2022 Is Different From 2018

I’ve been here before.

Probably, you’ve been here before. But if you haven’t, don’t worry, you’ll be here again.

It is in the nature of things.

But even as creative destruction brings tragedy to people’s lives, there are things to see and learn. Everyone, and I mean everyone, will create stories and reasons for what has happened, and what it means, including me.

The call for regulation will – of course – grow stronger than ever as stablecoins, shadow banks and levered hedge funds wipe out the consumer. The call for rebuilding will intensify, largely from the people looking to deploy sidelined capital. Some will point to Austrian economics and personal responsibility and dig in politically.

Then we will calm down, get bored and forget and repeat things again. The person is a cell, and the crowd is a super organism. There is only so much anyone can do to resist the corpus of which they are a part. And there is no good evidence that we should resist. No Luddite ended up correct in the face of permanent technological change reformatting the nature of human society. But perhaps they were happy about it.

If you want a silver lining – and I do – this is where to look. Is there creativity and innovation, among the swirling chaos of capital loss? Is it all recursive financial engineering, or is there some underlying operating economy and progress in the architecture of the world?

This is where we can see the big difference between now and the 2018 initial coin offering (ICO) collapse because you’ve been there before, too. Then, there were large amounts of money raised for early-stage venture pitch decks. Billions were raised for promises of things laid out on paper and never actually built or used. It was a collapse of the idea space, catalyzed by regulatory pressure on the token fundraising mechanism.

Fundraising is not the actual thing – if anything it is a liability to your investors before you build. Further, there was very little in terms of a Web3 economy. Ideas about how to organize in decentralized autonomous organizations (DAOs) or experiments with NFTs existed, but nobody was earning a living the way artists can this time around.

I am instead reminded of 2008 and Lehman Brothers. We had watched Bear Stearns collapse and be sold in a fire sale, and watched for who would be next. Lehman? Morgan Stanley? Today, the names are different. Celsius? Three Arrows Capital (3AC)? Or rewind back some more. Long Term Capital Management? Lehman went under when its counterparties refused to lend to it because of the perception of its over levered and underwater balance sheet. This was a sacrifice to the god of moral hazard. Every investment bank was sitting on the same exposure.

The 2022 crypto downturn looks less like a failure to deliver on the promises of an innovative technology, and more like a traditional financial deleveraging across an asset class. The words that people use, like “a run on the bank” or “insolvent,” are the same that you would apply to a functioning but overheated financial sector.

Further, crypto is far more correlated and integrated into the overall macro economy, so the spillover from the Fed raising rates, thereby creating a risk-off environment and tanking tech and crypto valuations, is happening in a way that would not in 2018. We made it to the institutional world, anon.

I’m definitely not saying Web3 is working flawlessly or fully mainstream. Rather, I am pointing to a systemic financial crunch that has global economic structural causes. Yes, there are bad faith actors who engage in “rug pulls” and scam, and there are hackers and thieves that break into the equivalent of digital banks. The price collapse is exposing their grift, and in the long run, their names won’t matter other than examples to bookmark a wiggle in a chart.

The machines and robots we are building in Web3, however, are functioning even if their total value locked (TVL) number melts down. That was not true for Lehman, Enron and other centralized corporate entities, whose bankruptcy proceedings and liquidations took years and years to unwind.

Firms, people and DAOs that survive these financial turns change their mental models. Treasuries should not be kept entirely in a proprietary token. Risk management matters most when everyone is ecstatic. Valuation multiples aren’t fundamentals. Leverage accelerates rates of change in both directions. These things are easy to say, but hard to do. Good thing we have no choice but to adapt because here is where we are.