We’re several months into the so-called crypto winter, with the price of Bitcoin and Ethereum still sitting at about a third of their all-time highs.
Many are speculating on the future of crypto and the web3 ecosystem.
Will it recover?
Was it a fad?
Was the NFT craze and DeFi Summer just a result of bored locked-down millennials with stimulus checks at their disposal?
Was it all just hype?
There are seven reasons why I think this crypto winter is different from 2018, and why it makes sense to be optimistic about the future of web3.
1) No material notable dropoff in development activity
Back in 2018, there was a notable and protracted downturn in human capital growth (new blockchain developers joining GitHub). This lasted for about 2.5 years, per the chart below.
However, my own research on human capital and project growth over the past year, below, shows no such dropoff, save for a short-lived dropoff in May at the peak of the Terra hysteria and the contagious effect it had on crypto’s market cap.
Project activity has remained steady and developer activity, whilst slightly lower, is holding steady.
2) Web3 is flush with capital
2021 was a bumper year for web3 funding, with over US$30 billion deployed into the emerging space.
And we’re on track for another record year in 2022, with US$3.6 billion deployed into web3 startups in June 22 — a whopping 60% more than June 21.
And according to Angelist, below, crypto and web3 investment is outpacing even fintech, which for years has been the darling of venture capital.
Mirroring this, investment into the metaverse subsector is also on track to beat 2021(below).
All of this points to the web3 ecosystem being flush with cash, and in a position to continue building through the market downturn, and weather the storm of external shocks — something it was not in a position to do in 2018.
3) Institutional buy-in
Back in 2018, there was little institutional buy-in. The likes of JP Morgan CEO, Jamie Dimon, called Bitcoin a fraud. But so much has changed since then.
All of the large investment banks — Goldman Sachs, Citi, HSBC, and JP Morgan, among others, have published reports predicting that web3 will become a multi-trillion dollar industry by the end of the decade.
They’ve all set up crypto analyst desks and trading teams.
The likes of Blackrock — one of the world’s biggest investment managers, is moving into crypto.
Of note, Blackrock stated that “despite the steep downturn in the digital asset market, we are still seeing substantial interest from some institutional clients in how to efficiently and cost-effectively access these assets using our technology and product capabilities.”
And we’ve seen countless brands such as Meta, Twitter, Nike, Adidas, Gucci, the NBA, and others, make plays in the NFT and metaverse realms.
It is a different world as far as institutional buy-in is concerned, all of which affords more legitimacy to crypto, and pours even more dollars into its coffers — revenue dollars, not just venture capital dollars.
4) Government buy-in
Governments across the globe have long struggled to make sense of crypto, and by most objective measures, still do. But despite the efforts of naysayers like US Senator Elizabeth Warren, legislatures across the globe are looking at how they can effectively regulate crypto in a way that doesn’t destroy its usefulness.
Joe Biden signed an executive order in March 22, outlining a policy for digital assets. This move has been echoed by countries across the globe.
While regulation is feared by some, it can bring clarity and legitimacy to crypto, in a way that brings further retail and institutional players into the space. In the long term, we can only hope that it will be a net good for the space.
5) The entire market is down — not just crypto.
We’re in a recession!
In 2018 the crypto crash was mostly an isolated incident. And while the CeFi failures of Terra, Celcius, Voyager, and others, were contagious events that affected crypto market sentiment and liquidity, external market forces such as soaring inflation and negative GDP growth all have an impact on money flows and crypto.
But the current crypto crash is not an isolated incident.
Money is tight, and investor sentiment is shaky, so most asset classes are feeling the pinch.
Top tech such as Amazon, Microsoft, and Snowflake were smashed over the past year, falling by as much as 80% in the case of Snowflake (below).
The S&P500 saw its market cap fall by about 25% from Jan 22 to June 22.
However, if history is our teacher, we expect bear markets every 3.6 years or so, and they typically last 9 months. This is normal. What matters is that prices trend upwards over the long run, which, in the case of the public equities markets at least, has held true since its inception (below).
6) Fundamentals-first founders
Prior to the broader tech crash of 2022, it was not uncommon for tech startups to get valuation multiples of 50X or even 100X, but this has come crashing way down.
SaaS companies are now being valued at a paltry 5.6X on average. This has resulted in numerous venture funds having to mark down the value of their portfolio investments — not good news for their limited partners.
And in a downturn, venture capitalists are being a lot more diligent about where they put their money. It’s taking longer to close deals. And this too is being felt by web3 startups.
It’s no longer enough to use hype and buzzwords alone, in a bid to catch the next wave. Up until markets went into a tailspin, money was flying into web3 startups as it was .com startups in the late 90s. It seemed like all you needed to do was use words like web3, NFT, token, decentralized, or DAO, and you’d raise money hand over fist.
But today, in light of the crash and the numerous shitshows we saw earlier this year by less than responsible or credible founders — *cough* Do Kwon *cough*, the focus is now back on fundamentals — which is a VERY GOOD thing for crypto in the longterm.
Does this actually create value for society?
Is this defensible?
Does this make more money than it costs?
Can this grow at a high enough rate?
Is the market big enough today, or will it be big enough tomorrow?
VCs are now asking these questions of web3 founders a lot more than they were 12 months ago when the competitive funding environment forced the hand of many VCs before they had time to do their due diligence.
And again, I stress, this is a good thing.
7) Early evidence of recovery
Finally, in light of all of the above, we’re already seeing crypto bounce back. ETH has rallied from a low of US$990 in June to over US$1500 today. Admittedly, this is still way lower than the highs of US4,700 recorded in November 21, but it is a promising development.
And perhaps ETH has fared better than other alternative layer 1s such as Avalanche because of the fundamentals underpinning it, and the broader Ethereum ecosystem of applications it supports.
That, and the forthcoming merge, might also have something to do with it.
This is why I think it pays to be, at least cautiously optimistic, about the near and especially the longer term future of the cryptoverse.
What do you think? Why else might this market be different? How might I be wrong? Let me know in the comments.