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“When I see a bubble forming, I rush in to buy.”

— George Soros

Crypto loses its mind — again

The defining characteristic of an investing bubble is when everything related to some theme goes up together: tulips, railways, dotcoms, subprime mortgages.

A longer list of these would show there are no repeating themes because the cause of every bubble is always something new — with one notable exception: crypto. 

Crypto is a weird kind of bubble that keeps re-inflating. 

When Solana’s SOL token crashed to below $10 in 2022, for example, would anyone have argued that its 2021 high of $250 wasn’t a mania-induced fantasy?

The idea that SOL could get back there over any reasonable timeframe, if ever, was laughable — 2021 SOL prices seemed as remote as 1636 tulip prices.

And yet, we’ve now far exceeded them.

SOL’s market capitalization exceeded a remarkable $100 billion this week, vs. just $75 billion at the “bubble” top.

There is some logic to this.

By one measure, SOL is also "cheaper" than it was back then as it trades on about 55x trailing 30-day REV (real economic value), per data from Blockworks Research.

That may be an exception that proves a rule, however, because nearly everything in crypto has gone up this week, led mostly by cryptocurrencies with no valuation at all because they make no earnings — memecoins have been an unexpected winner from the election of the first crypto president.

This is surprising because memecoins already had a free pass from the SEC, having been deemed more akin to collectibles than securities and therefore not worthy of regulators’ attention. 

Memes may even have been a beneficiary of Gary Gensler’s antagonistic SEC because crypto “investors” had few other options — a common pre-election take was that President Trump would be bad for memecoins because, given the chance, investors would shift to investing in tokens with real utility. 

Some argued similarly that Trump would even be bad for bitcoin because bitcoin had for so long enjoyed its status as the only fully legal cryptocurrency — and now, effectively, they all are. 

Others thought it shouldn’t matter much either way.

When asked early last week about the implications of the election for crypto, Arthur Hayes said, “I don’t think it matters at all,” arguing that regulations are irrelevant to the long-term trajectory of crypto.

Exactly one week after the election of America’s first crypto president, however, we can see that the outcome did matter to the trajectory of crypto — in the short term, at least.

The memecoins dogwifhat and Shiba Inu, for example, rose as much as 60%. Pepe and Bonk rose 70%, and Dogecoin rose as much as 150%.

Even less-seasoned memes like Fwog and Goatseus Maximus were also up more than 70%.

This is all ridiculous, of course.

Fwog, to pick one example, is just a bit of code on the Solana blockchain that includes a pointer to a URL featuring a picture of a cartoon frog.

There’s no logical reason why Trump’s election should make code that points to a cartoon frog nearly $300 million more valuable than it otherwise would be.

But these types of things keep happening.

Dogecoin, which famously started as a joke and seemed like a very bad one after falling 90% in the 2021 crash, now has a market capitalization of $53 billion, more than halfway back to its 2021 bubble high.

(If DOGE was a US company, its market cap would be good for 194th in the S&P 500, just behind Autozone and ahead of Phillips 66, Diamondback Energy and Allstate.)

This second act for fallen cryptocurrencies, meme or otherwise, is in stark contrast to the famous examples of tulips, railway stocks and dotcoms, which (with a few rule-proving exceptions) were mostly left for dead after their respective bubbles burst.

That does not, of course, mean that any of these things are good investments (I’d much rather own Allstate at $54 billion than Dogecoin).

But it does perhaps mean that crypto has found its ever-elusive “product-market fit” — whatever else it may become, crypto is already a big success as a permissionless capital market.

This latest bubble proves once again that people want new and more things to trade; they want to trade them on nights and weekends, across borders, from anywhere; they want to buy things that might 10x in a week or two; they want to trade things that are silly; they want to invest in other things that are (or might someday be) useful.

If nothing else, crypto (and only crypto) is providing these things to a growing cohort of crypto enthusiasts.

Decentralized finance attracted $5 billion of inflows over the past week (as measured by stablecoin AUM) and centralized crypto exchanges likely attracted many billions more as people rushed in to buy the latest crypto bubble — the Drift token, for example, doubled this week and the Pnut memecoin tripled, both because they were listed by Binance.

This will probably end badly (again), but the more important takeaway from this week’s action might be that we now realize it won’t actually be the end.

Because if a bubble keeps re-inflating itself, maybe it’s not a bubble?

— Byron Gilliam

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