Short-Term Pain, Long-Term Gain (Redux)

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By Matthew Hougan

Thoughts on the recent market pullback—and a lesson from crypto’s recent past.

In July of last year, I wrote a CIO Memo called “Short-Term Pain, Long-Term Gain.”

At the time, crypto was in a bad place. Bitcoin, which had peaked above $73,000 in March 2024, had fallen to roughly $55,000, a 24% pullback. Ethereum was down 27% over the same time period.

The crypto market is facing a weird dynamic right now, I wrote. All the short-term news is bad, and all the long-term news is good.

On the plus side, I saw long-term catalysts like ETF flows, the bitcoin halving, and changing attitudes in D.C. On the minus side, I saw short-term challenges like the Mt. Gox distributions and government sales of bitcoin.

The dichotomy between short-term negatives and long-term positives is creating an incredible potential opportunity for long-term investors, I concluded.

That turned out to be prescient. Shortly after I wrote the memo, bitcoin bottomed and proceeded to rip straight to $100,000.

Today’s market has a very similar setup, with short-term negatives weighing against long-term positives. For investors with a long enough time horizon, I think it offers a very similar opportunity.

The Bad News: The Death of the Memecoin Carnival

First, let’s tackle the bad news.

As I write this memo on Tuesday morning, February 25, crypto markets are selling off sharply. Bitcoin is down 8% and trading below $90,000, Ethereum is down 10%, and Solana is down 12%.

The proximate cause is fallout from last weekend’s hack of Bybit, a Singapore-based crypto exchange. If you missed the news, hackers used a classic phishing scam to steal $1.5 billion in Ethereum from the exchange. While Bybit (remarkably) was able to dip into its own coffers and make all its clients whole, the hack rattled crypto, causing a cascade of liquidations.

The Bybit hack didn’t happen in isolation, however; it came after a series of memecoin-related scams over the past few weeks, including:

• Libra: Argentine President and crypto fan Javier Milei endorsed a memecoin called Libra, which turned out to be a multi-billion-dollar scam.?
• Melania: A coin associated with First Lady Melania Trump similarly went sour, costing investors billions.
• Trump: To a lesser extent, a coin associated with President Trump did the same.

News reports have suggested that the Bybit hackers were affiliated with the government of North Korea, and that they attempted to launder the stolen ETH via memecoin platforms. The Bybit scam has a memecoin angle as well; regulatory investigations are likely to follow.

Taken together, these events probably spell the end of the recent memecoin boom.

And while that may cheer “serious” crypto investors, memecoins have been the hottest segment of crypto outside of bitcoin over the past year, injecting significant trading volume and energy into the space (and particularly the Solana ecosystem). Removing that activity from the system will have fallout, and you’re seeing it today.

The Good News: Pro-Crypto Regulation, Institutional Investors, the Stablecoin Boom, and More

The thing about the short-term news is that its impact will end. With few exceptions, memecoins will stop mattering, and that will be that. Interest can’t drop below zero.

Fortunately, my long-term thesis on crypto has never revolved around memecoins.

On the flip side, there are a number of long-term trends that I believe will continue for years. These include:?

• Pro-Crypto Regulation: We are in the early days of a massive shift in Washington’s attitude towards crypto. In the past few weeks alone, we’ve seen the SEC drop high-profile lawsuits against firms like Coinbase and legislators coalesce around pro-crypto bills related to stablecoins and market structure. These developments will allow crypto to break into the mainstream and significantly reshape finance in the coming years.
• Institutional Adoption: Institutions, governments, and corporations are buying bitcoin at massive rates. So far this year, investors have plowed $4.3 billion into bitcoin ETFs. We expect that to reach $50 billion by year-end—with hundreds of billions coming over the next several years.
• Stablecoins: Stablecoin AUM is already at an all-time high of $220 billion, up almost 50% over the past year. But we think this is just a down payment. As stablecoin legislation makes its way through Congress, we think the size of that market could spike to $1 trillion by 2027.
• The Rebirth of DeFi and the Rise of Tokenization: Decentralized Finance (“DeFi”) applications are seeing renewed interest, with lending, trading, prediction markets, and derivatives all showing heightened activity. Meanwhile, tokenized real-world assets are setting new all-time highs in AUM every day.?

Where the Market Goes From Here

I find this framing helpful because, at a certain level, it makes positioning obvious. On one side, you have the loss of memecoins and the Bybit hack. On the other side, you have pro-crypto regulation, mass institutional adoption, a trillion-dollar stablecoin boom, the rebirth of DeFi, and the rise of tokenization.

This is what I call a no-brainer.

I would caution, however, that this market pullback has more teeth than the one I highlighted in July 2024. That one was truly transient, driven by one-off asset sales that were over as soon as they started.

The memecoin boom was large, and the hangover could be more significant. It might take days, weeks, or months to work through it.

But the overall thesis is the same: The short-term news is bad, the long-term news is good. When that happens, I like my money on the long term.

Risks and Important Information

No Advice on Investment; Risk of Loss: Prior to making any investment decision, each investor must undertake its own independent examination and investigation, including the merits and risks involved in an investment, and must base its investment decision—including a determination whether the investment would be a suitable investment for the investor—on such examination and investigation.

Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status. Crypto assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies, stocks, or bonds.

Trading in crypto assets comes with significant risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks and risk of losing principal or all of your investment. In addition, crypto asset markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Crypto asset trading requires knowledge of crypto asset markets. In attempting to profit through crypto asset trading, you must compete with traders worldwide. You should have appropriate knowledge and experience before engaging in substantial crypto asset trading. Crypto asset trading can lead to large and immediate financial losses. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price.

The opinions expressed represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events, or a guarantee of future results, and are subject to further discussion, completion and amendment. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.