Keep Your Head When All About You are Losing Theirs
Keep Your Head When All About You are Losing Theirs
The last few days have been turbulent to say the least.
In this week's newsletter, we provide a few comments of our own regarding the impact of Bitcoin volatility on our industry and our investment strategies before cutting and pasting the best viewpoint we have read this week from Bitwise, one of our portfolio companies, which we believe is worth every investor's reading time.
Please share your views back to us, since it is certainly the case that this last weekend, as we write, no one in the world knows what is going to happen next week in the public markets.
WHAT JUST HAPPENED?
At one and the same time, markets seemed to finally be about to reflect the impact of AI which will undermine the long term cash flows of most industries, and potentially undermine the values of many public equities including some older, and less well positioned software and technology stock prices, and yet, the US stock market hit an all time high, scarce commodities including Silver seemed to be about to stumble and and Bitcoin was driven back down to levels last seen a year ago.
How do we reconcile these seemingly discordant market moves occurring simultaneously?
Well we don't, mostly. We are not traders, we are long term private equity investors and venture capitalists. We can't make sense of whether prices should move up or down or sideways today or this week. We take a long term, multi-year view.
However, as long term investors we should be aware of the impact that public markets can have on our portfolio companies, and how to best help them weather short term market chaos.
IMPACT ON DIGITAL FINANCE
Today's prices do impact our investments and as we have noted in the past, Bitcoin in particular is important for blockchain adoption and innovation in at least four ways:
Blockchain Business Impact. Many of the Blockchain businesses that we are investors in derive their revenues and cash flows from supporting users as they buy, hold, and sell digital assets including Bitcoin. So on the one hand volatility may stimulate activity in the short term, but it can also have longer term consequences for their businesses if business is negatively impacted over the longer term.
Digital Finance Adoption. Perhaps most importantly, we believe we are in the middle of an inflection point in adoption as the mainstream population begins to open its first digital wallets and we go from maybe 500 million digital wallets to billions. However, uncertainty can chill the first moves of new users, especially if they are risk averse to begin with. A crashing Bitcoin can result in delayed adoption and the shifting out of the diffusion of innovation curve by months or even years.
Regulatory Push Back. Thirdly, regulators (and naysayers) are looking for reasons to slow down digital finance and/or to try and make it the sole domain of incumbent traditional financial institutions. Turbulence in digital asset markets is a good reason to cry foul, and say "I told you so, these crazy disruptive innovators can't be trusted with our financial system." Regardless of the reality that most market disruption is rooted on Wall Street, and its periodic excesses and hangovers, including perhaps with regard to recent trades that impacted our innovations and industry.
Going Public Processes. Finally for now, we know from the past, that the going public window tends to open and close every year or so, as public market concerns impact the market's appetite for new issues. We have a large number of blockchain unicorns in process of going public through IPOs and DeSpac mergers, and we hope short term market turbulence will not slam the window on them, although that is always a risk in times like this.
As we wrote in our Fund IV Q4 2025 update letter, it is hard to stick to an investment strategy and ‘keep your head when all about you are losing theirs’ (to channel Kipling), and at this time, it sometimes feels just like that.
We have a large portfolio of blockchain companies and tokenized projects, most of which are still hard at work, but in some cases their token prices are trading down, and it would be easy to panic and sell low, rather than be patient and wait for the projects which may, as in traditional VC, mature to become 5x and better exits driving portfolio returns.
However, our investment strategy is unchanged and remains to stay patient, managing downside where possible while preserving exposure to outcomes that could disproportionately drive returns.
BUT WHAT IS HAPPENING TO BITCOIN?
Having said this, we know many of you are still looking for insights into what is taking place right now in the public liquid markets for digital assets, and most importantly, for Bitcoin. So we can't do better at this juncture then cut and paste into our newsletter the content just shared by our portfolio company, Bitwise. Matt Hougan, the Chief Investment Officer over there, is someone who does has his finger on the Bitcoin pulse, and we found the following to be the best overview we have read this week to explain what is happening right now.
Why Crypto Is Down and When It Might Bottom
Matt Hougan
Chief Investment Officer
Bitwise Asset Management, Inc.
Addressing three big questions on the recent market pullback
Bitcoin fell 14% yesterday and 25% in the past week. Other crypto assets have followed. And although bitcoin is up sharply this morning, it still sits almost 50% below its all-time high, set just four months ago. Many of you have written with three big questions:
Why is the market down?
Could it fall further?
When will it bottom, and what could help it recover?
I will do my best to answer them here.
1. Why Is the Market Down?
There is never a single reason why the crypto market falls. Markets are complex, and there are always multiple factors at work. In past bear markets, I’ve found that listing all the contributing factors in black and white has helped me understand what was really happening.
In this case, I think there are six big ones:
Factor 1: Front-Running the Four-Year Cycle
The biggest reason is also the simplest: Long-term crypto investors have been selling to front-run the four-year cycle.
As readers of this memo know, crypto has historically moved in four-year cycles, with three big up years followed by a pullback. We had these down years in 2014, 2018, 2022, and … well … you can do the math.
It sounds too simple, and it is a self-fulfilling prophecy, but one of the major reasons for the current pullback is that long-term crypto investors have been worried the cycle would repeat. Rather than stand firm, many of these investors decided to take gains. While measurements are imperfect, I estimate these investors sold well north of $100 billion of bitcoin last year.
