The Tragedy of the Bubble in the Encryption Ecosystem: How to Respond Rationally?

After the article "Returning to Common Sense in Investment" was published on April 23, a fren sent me some of his thoughts. Many of these thoughts contain what I find to be very brilliant points. Today, I would like to share some of this fren's brilliant points with everyone.

"To some extent, I feel that the rise in this industry during the previous bull markets was purely due to continuous hype narratives + the pool is too small, and just a little influx of funds can cause a surge, directly overwhelming most people."

This summary is very to the point.

Let me add a little: during the rise of the previous bull markets, the crypto ecosystem has indeed produced some remarkable innovations. ICOs, DeFi, and NFTs all count in my opinion, and I do not deny any of these.

However, relying solely on these innovations cannot recreate the scenes of madness we once witnessed. Because some classic projects born from these innovations still struggle to compare with traditional good companies in terms of cash flow, and when we try to value those governance tokens with very limited value using cash flow methods, we find that the prices of those governance tokens are inflated.

But is this kind of exaggerated surge exclusive to the crypto ecosystem?

No.

The A-shares that everyone looks down upon have all existed.

From 1991 to 1993, during the first bull market of A-shares, 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 no less than the price increase of Bitcoin in the recent two cycles (2019 ~ 2021, 2022 ~ 2024).

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

I couldn't find the gains of those妖股from that year, but if we speculate, we can imagine how exaggerated the gains would be for individual stocks in that environment.

I think that back then, they must have told stories that were just as compelling as Bitcoin, with the same kind of "imaginative potential."

It seems that there is nothing new under the sun.

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

When the A-shares emerged, they faced only the domestic market in mainland China, which was still undergoing reform and opening up. The scale and size of that market were still very small. Yet, even so, it could create such a large bubble.

When the crypto ecosystem emerged, it directly faced the global market, which is an unrestricted and permissionless market. The scale and volume of this market far exceed that of the previous A-shares, so it is not surprising that the crypto ecosystem could create such a large bubble.

History does not repeat itself, but it always rhymes with the same endings.

"Regardless of whether it is blockchain or not, this story must have had a huge wealth effect in its early stages, whether or not it can generate real value, it continues until the game can no longer be played. Or rather, this characteristic is not exclusive to the blockchain industry. Instead, blockchain just happens to align with this more fundamental characteristic of the financial market."

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

So the bubble we see in the crypto ecosystem is neither special nor an exception.

Since nothing is special or exceptional, the bubble will eventually burst, and things will eventually return to their original state.

"In the early days, he will definitely have a lot of gamblers, 100%, because the pool is small. But once the pool gets big, this gameplay is 100% unsustainable. From this perspective, pump is a miniature version of the blockchain industry; its rise and gradual decline completely reflect the development history of blockchain up to now."

This passage expresses a very important point:

It is 100% impossible to sustain this ecosystem by relying on gambling methods.

Its brilliance lies in vividly depicting the entire process of the development of this game using the application pump.fun, which has risen in this round of market trends, and points out the unsustainability of this type of gameplay.

At this point, I want to express that:

I have always been very optimistic about the future development of the crypto ecosystem. However, while being optimistic, we cannot cover up the serious problems it currently faces, nor can we "fool ourselves" into thinking that these problems are "normal," that these problems are special, or that these problems can be exceptions.

Recognizing these issues, returning to common sense and the basics, we can better navigate the road ahead and evaluate and participate in projects within the ecosystem in a healthier way.