The past few days have not been kind to any asset class, particularly in my chosen field of digital assets. Like many professional investors, I tend to crack open the history books at times like this in order to gain some much-needed perspective.
This week I am reminded of Sir John Templeton, one of the most successful investors of all time, who created a fortune in 1939 by buying shares of publicly-traded European companies at the outset of World War II. He was once quoted as saying: “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
Templeton’s bet on pessimism paid off, leading him to become one of the world’s wealthiest investors and laid the foundation for a global investment advisory powerhouse that still bears his name today.
As I write this, pessimism is everywhere as assets of all sorts get pummeled in response to stomach-churning macroeconomic data. In the crypto markets, Bitcoin and Ethereum – which are still the best performing assets of the previous decade – are trading at 55% below the all-time high that they set last year.
Worse, price movements in digital assets are very highly correlated with price changes in the NASDAQ. This means that investors are selling crypto as aggressively as they are dumping stocks. This does not bode well, at least in the short term, for crypto investors when the largest technology stocks are trading as much as 85% below their own all-time highs.
Yet it is at these times, when fear runs rampant, that savvy investors must remember Sir John’s timeless advice. This holds particularly true for crypto investors, who have seen this all before. I have been an active trader of digital assets for nearly a decade, and am now experiencing my third bear market.
The cycle has become familiar - and the uncomfortable truth is that the pain of bear markets is every bit as essential to crypto’s evolution as bull markets. In crypto, bull markets are euphoric. Everyone believes they are brilliant because the price of everything they own increases, often exponentially. Soon, though, greed and hubris replace prudence. The market begins to believe that 20% APY stablecoin yields are not just sustainable, but the ‘new normal’. Attempts to conduct due diligence or ask probing questions on social media are sneered at by founders, and shouted down by toxic communities of rabid followers.
Ultimately, as we’ve witnessed this month, the market always self-corrects and fraudulent projects go to zero. If the bull market is a street party, then the bear market is the power washer that drives through the next morning to sweep the residual garbage and filth back into the sewer.
Yet bear markets also serve an even more important purpose to the crypto industry – they are when the greatest and most successful projects are built.
This raises another interesting lesson from recent history. NFTs entered the public lexicon in 2021 when the previously unknown artist Mike Winkelmann (known more commonly as Beeple) sold his work ‘Everydays: The First 5,000 Days’ in a Christie’s auction for a whopping $69 million. However, the first NFTs had actually appeared near the end of the 2017 bull market, with the launch of projects like CryptoKitties and Cryptopunks.
In the ensuing two years, as the price of Bitcoin dropped a calamitous 85%, most people - even crypto industry veterans - forgot about NFTs. In that time, however, a small group of enterprising founders did not. In the summer of 2018, they built a proof of concept for an NFT marketplace and raised capital for their business at an $8 million valuation. This team quietly and diligently built their platform, in an obscure corner of the crypto market that few knew about and even fewer cared about, for the next three years. Then Beeple’s sale electrified the world, and suddenly the small platform—now called OpenSea—found itself astride a tidal wave. Earlier this year the company raised capital at a valuation of over $13 billion - a massive 1,600x return in less than four years.
This, then, is the type of opportunity that crypto investors should seek. Not the latest DeFi ponzi, or celebrity-endorsed NFT drop, but truly ground-breaking and scalable infrastructure that will power the next iteration of the digital asset ecosystem’s evolution.
It is my belief that the metaverse will be the primary driver of that evolution, and the core theme of the next bull market. Just as those who invested in NFT infrastructure realized stratospheric returns in the previous cycle, I believe that those who invest in the foundation of the metaverse will achieve similar success in the coming years.
Wall Street’s largest investment banks have recently forecast that the metaverse presents a multi-trillion dollar investment theme over the next decade, with Citi going so far as to predict it could reach as high as $13 trillion by 2030, with an estimated five billion active users.
Today, of course, the metaverse is still in its ‘Cambrian explosion’ phase. There are innumerable platforms in various stages of development; very few are able to onboard users at scale, and even the most advanced of those offer clunky and awkward user experiences. Currently my team tracks over 350 active metaverse projects, many of which are staffed by some of the smartest and most innovative people on the planet. We have invested in 26 of those projects as of this writing, and we expect that several of these will produce the transformative technology that drives the next crypto bull market forward.
A metaverse investment strategy requires focus on two industries - crypto and gaming. (I refer to video games here, not to the Las Vegas variety). Growth of the digital asset market over the past decade has been incredible, though as already mentioned it also brings inherent volatility with extreme bouts of both value creation and destruction. Gaming, on the other hand, has grown steadily for the past decade and recorded an incredible 27% growth rate in the US in 2020 - the first year of the recent pandemic. This growth is expected to continue for the next several years, with the most conservative estimates in the range of 7-10% annually.
The ongoing convergence of digital assets and video games will become the primary driver of the metaverse’s growth and development. Now is the time, even in the face of what may ultimately become a severe global recession, for long term-focused investors to participate in its growth. This strategy was vindicated in the last bear market cycle for those who had the courage to invest in NFT infrastructure, at a time when fear overpowered greed in the digital asset markets. Investors who have the courage to heed the words of Sir John Templeton will very likely be rewarded when this bear market ends, as all bear markets ultimately will.