Lessons from Bear Market and When the Winter Will End
Lex Sokolin is Head Economist at major blockchain company ConsenSys.__________
To say the cryptocurrency market has been on a rollercoaster ride is an understatement. In January 2021, barely nine years after it began trading, the aggregate value of the cryptocurrency market reached $1 trillion (USD) – the fastest asset by many standards to reach this milestone. Ten months later, on November 10, 2021, the asset class nearly tripled to $2.9 trillion as several tokens reached all-time highs.
Rocks and pixels regularly sold for millions, profile pictures on Twitter were awash with laser eyes, and Euphoria had no limits.
However, just one month later, the market cap dropped to $2.3 trillion, a drop of -21%. By mid-June 2022, the entire market class had fallen to a market cap of $800 billion, more than -70% off its all-time high.
The takeaway? Crypto winter is here, with much of the euphoria evaporated for anguish and bafflement.
With apologies to Mark Twain, reports of Web3’s death have been greatly exaggerated. We’ve been down this volatility path in 2011, 2013, and 2018 only to bounce back. But the question isn’t so much if, but when, there will be light at the end of the tunnel.
Lessons from the crypto winter
A crucial takeaway from this latest bull run is that exaggerated narratives and the urge for high returns spurred “greed” among investors. While this is often assumed to be associated with retail investors, this cycle showed that even the most blue-blood investment firms were engaging in dangerous and unsound behavior.
Secondly, it became apparent that in the Web3 ecosystem, many of the prevailing token design principles needed to be sound. For example, tokens that rely on the network’s continued growth to prop up price have been found wanting, and governance as a token’s core objective function needs to be improved.
Token holders need and deserve more.
In addition, investors need to understand that crypto has yet to live up to the narrative of being an alternative asset class, as it is closely linked with traditional asset classes. For example, the crypto market cap soared as long as the Federal Reserve (Fed) kept rates near zero, similar to equities. However, as soon as the Federal Reserve telegraphed its intention to raise interest rates, valuations began to crumble.
One last failing is many protocols within the space were being created to operate as money “Lego,” deriving an unsustainable yield rather than having a real-world use case. As a result, these sorts of protocols, particularly within decentralized finance (DeFi), have disintegrated. A protocol must have a function to sustain usage and drive growth over time.
Despite highly-stressed market conditions and depressed prices, DeFi protocols (e.g., Aave, Compound, and MakerDAO) remained resilient whil Will Come Out on Top Following FTX Collapse- Rich Dad Poor Dad Author Robert Kiyosaki Says BTC Will Bottom at This Price, Not Worried About Crash
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