Jacob Felder fiddled with the key fob of his brand new Lamborghini, somewhat still in disbelief at his fortune, and remembering that no so long ago he was foaming lattes, working as a barrista at his local coffeeshop.

But what a difference a couple of months in the crypto markets can make.

In the fall of 2017, Felder, and others like him, would become freshly-minted millionaires, punch drunk from the heady and highly speculative, leverage-fueled returns of the initial coin offering or ICO craze.

By the summer of 2018, Felder would be driving an old Toyota and looking for a job.

Like it or not, speculation, and the leverage that has helped fuel that speculation, is an integral part of the cryptocurrency industry.

Buy This Shiny New Thing

When a brand-new, barely understood technology, meets with the marketing machinery borne out of speculation, it’s small wonder that the ensuing bubble can develop with such haste and reckless abandon.

But if the 2018 crypto crash and the 2022 one taught investors and traders anything, it’s that the crypto industry has reached sufficient terminal velocity that at the very least supports cycles.

Depending on the frame of reference, on average, the crypto markets experience a sharp correction once every four years on average, akin to the Olympics or the World Cup.

And every correction, the mistakes get magnified, thanks to the growing number of adopters and users of cryptocurrencies and the blockchain technology that underpins them.

For better or worse, while the quantitative value of the mistakes made in the nascent crypto industry are growing, qualitatively they have been the same.

Decentralize Dis

Despite being touted as a trustless system, there has been no shortage of grifters eager to sell their perverted brand of blockchain that hinges on “trust no one, but ok, trust me” centralizing an otherwise decentralized technology and paving the way for the frauds and failures that have pockmarked the evolution of the cryptocurrency industry.

From Mt. Gox in 2014 to FTX in 2022, loose lending and few (if any) risk controls and regulations have allowed the cryptocurrency industry to perpetuate larger failures and more egregious frauds.

Before the failure of Three Arrows Capital, lenders barely bothered to verify a crypto borrower’s ability to pay, preferring to rely on the assumption that the value of their security (crypto itself), would continue to appreciate in value.

In all likelihood, future crypto lenders will demand reams of evidence that borrowers can not only afford their loans, but that they will have ways to pay back on the interest.

Lenders and exchanges that once held big pools of “shitcoins” and undercollateralized loans with little consequence will no longer exist, and institutions that are looking to lend will surely insist on the same levels of security and surety as exists in the financial services industry.

Because regulation will be some time coming, the exotic instruments with ridiculous amounts of leverage like perpetual securities that have variable funding rates and other exotic instruments peculiar to the crypto markets alone, will likely persist for some time, but not indefinitely, and possibly only on the fringes.

Predictions that Bitcoin, the most visible bellwether of the cryptocurrency markets, will crash to below US$10,000, have thus far, failed to pan out, and by some measures, most of the worst excesses of leverage have been washed out by the numerous high-profile failures.

A recent measure of open interest in perpetual futures on Binance.com saw a drop of as much as 50.3%, suggesting that even if speculators are betting on crypto, they’d prefer to do it without borrowing.

To be sure, leverage washing out of an over-hyped and speculative market, against a backdrop of declining asset prices across the board, is unsurprising, and even healthy.

And whether or not Bitcoin can maintain its current level of between US$16,500 and US$17,500 (at the time of writing) remains to be seen, especially given that the crypto markets have never before run into a recession, which the U.S. Federal Reserve appears to be hellbent on ushering in through its continued rate hikes.

Higher Lows

Bitcoin has fallen around 64% for 2022, reasonably close to the losses it suffered in the last crash in 2018, where the cryptocurrency shed 70% of its dollar value in the wake of the ICO collapse.

What’s perhaps more interesting is that at current prices Bitcoin has only fallen 17% from its previous all-time-high in 2017 of around US$20,000 to US$16,500, whereas in 2018, Bitcoin fell to around US$3,500 — a higher low.

While there are plenty of speculators who bought cryptocurrencies on leverage, there appear to be just as many who are prepared to buy and hold the asset class with no borrowing.

What happens next will be critical.

With the U.S. Justice Department, Commodities and Futures Trading Commission and Securities and Exchange Commission all gunning after FTX founder Sam Bankman-Fried, following the spectacular collapse of his cryptocurrency exchange under a hail of fraud allegations, the pressure to do something to regulate the crypto industry that has been infamously dubbed the “Wild West” will grow.

A redesign and overhaul of crypto’s lending apparatus and measures to better insulate the system from fraud and misrepresentation will help to make sure that the mistakes of 2018 and 2022 are not repeated.

Similar to the way reforms of the financial system took place in the wake of the 2008 financial crisis, reform will need to be taken in the cryptocurrency industry as well, if it is to persist.

And just as the 2008 financial crisis ushered in a new era of borrowing prudence, the 2022 crypto crash could possibly do the same and fresh crypto regulations could help prevent a return to the old ways of doing business.

Regulators could reign in the worst excesses of crypto lenders to make sure that borrowers don’t take loans they can’t afford and leverage brought back down to realistic levels.

Many of the centralized crypto operators and exchanges that didn’t require evidence of repayment ability or even basic AML and KYC will need to adapt to fresh restrictions when they are rolled out.

The good news is that those who bought crypto at or near the peak, especially on leverage, are likely to already have sold their holdings, but any recovery is likely to be uneven.

What next?

Investors who were burned by the frauds and fiascoes of 2022 are unlikely to return to the crypto markets in a hurry, especially if they had lost a substantial amount in this “Crypto Winter” but there will be fresh “crypto curious” who are wondering if just a taste of the nascent asset class wouldn’t help their portfolios in the long run.

As the crypto industry withdraws, licks its wounds and goes through a period of introspection, it’s likely that the tokens which make up the bulk of market cap in the next four years is unlikely to look as how it looks today.

Many of the shoddy practices by large crypto companies will (hopefully) be done away with as investors and lenders demand more mature industry practices to protect the value of their investments.

Regulations will undoubtedly take some time to formulate and follow-up with and while the fallout from FTX’s collapse was formidable enough to foment pressure for regulation, it will lack the sense of urgency that was present in the wake of the 2008 financial crisis.

During this inter-bull period, when cryptocurrency markets are likely to see a lull in activity, is where the biggest bargains could be had.

Regardless of one’s view on the underlying technology, cryptocurrencies are likely here to stay and their true value, only just being understood.

The same way that the internet was dismissed in the aftermath of the dotcom bubble, it would be shortsighted to write off crypto because of the crash of 2022.

But investors hoping that token prices will soar by high multiples will need to manage their expectations.

From the depths of the 2001 dotcom crash, it took the stocks of technology companies almost two decades to plumb their all-time-highs, building tremendous value along the way to justify their heady valuations.

Interest rates may have hammered the stock prices of tech firms, but few would dare argue that the technologies and services they deliver are no longer relevant.

Just as price does not always equate value, the clutch of cryptocurrency firms that survive this downturn will need to deliver real value to customers and investors and the bull run in token prices and company valuations that exists in the horizon will need to be built on sustainable metrices of user growth, application use, and new service offerings.

Betting is instantaneous, but building takes time and for those who are not crypto-tourists, now is the time to build.