The Bitcoin Bloodbath Will Get Worse. This Is Fine.

It’s getting ugly out there.

Bitcoin is down over 8% this week and has fallen nearly 50% from last year’s all-time-high. The situation isn’t much better for Ethereum, down 5% over the week, while newer best-of-breed coins like Solana (SOL), Terra (LUNA), and Avalanche (AVAX) fell over 10% this week. Things haven’t looked this bad in a while, and it’s going to get worse before it gets better.

But don’t be alarmed. Like the meme of the dog in a bowler hat sitting in a house on fire: This is fine.

Before getting into why things will be (mostly) fine, let’s take a look at what’s causing crypto to melt down in the first place.

The primary culprit is the global macroeconomy. Governments around the world are being walloped by inflation levels not seen in 40 years, and central banks are finally taking measures—like jacking interest rates and shrinking their balance sheets—to fix this. Unfortunately, this has meant taking away the cheap money punchbowl that has powered decades of surging stock and real estate prices.

The result has been a wipeout in both stocks and crypto (Bitcoin is more closely correlated with the Nasdaq than it’s been in ages) and fear among investors. Meanwhile, other global events—from the war in Ukraine to new Covid lockdowns in China—are fueling further sell-offs and adding to the sense of unease. In these circumstances, is it any surprise people are flushing their Shiba Inu tokens? Many crypto enthusiasts, and Bitcoiners in particular, like to believe blockchains will supply an alternative financial reality when the world goes to hell, but it’s clear that’s not (yet) the case. Crypto is as prone to macroeconomic shocks as everything else.

Meanwhile, the crypto industry itself has become a bubble waiting to pop. Pick your example—from the glut of worthless Layer 1 chains to fly-by-night NFTs to Floyd Mayweather’s latest pump-and-dump. There’s a lot money being squandered in stupid ways. That’s fine as long as there are enough “greater fools” out there to buy that garbage, but when the music stops, it’s going to look a lot like the ICO fallout of 2018.

We might be at that stage again now. Paradoxically, though, the current carnage we’re seeing should be cause for optimism.

Since the birth of Bitcoin, the crypto industry has been marked by spectacular booms followed by painful crashes. If history repeats itself—and I’m betting it will—the impending downturn will serve as a healthy cleanse and reboot for the industry.

That’s what happened in 2013 when the price of Bitcoin brushed the once jaw-dropping figure of $1,200, only to plummet afterward. It took years to reach that level again, but in the interim, something remarkable happened: dedicated teams put their heads down and built a series of innovations that transformed the industry. By the time the next boom rolled around in 2016, crypto had gone from being just Bitcoin and a handful of altcoins like Litecoin and XRP to encompass smart contracts, utility tokens, and a multi-chain future.

A similar thing happened after the bust of 2018. When crypto came roaring back in 2021, the technology had changed profoundly. A series of stylish NFT platforms had eclipsed the primitive CryptoKitties of the previous boom, DAOs took off for real, and the entire plumbing of the industry had become far more sophisticated.

It’s going to happen again. Just as in the past, the dilettantes and hustlers will move to some other shiny thing, while the real crypto believers will stick around to lay the groundwork for the next era of Web3.

It’s hard to predict exactly what this next era will look like, but a good bet is that it will feature low gas fees, easy-to-use Layer 2 options, and NFTs moving to the core of the music and entertainment industries. It’s a fun future to imagine—provided you have the stomach to get through another Crypto Winter.

This is Roberts on Crypto, a weekend column from Decrypt Editor-in-Chief Daniel Roberts and Decrypt Executive Editor Jeff John Roberts. Sign up for the Decrypt Debrief email newsletter to receive it in your inbox every Saturday. And read last weekend’s column: Sam Bankman-Fried’s Bahamian Honeymoon Phase.