The unprecedented clash of different investing cultures
By 2020 two basic kinds of crypto investors were evident: Mavericks and Mainstreamers:
- Mavericks - the original diehard Bitcoin (and altcoin) HODLrs. These individuals believe that central banks and fiat currencies are fatally flawed and that crypto offers a better future well worth the risk and volatility.
- Mainstreamers - the newer entrants who didn’t want to miss out on huge gains they were hearing about.
By 2021 Mainstreamers could be divided into 2 subgroups - Corporate vs Retail:
- Corporate - established institutional investors and fund managers, corporations (Microstrategies, Tesla) and finance (BNY Mellon, PayPal) probably nudged by Paul Tudor Jones' inflation thesis.
- Retail - individual often non-qualified investors day trading via consumer apps like Robin Hood, Coinbase etc.
The financial press noticed and worried that Retail Mainstreamers made excessive use of leverage - borrowing in order to bet on future price movements. When they bet wrong, forced liquidations had a cascading effect and caused the market to plunge.
But who caused the crashes?
If you think the 2021 bubble and crash was exacerbated primarily by Retail Mainstreamers, listen to NLW unpack how the Grayscale Bitcoin Trust NAV trade also contributed to the bubble (and wait til you hear how goofy it was).
So no we can't blame this entirely on inexperienced retail investors using too much leverage. Corporate investors played a role as well.
There is so much we don't know about this emerging new financial ecosystem. It has so much promise. And yes, crypto prices are in most cases higher than they were a few years ago. And the inflation thesis remains compelling for most categories of crypto investers (Related: David Leonhardt lays out arguments and indicators for high vs low inflation scenarios for next 2 years.)
But all of us - not just the regulators - still have an extremely limited understanding of how our behaviors impact the overall system and its participants. And things are evolving FAST. This is a crash course and need to take notes as fast as we can.