Factor 2: The Loss of the “Attention Investor” to AI and Metals
Crypto has benefited in recent years from being the most exciting, dynamic, and volatile segment of the market. This has attracted significant retail participation. But today, crypto is not the only hot thing. AI stocks—and, more recently, precious metals—have stolen some of the spotlight. “Attention investors” can be fickle, and may yet turn their attention back to crypto—but for now, they are a source of capital that has partially withdrawn from the crypto ecosystem.
Factor 3: The October 10 Leverage Liquidation Event
Crypto experienced the largest leveraged blowout in its history on October 10. It happened after President Trump announced a surprise 100% tariff on all Chinese goods at 5:30 p.m. ET on a Friday. With most financial markets closed, traders reached for crypto to express their displeasure.
Factor 4: Concerns about Kevin Warsh as Fed Chair
On January 30, President Trump nominated Kevin Warsh to be the next chairman of the Federal Reserve. While I personally believe Warsh will prove an excellent choice, he was seen as the most hawkish of the four candidates.
Factor 5: Quantum Fears
Over the past few months, there has been rising concern among bitcoin advocates—including high-profile thought leaders like Nic Carter and Willy Woo—that the community is not doing enough to address the future risk of quantum computing.
I believe that quantum is both a long-term risk and a solvable problem for bitcoin. But it doesn’t matter what I believe. Until we see concrete steps on quantum from the bitcoin development community, a portion of the OG crypto investment community is going to remain stuck on the sidelines.
Factor 6: Macro Risk-Off Sentiment
Bitcoin has suffered from the broader market’s risk-off shift. Yesterday, bitcoin wasn’t the only thing that was down: Gold fell 4%, silver tumbled 20%, and tech blue-chips like Microsoft, Palantir, and Amazon were down significantly as well.
The good news: Some of these factors show signs of exhausting themselves. According to onchain data, long-term holders have stopped selling aggressively, and some are beginning to nibble around the edges. Open interest on bitcoin derivatives exchanges has fallen to levels last seen in 2024. And rate cut expectations are now increasing, according to CME futures traders.
With crypto market sentiment near historic lows—and around the levels where crypto bottomed in 2018 and 2022—it feels like much of the bad news is already priced in.
2. Could It Fall Further?
Yes, it’s possible, if history is any guide.
Previous drawdowns have been significantly larger than the current 54% fall from the peak. Bitcoin fell 86% in the 2014 drawdown, 84% in 2018, and 77% in the 2022 post-FTX collapse. And prior crypto downturns have tended to last 12-13 months, meaning this one could have a ways to go. Our internal “market bottom” models suggest the probability of a bottom is increasing, but it’s not a surety.
Big picture: My view is that crypto is a more mature asset class than it was in the past, and we are unlikely to see a 77% drawdown again. But it could go lower from here.
3. When Will It Bottom, and What Could Help It Recover?
This is the most important question.
Bitwise has been around for eight years, and we have lived through multiple bear markets. We were here in 2018, when bitcoin fell 84%, and in 2022, when it tumbled 77%. And today feels a lot like those moments.
That anxious feeling in your stomach? It was there in 2018. The worry that the pullback wouldn’t stop? We had that in 2022.
In hindsight, those were incredible buying opportunities. An investor who “bought the dip” in 2018 is up ~2,000% since. The 2022 investor is up ~300% in a little over three years.
For those with a long-term horizon, the current moment is a similar opportunity. All of the good news we’ve highlighted about crypto in the past year is still true. The world is increasingly digital. It increasingly demands non-fiat currencies. We’re seeing regulatory progress. Stablecoins are ascendant. Tokenization is taking off. New use cases, like prediction markets and so-called “AiFi,” are emerging. Wall Street is building on blockchains. Right now, the prices don’t reflect that progress. But fundamentals are what drive things over the long term.
What could be the catalyst that turns things around? More often than not, it’s simply time. Crypto bear markets tend to end in exhaustion, not excitement.
But there are a few specific events to look forward to, like the potential passage of the Clarity Act, a shift back to risk-on markets, progress on quantum, rising rate-cut expectations, AI-linked crypto breakthroughs, and more.
If we get a positive shock, great. If not, we’ll grind out a bottom. In the meantime, I’d prescribe two things: patience and an eye on the destination.
Which brings us to our final suggestion to close out this week's newsletter. Every disciplined investor should re-read our prior newsletter and take a quick look at the Cambridge Associates long term data that demonstrates that Blockchain and Crypto venture capital outperform Venture Capital, which in turn outperforms most other asset classes.
Do not hesitate to reach out to us if you need 1%-2% of your total portfolio allocated to Blockchain venture capital funds by contacting our team at IR@fifthera.com.
We look forward to talking to you about our investment perspectives and activities.
The Fifth Era Partner Team
About Fifth Era
We are entering a period of unprecedented innovation we call the Fifth Era, and every industry and business will be dramatically impacted. We focus on investing into these new innovations. Fifth Era specializes in investment strategies which construct portfolios of hard-to-access funds and direct investments through our investment strategies - AI Access and Blockchain Coinvestors. Fifth Era's investment strategies are now in their 12th year and to date we have invested in a combined portfolio of 1,500+ companies and projects including 80+ unicorns. In the US we are a SEC registered investment advisor, in the UK a FCA appointed representative and our funds are registered in Switzerland. Visit us at www.FifthEra.com to learn more.
SEC Registration does not imply a certain level of skill or training.
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