This is both the hardest and easiest strategy to implement. It's difficult because when I see an opportunity, I want to take advantage of it. It’s easy because when I don’t, I can sit back and relax. Alas, I am painfully human, and thus subject to all of the short and long-term mental biases that come and go on a daily basis. If the ultimate goal is to accumulate wealth, then striking the balance between capturing opportunity and being patient is a mindbogglingly difficult exercise in gaining control over my humanism and emotional being.
It most certainly takes a few cycles to “make it,” whatever that may mean in your personal calculus. I was drawn to crypto because of the staggering capacity for innovation; an industry where projects can bootstrap themselves financially without having to navigate traditional fundraising routes; a canvas in which a simple contract can craft novel financial innovation; a place where innovation is dramatic, inspiring, and dispiriting all at the same time.
But I’d be remiss to ignore the impact that the potential for financial success has on the psyche. Of course we’re fueled by a desire to make money – ultimately, we’re all-consumed by the inherent desire to find comfort, be it a spouse, a warm home, or financial freedom. But it’s important to stay cognizant to what drew you in in the first place. This industry is nascent, filled with rugs and scams of all natures, but it remains a place where deeply important work has the potential to dramatically alter the way we humans interact with money. For that reason alone, I remain convinced.
Additionally, in defense of the power of trying and failing, Web3 has one significant disadvantage with regard to Web2. If a tech company in the early 2000s failed, then the losers are the VCs and limited partners who invested in that company’s seed round. Nobody loses sleep over rich men whiffing on an investment. But in Web3, the capital at risk is that of millions of individuals. When an idea fails, valuable IP can be salvaged in bankruptcy court and used to fuel a more innovative solution. We tweak, iterate, and improve until we stumble upon a valuable solution. The ability for a primitive to try and fail is deeply important for this type of progress – we find real value in the tools we’re building when picking up the pieces of what did not previously work. For Web3, the bar must be set much higher, because when primitives fail the sentiment drifts too far from “this was an innovative idea” to “this was a scam, a grift, a cash grab, and I fell for it.” This type of narrative is to be expected in a space where capital is tossed around like a hot potato, and the losers are disproportionately retailers.
Narratives will come and go, but true innovation can and will break through. Markets are controlled by too many factors to bother navigating; but ultimately, they are cyclical. Perhaps the space needed to shake out some of the dead-weight that contributed to exorbitant company valuations and diluted token values. In this context, it feels more like growth from a human perspective rather than growth in the market sense. In my mind, markets driven by this human collective often display many of the same human emotions we exhibit on an individual basis. Growth is slow and requires sacrifice. Such is life.
And so we beat on, boats against the current, borne back ceaselessly into the past. Zoom out, learn lessons from the failures, and indoctrinate them in your psyche. The night might seem dark and full of terrors, but the sun will rise again, eventually.
Disclosure: I probably own assets mentioned in this article. This is not and never has been investment advice.