Outlier founder: Don’t rush to define the cold winter market, it is not as bad as 2018

Last week, multiple sectors of the crypto industry, from Coinbase CEO Brian Amrstrong to CoinDesk reporters, reported that we are in a "crypto winter." But what is crypto winter? How can crypto winter be objectively measured? Jamie Burke, CEO of Web3 accelerator Outlier Ventures, answers these questions from a position of investing throughout the 2018 crypto winter. He offers a framework to help better define and assess the health of the industry as a whole, understand the differences between 2018 and now, and provide insights into where he thinks the industry is headed.

What is a tech winter?

The term "winter" was first used to refer to the AI ​​community in the context of technology cycles during a public debate in 1984, where it was described as "a chain reaction that began with pessimism in the technical community, spread to the media, resulted in severe funding cuts, and the subsequent cessation of serious research."

This definition accurately summarizes everything that happened in the cryptocurrency industry from 2018 to 2020. It was not until the DeFi Summer awakened the crypto community that capital began to be redeployed to the industry. Like artificial intelligence, cryptocurrency as an information technology is expected to go through several hype cycles, followed by periods of disappointment and criticism, funding cuts, and only regain attention a few years later. The situation is even worse for the artificial intelligence industry, which has been waiting for decades.

So, to objectively measure whether we are in a crypto winter, we need to consider these conditions: pessimism in the community and media, followed by severe cuts in funding, and no serious research continuing. While I think there is clearly a pessimism in parts of the community and especially in the media, let's unpack these views and try to find objective answers to help us determine whether we are currently experiencing a tech winter.

No ongoing serious research?

First, I think that unlike the AI ​​winter of 1984, cryptocurrencies have been commercialized for more than 8 years and have broken out of the pure R&D stage. In this case, we can measure the level of R&D funding by the capitalization of major protocols, the number of new Web3 primitives, Layer1 and Layer2 launches, or by the activity of Github code bases. As part of the R&D Trends report, we continuously analyze the development activity of all major Web3 protocols, and these activity indicators show that code submissions continue to exist and in many cases have increased.

From another perspective at our accelerator, we are seeing a large number of startups launching to bundle and commercialize blockchain infrastructure. We have received over 2,000 applications so far in Q1 and are not seeing any signs of slowing down in the number of founders and developers joining the space. Hiring for early-stage positions in the industry is also booming, with over 200 open positions on our job board alone, and anecdotally we are seeing layoffs at large companies like Coinbase with employees leaving receiving dozens of job offers on the same day. Similarly, we are seeing Web2 executives jumping ship from large tech companies at record levels (partly due to layoffs) as equity plans at large companies don’t lock in talent like they did in the past.

Severe funding cuts?

This is our next requirement for classifying an industry as winter: significant funding cuts. Here, I believe many are making a mistake by looking at only part of the story instead of the whole.

It is obvious that among publicly listed cryptocurrencies, there has been a significant decline in market capitalization. At the time of writing (June 16), the total market capitalization of the crypto market has fallen from an all-time high of over $3 trillion to just under $1 trillion, with 72 of the top 100 tokens falling by as much as 90%. Borrowing from the traditional capital market concept of "bear market", if the entire market, indexes such as the S&P 500, individual securities or commodities fall by 20% or more over a sustained period of time (usually two months or more), it can be said with certainty that we have entered a bear market, but this alone cannot indicate that the market is experiencing a cold winter.

To get a more complete picture of overall funding, you need to look beyond the publicly listed assets in the secondary market and also look at primary venture activity. It is here that Outlier, supported by tools like PitchDeck, can provide some deeper insights into the health of the industry.

While funding into early-stage startups, from Pre-Seed to Seed to Series A, has slowed relative to the first quarter, funds are still being actively allocated to new cryptocurrency funds and deployed. This year, funds explicitly allocated to Web3 investments alone have raised more than $15 billion in total funds, up from $12 billion in the same period of 2021, with a new fund launched almost every week.

Combining our token launch platform Ascent and the latest data from exchanges such as CoinList, Kucoin and Huobi, the number of newly listed cryptocurrencies has dropped significantly, some platforms have completely suspended all token listing activities due to the sharp decline in returns, and many other platforms' listing activities are currently temporarily postponed for several months. But in the context of TGEs (token distribution events), a long-term trend has emerged since 2017, that they are no longer fundraising events, but network launches from a product and community perspective.

While the primary and secondary markets are certainly linked, the former requires the latter as a liquidity condition to realize returns to its LPs or recycle profits back to the market. While in the crypto space, this cycle is short-lived relative to classic equity investments, they still require a healthy secondary market consisting of retail and more actively managed institutional funds (such as hedge funds). This is the biggest damage we have seen, and in addition to the demand drying up, crypto-native hedge funds such as Three Arrows Capital are also under great pressure.

How to create an objective framework?

Based on the above questions, will venture capital in the crypto industry dry up before demand in the secondary market recovers, or will both eventually disappear for several years.

An objective measure of crypto winter is as follows:

• What stage is the secondary market in: It needs to fall for 6 consecutive months, falling more than 90% from the ATH;

• Primary Market: VC and private equity sales have also declined for 6 consecutive months, down more than 90% from ATH.

How likely is this and what happens next?

The result of our joint investor sentiment survey is that the bear market in the primary market is expected to be relatively short (between 6-12 months on average), with only 20% believing it will last more than 12 months; in addition, crypto project valuations are expected to drop by only 25% on average, with the top 10 projects seeing smaller declines. If this is a correct assessment, then with enough patient venture capital allocated to the crypto space, we will be safely entering another bull market.

But the question is, how will the bull run happen? Where will the new funds and demand come from?

Typically, crypto bull markets are driven by a combination of emerging innovations that create a new form of native assets and yields. In 2017 it was ICOs, in 2020 it was DeFi, and in 2021 it was NFTs. It’s hard to say exactly what the next innovation trigger will be, but what is certain is that Outlier has a large enough think tank and a strong motivation to solve it, and we guess it’s either a native form of social graphs or more and more programmable digital consumables.

But having said that, all previous crypto cycles have occurred in more favorable macro environments, usually with quantitative easing attracting new capital. Many, including myself, believe that the current state of the crypto secondary market is largely driven by a deteriorating macro environment, similar to the downturn in the stock market. However, because crypto is permissionless, 24/7, and has shallow liquidity, it exaggerates the impact of macro sentiment. This has a positive side, as it means that crypto is recognized by the broader market, but it also means that there are drivers outside of the industry's control, and the same type of macro environment is not yet in place.

However, unlike the period when hot retail money poured into cryptocurrencies and ignored fundamentals, as they were no longer the main driver of price, today's market will be driven by more professional money trying to find actual value. This means that during this relatively calm period, the crypto industry is expected to begin a process of developing fundamentals that will continue into the next bull run. The growing maturity of this trend, coupled with the growing number of industry applications outside of DeFi, may reduce the future correlation of cryptocurrencies with traditional asset classes, making them more resistant to purely external macro sentiment.

Taking all of these factors into consideration, while the market is strongly bearish in the short to medium term, I can tell you that it is not a crypto winter at the moment, it may be more like a summer sale.

By Jamie Burke, Founder and CEO, Outlier Ventures

Compile: 0x11

Source: Foresight News