Matt Huang, the co-founder and managing partner of crypto investment firm Paradigm, looks at investor psychology as Bitcoin goes through several boom and bust cycles.
In a paper dubbed “Bitcoin for the Open-Minded Skeptic,” the former Sequoia Capital partner provides an easy-to-understand framework in an effort to help investors gauge Bitcoin as a new monetary asset.
Since many investors consider Bitcoin to be a big bubble, Huang pacifies critics by confirming that the leading cryptocurrency is indeed a bubble asset. He points out that in Bitcoin’s history, the digital asset has gone through four notable bubbles:
The serial entrepreneur takes it a step further by highlighting that Bitcoin relies on bubbles to inspire broader awareness.
“Each bubble has a familiar pattern. High conviction investors start buying when Bitcoin is boring and unloved. The resulting rise in Bitcoin price attracts media attention, which then attracts investors (or speculators), many with lower conviction and shorter time horizons. This drives the price of Bitcoin higher, which drives further attention and investor interest. This cycle repeats until demand exhausts and the bubble crashes.”
Huang notes that while it can be painful for investors when the price comes crashing down, each bubble has led to the growth of hodlers or long-term investors who believe in the potential of Bitcoin as a future store of value. The Paradigm executive says that Bitcoin’s higher low after each cycle illustrates the cryptocurrency’s growing base: $2 in 2011, $200 in 2015, and $3,500 in 2018.
On top of Bitcoin’s boom and bust cycles, Huang also explores the following topics:
You can check out the research paper here.
Featured Image: Shutterstock/AlekseyIvanov