From January 7th to January 17th 2018, Bitcoin and the rest of the crypto currency market lost $405bn of its market value . When I first saw that number, it was understandably hard for me to quantify. So, I broke it down into days, then hours, and then seconds. In the 864,000 seconds that occurred between those ten days, an average of $462,962.96 was lost per second. That is more than double the median cost of a home in the United States, gone every second. While this might be old news for those who had already been investing in the space, every time I look at that number it still shakes me. Which is why, for better or worse, right now Bitcoin (and the rest of the cryptocurrency market) is at a huge crossroads with how the community, and it’s investors are going to respond. And whether those insane 3x-10x-100x gains from what seems like an eternity ago will ever return, remains to be seen.

While the cryptocurrency market has shed more than half of it's value, it's still not gone. In every outcome, there’s a lesson, and understanding why the crypto market crashed will help us as a community better understand what internal and external factors come into play, that drive price action and market sentiment. Any barstool economist with a coherent thought could have told you “Oh yeah, the market was bound to crash eventually. I mean come on! No market can sustain appreciation like that forever!”, and to an extent I agree; simple market theory tells us that eventually there has to be a correction on all markets. But in the case of January, there were crucial factors that played a bigger role than people really realize.

Before I go into the driving forces of the crash, I wanted to briefly introduce myself, and quickly share my personal story with cryptocurrency. I believe that know who’s writing the information that you’re reading is just as important as what you’re reading.

In early 2016, I was working Big 4 accounting, and living in Silicon Valley when a good friend from college introduced me to Ethereum. He explained that it was Bitcoin, but instead of it being just a currency or a store of value, it was a platform to which you could fulfill “smart contracts” on. For those who don’t know, smart contracts are programs that allow two entities to transfer digital assets to each other given certain conditions. Kind of like a cyber middle man that isn’t a third party but rather a network and has no vested interest in the transaction other than a tiny fraction of Ethereum. That fraction of Ethereum is used as “gas” to broadcast the transaction onto the chain and incentivize the miners to mine the next block. The network is propped up by computers solving complex algorithms or “mining”. When the computer solves specific algorithms, it is rewarded with Ethereum. Each time an Ethereum is found, the network is able to add another entry point to the end of the ledger (Or another block to the chain, hence “blockchain”). If you’d like more info on blockchains, Hackernoon has summated it perfectly here. Feel free to send me a message if you have any more questions. Given the possibilities of what smart contracts could do, I was sold. I loaded Coinbase, input my credit card and bought 5.34 Ethereum for about $50. As busy season quickly approached, cryptocurrency sadly became an afterthought and Coinbase just another app on my phone.

Fast forward to May of 2017, I get a text from my friend telling me to check Ethereum. Low and behold, it was at $99. That familiar wave of euphoria that everyone who has ever found “free” money suddenly experiences, washed over me. I decided I wasn’t going to dismiss crypto again. From then on, I began to dedicate serious time to learning about and researching the technology behind this growing asset class. Early on I had some wins (Antshares and Waltonchain around $1.50, and Raiblocks when it was at $.03) and many more losses (Sia, Golem). But I’ve always believed that the disruption from the underlying technology these coins bring to their respective sectors will create an immense amount of value to the global markets.

Being one of the first people I personally knew who was investing in cryptocurrencies was exciting at the time. A lot of people I knew dismissed the idea of crypto, stripping the market down to the only use case being to illegally buy drugs and fund other illicit activities from strangers on the internet. And I must admit, at first it hurt. Close friends telling you you’re crazy for believing in something doesn’t feel good. Luckily, I didn’t let it get to me. And unironically, these same people started to ask me how they could get into the market not 2-3 months later when everything was appreciating like crazy. Which brings me to my first point; The Bitcoin market crashed because of dumb money.

