Conditions like this are a great opportunity. You can take a step away from the charts and spend some time studying the history of financial markets to give you an edge.
Today's history class is on the infamous dotcom bubble:
Why it occurred;
What kind of similarities can be drawn to the current crypto markets;
What lessons we can draw from our comparison.
This will be useful because human psychology doesn’t change. And so, understanding how market participants behaved in a similar scenario will allow you to better navigate the current markets.
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💭 Lessons Learnt from the Dotcom Bubble
Dotcom and Crypto Compared
According to Investopedia, the dotcom bubble was a rapid rise in U.S. technology stock equity valuations fueled by internet-based companies during the late 1990s.
During this period the technology-dominated Nasdaq index rose over 500% between the years 1995 and 2000.
By the end of 2001, the bubble had popped, most dotcom stocks went bust and many blue-chip technology stocks lost more than 80% of their value.
Webvan, a dotcom darling that achieved a valuation of $1.2 billion in 2001 is a famous example of projects failing during the bubble. The team had limited experience in the field but received high levels of capital because they were seen as a tech start-up.
Similarly, the recent crypto bull market was a rapid rise in cryptocurrency-based projects fueled by blockchain technology. Both runs are fuelled by ground-breaking technology currently in its infancy but with the potential to change the world forever.
With regards to over-valued projects, we can see this now in the current crypto market with protocols that have limited users, poor user experiences or a lack of direction and yet receive valuations in the hundreds of millions.
The crypto market is not going anywhere but project valuations are likely inflated and many projects will not last. Knowledge is power. People who can see the reality of the situation and draw lessons will prosper.
Lessons We Can Draw
Doing your own research is essential because the likelihood is that like the dotcom bubble, over 90% of the projects that exist today, will not exist in the next 5-10 years. Consequently, you want to only hold long term positions in projects you truly believe will stand the test of time and take caution with projects you feel will not. Good due diligence helps us distinguish between good and bad projects. Consider starting with our project due diligence guide. This will help you with key considerations when deciding on a project such as Community, Tokenomics and Product.
Now that we have established valuations are heated, we notice the current situation is a lot more delicate. You’ll want long term positions in top tier projects (as discussed above) and in more medium-tier projects, it does not make sense to have a long term horizon. Consider taking profits quickly on medium-tier projects. For more on crypto investment horizons, consider listening to our podcast with Ryan Selkis, Founder of Messari.
Manage Your Downside
Finally, our comparison with the dotcom bubble reveals that the current risk assessment is something of a barbell distribution. If you imagine a barbell, there are heavyweights on either side of the object and the middle is very thin. This is a good indication that with every crypto project investment, you will likely either:
Experience severe downside. The majority of projects will go to zero. It’s likely you will experience extreme negative returns.
Experience severe upside. If you land on the minority of projects that will continue to do extremely well, you will experience extreme positive returns.
Note there isn’t much of a middle ground here. It’s unlikely projects will do ‘ok’. As such, downside protection is incredibly important. You need to be comfortable with the barbell risk distribution and the chance of severe downside. For more on barbell distributions, consider our summary of Nassim Taleb’s Antifragile.
🎠 No Wonder Land
I mean, come on, is it a theme park or a DeFi protocol? Wonderland and a few other ‘Frog Nation’ projects shot to fame in Q4 last year with their charismatic leader ‘Dani’ in the driving seat. But with the rollercoaster events of the last week, have the wheels now come off?
Wonderland ($TIME) is a DeFi fork of Olympus DAO, a reserve currency protocol that allows holders to stake the native token.
Daniele Sestagalli had a rock star rise to CT fame, with his Frog Nation community rallying behind this and other projects like Abracadabra ($SPELL) and Popsicle ($ICE).
However, the treasurer for Wonderland, Sifu, was recently unmasked by ZachXBT as Michael Patryn, co-founder of QuadrigaCX – does that ring a bell?
In September last year we ran a story on the untimely demise of the other QuadrigaCX co-founder, Gerard Cotton, who mysteriously died in India on honeymoon, taking with him hundreds of millions of dollars of investor money to the grave.
Patryn, born Omar Dhanani, is a convicted felon, whose crimes included identity theft and credit card fraud in 2005, and burglary, grand larceny, and computer fraud in 2007 – all before entering the crypto space!
A vote by TIME token holders at the weekend closed 87.5% in favour of kicking Sifu out of the project. However, a second poll narrowly voted against winding down Wonderland and the DAO must now identify another entity to take control of the treasury.
🦄 Phantom Wallet Achieves Unicorn Status
Popular Solana based wallet Phantom has raised $109 million in funding. Led by Paradigm, this now brings the total valuation of the decentralised wallet to $1.2 billion achieving what is known as a unicorn status.
Phantom is the most used wallet on the Solana ecosystem with around 1.2 million weekly active users. For comparison, the six-year-old multi-chain wallet MetaMask had over 21 million monthly active users in the back end of 2021.
Currently, the application has limitations to adoption. It can only be used as a web extension and only interacts with the Solana ecosystem.
The team aims to use funds to launch a mobile application and take the wallet cross-chain creating competition for the most popular wallet MetaMask.
This is important to the crypto space because it means more active users, more capital flows and ultimately greater credibility of the space as a whole.
Wallets are the form of identification and authentication when interacting with the decentralised web and despite improvements, many crypto native products still pose difficulty for the average user.
The key to mainstream crypto adoption is a reduction in barriers to entry and that is what Phantom wallet aims to achieve.
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Not financial or tax advice. The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision. See our important security disclaimers here.
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