The bubble tragedy of the crypto ecosystem: How to deal with it rationally?

After the article "Return to Common Sense for Investing" was published on April 23, a friend sent me some of his views. I think there are many very interesting views in these views. Today I will share with you some of this friend's wonderful views.

"To a certain extent, I feel that the rise of the previous rounds of bull market in this industry is purely the continuous hype of narrative + the pool is too small, and any capital that enters will skyrocket, which will directly subdue most people."

This summary is very accurate.

I would like to add a little bit: in the rise of the previous rounds of bull market, the crypto ecosystem still emerged with very remarkable innovations. ICO, DeFi, and NFT all count in my opinion, and I don't deny them.

However, these innovations alone certainly cannot form the scenes of madness we have seen. Because some classic projects born from these innovations are still difficult to compare with traditional good companies in terms of cash flow, so much so that when we use cash flow to value their governance tokens with very limited value, we find that the prices of those governance tokens are too high.

However, is this exaggerated surge only in the crypto ecosystem?

No.

The A-shares that everyone despises the most have had it before.

In the first A-share bull market from 1991 to 1993, the Shanghai Composite Index rose from a low of 127 points to a high of 1558 points in just two years, an increase of 12 times.

This increase is in no way inferior to the increase in Bitcoin in the last two rounds (2019 ~ 2021, 2022 ~ 2024).

It should be noted that this is the increase in the index.

I have not found the increase in those monster stocks in those years, but we can imagine how exaggerated the increase would be for individual stocks in that environment.

I think that they should have told a story that was no less impressive than Bitcoin and had the same "imagination space".

It seems that there is nothing new under the sun.

However, there is another obvious difference between the crypto ecosystem and A-shares.

When A-shares came out, they only faced the mainland Chinese market, which was still in the process of reform and opening up. The scale and volume of that market were still small. But even so, it could blow up such a big bubble.

When the crypto ecosystem was launched, it directly faced the global market, which was a market with no barriers and no licenses. The scale and volume of this market are much larger than the A-shares in the past, so it is not surprising that the crypto ecosystem can blow up such a big bubble.

History will not repeat itself, but it always rhymes with the same footing.

"Whether it is a blockchain or not, this story must have a huge wealth effect in the early stage, regardless of whether it can generate real value, and it will continue until the game can no longer be told. Or in other words, this feature is not unique to the blockchain industry. Instead, the blockchain just happens to meet this more essential financial market feature."

I think this sentence comprehensively summarizes the characteristics of all financial markets in their early stages. Such stories can be staged in the early days of A-shares, not to mention the crypto ecosystem.

So the bubbles we see in the crypto ecosystem are not special, nor are they an exception.

Since it is not special or exceptional, the bubble will eventually burst and things will eventually return to their original state.

"There will definitely be a lot of gamblers in the early stage, 100%, because the pool is small. But once the pool is large, this gameplay is 100% unsustainable. From this perspective, pump is a miniature version of the blockchain industry. Its rise and gradual decline are completely the development history of blockchain up to now."

This passage expresses a very important point:

That is, it is 100% impossible to continue to promote this ecology by relying on gambling.

The wonderful thing about it is that it vividly uses pump.fun, an application that has emerged in this round of market, to vividly portray the whole process of the development of this game, and points out that this gameplay is unsustainable.

Having written this, I want to express:

I have always been very optimistic about the future development of the crypto ecosystem. But while being optimistic, we cannot cover up the serious problems it is currently facing, and we must not "deceive ourselves" into thinking that these problems are "normal", that these problems are very special, and that these problems can be exceptions.

Only by recognizing these problems, returning to common sense, and returning to the original, can we better take the next path and evaluate and participate in projects in the ecosystem in a healthier way.