Dumb money has always been around. Joe Kennedy, (patriarch to the Kennedy empire) famously quoted that he sold all of his stocks in the early 20’s before the crash because his shoe shine boy was giving him stock tips. The late Fall/Winter of 2017 was this exact sentiment. Everybody with $20 and an Iphone wanted to “get in on Bitcoin while it’s still cheap”. We saw coins like Tron with no working product and a copied white paper shoot up a 1000%. At it’s peak in January, Ripple (100 billion coin supply potential SWIFT replacement) hit $3.82 giving the project a valuation of close to $148 billion dollars. For reference, that puts Ripple squarely in between Unilever and the Agricultural Bank of China. But that’s not counting total supply, just circulating. If you took Ripple’s total supply of a 100bn coins at $3.82, you would be looking at $382bn throwing it in between Johnson & Johnson and Exxon Mobil. This is insane for a technology that hasn’t been implemented yet. Youtubers who promoted Bitconnect (a thinly veiled Ponzi scheme) with zero financial experience or qualifications made millions getting their subscribers and followers to buy in using their promotional codes.

Anyone who was watching the crypto market from before late last year quickly saw enthusiasm turn to euphoria and finally delirium. You could pick any of the top 100 coins during the bull run and expect 5-10% appreciation any given day of the week. And as a relatively early adopter, it felt great. Yet for the majority of investors, there was absolutely zero understanding of what people were actually buying. Everyone just assumed it would go up, and so they put a bunch of money into an incredibly volatile UNREGULATED market where there are no safety nets if you get burned/scammed/cheated/dumped on etc. But the majority of people didn’t care, and they didn’t have to because it kept going up.

Until it didn’t.

But why? The news cycles were chugging along full steam ahead, people were happy and making a bunch of money. Alt coins were tied to Bitcoin which historically has been the least volatile of any crypto. What was the problem?

Simple.

Cryptocurrency assets were valued on speculation and immediate short-term appreciation that could not be sustained given their current utility. People wanted those 10x, 20x gains on new coins with a whitepaper and a promise, but without any working products or marketing moving in their industries. Speculation can only get you so far, and when the trendiness of Bitcoin and crypto wore off, appreciation began to taper off. All the while, “whales” (single accounts on exchanges with large sums that typically are able to singlehandedly move the market), were manipulating markets to their agenda. In the West, fake new stories came out exclaiming South Korea, or China was “banning” cryptocurrencies. People began to panic. In a highly volatile, new market such as this with little actual money in the market compared to other financial institutions, sentiment is exponentially more important. Crowd thought, and its respective emotions can make or break industries like this, especially when most are in it for the quick buck. The culmination of this shift of market sentiment, from “wen lambo” to panic sell, drove the market into the ground. A lot of people didn’t care to learn about the technology, or why it was important, and want to just make a quick buck and leave.

Aside from all of these setbacks, I’m more bullish than ever on cryptocurrency. None of the technology in any of the projects has changed. Some of the most talented computer engineers, scientists, and thought leaders of our generation are trying to solve huge real-world problems. Regulation is coming (regulation is good, if done properly), and advocates like Chris Giancarlo of the CFTC are leading the way. Financial institutions are beginning to publicly validate the use cases of crypto, when in the past it was “all a scam”.

Gone are the days of “wen moon?” and “wen lambo?”. We are foundationally in the learning phase, the weeding out phase, the dumb money turns into smart money phase, where people can’t just rely on massive gains and bandwagons. Those that were just looking for a quick buck have seemingly come and gone, with those still fascinated and interested in blockchain furthering their knowledge and nerve. Bitcoin and alts are going to see their previous numbers, but it won’t be because of a massive run. It will hopefully be slower, more realistic growth that is sustainable in the long term. By now, a lot of people have heard of Bitcoin. A lot more stores and businesses are accepting it, congress is talking about it. We are firmly past the early adopter phase. Reddit’s r/cryptocurrency is one of the site’s fastest growing subreddits with more than 600k users. Twitter influencers like (@aridavidpaul, @needacoin, @venturecoinist, @cryptobully and @notsofast ) have amassed huge followings for their technical analysis, research and (of course) memes. CNBC and other news sites have jumped on the crypto train with their recommendations, however uninformed. For better or for worse, cryptocurrencies aren’t going anywhere. And while it’s still the “Wild West” of investing, I think it’s important for everyone to understand who and what they’re putting their money behind. Learning about the technology, the markets, and the big problems teams are trying to solve will naturally teach you to mitigate risk and invest properly. And by that time, bull run or not, you’ll be ready.