Has the crypto market really entered a cold winter? At least this bear market is completely different from 2018

“Has the market bottomed out?” That’s the billion-dollar question.

If you spend a little time in the Web3 community, you’ll notice that there’s a lot of narcotic optimism. The crypto collective consciousness wants to believe that the declines of the past few months are “temporary” and that market prices will rebound soon.

Admittedly, this optimism is difficult to sustain.

Market prices tell a worrying story: Bitcoin has fallen 58% from its all-time high (ATH) of about $67,000, Ethereum has fallen 62% from its ATH of about $4,700, and the overall crypto market capitalization has fallen 58% from $2.8 trillion to $1.2 trillion. Both the Federal Reserve and the Bank of England are raising interest rates to curb inflation and plan to start quantitative tightening. The collapse of the fifth largest blockchain Terra (considered by many to be a "blue chip stock") further dampened market sentiment.

First, the crypto industry is also seeing massive layoffs. Coinbase has drastically cut job openings. Robinhood, Gemini, Brazilian crypto unicorn 2TM, and Mexico-based Bitso are all reportedly cutting around 10% of their staff.

Should we worry about the coming crypto winter? What exactly is a crypto winter?

Let’s review the market conditions during the bear market of 2018. In early 2018, Bitcoin fell 69% from its 2017 all-time high of $19,783 to $6,155 in 7 weeks. By the end of the year, the total market value of cryptocurrencies plummeted from a high of $830 billion to $120 billion. It was also at this time that the seeds of DeFi were planted in the ruins of the ICO craze. Ordinary companies viewed cryptocurrencies not as opportunities but as speculation, and policymakers and corporate CEOs viewed cryptocurrencies as a big scam and a flash in the pan.

…but price signals and headlines don’t tell the whole story.

2022 is not 2018

Look at the cryptocurrency landscape today. By all measures, the state of crypto today is far better than where we were after the end of the 2018 bull run.

First, the state of DeFi is way ahead of the past. By the end of the 2017 bull run, there were only about 100 dapps active. Today, there are thousands on Ethereum alone. The NFT and blockchain gaming sectors are two multi-billion dollar verticals, and we’re even seeing early signs of DeFi on the Bitcoin blockchain.

Layer 1 networks are scaling transaction throughput dramatically, whether through Layer 2, Layer 0 interoperability networks (Cosmos, Polkadot) or Rollups on payment channels like the Lightning Network. Today, Ethereum’s Layer 2 ecosystem has $5.1 billion in TVL. All of this was just abstract academic ideas in 2018, but is now fully deployed in functional protocols.

Three years ago, DAOs were a small community, but today they are a giant force with $9 billion in financial backing. No wonder they are siphoning talent from the traditional labor market. DAOs are rapidly developing infrastructure tools and developing solid strategies around governance and financial management.

Today, with more and more DeFi utility cases, the ability to speculate and make quick profits is no longer the main reason why investors are interested in cryptocurrencies.

Secondly, a host of large institutional players have already stepped into the Web3 door. Wall Street’s largest firms such as JPMorgan Chase, Citi, BNY Mellon, and more global banks are expanding their product offerings to crypto assets or leveraging DeFi protocols directly. Despite layoffs, Coinbase and Robinhood are launching their own crypto wallets.

Then there are Big Tech’s forays into the Metaverse: Facebook’s rebranding to Meta; Twitter, Instagram, and Spotify’s integration of NFTs; Google and Microsoft spinning off their own Web3 research divisions or actively investing in Web3. Large retail and fashion brands are all shifting their business strategies toward Web3: Walmart, Warner Bros., Gucci, Louis Vuitton, Nike, and many more.

Third, the industry is well funded. Unlike the bear market in 2018, builders are hardly dragged down by the bear market. The total amount of funds raised by blockchain startups in 2018 was $5.8 billion, about a quarter of the total amount of $25.1 billion raised in 2021.

We are halfway through 2022, and VCs have reportedly raised $15 billion so far this year. That number doesn’t include the massive $4.5 billion fund announced by a16z last week (check out our podcast with Marc Andreessen and Chris Dixon). Market prices may be falling, but the abundance of capital ensures that innovation continues to emerge.

Finally — and perhaps most importantly — the regulatory window for crypto policy is rapidly shifting from “ban it” to “how to regulate it.” This is unlikely to appease the most hardcore tech libertarians, but it is progress. In policymaking circles — especially in the West — condemnation of cryptocurrencies is starting to sound silly. All good politicians have a nose for opportunity and can see that it’s better to go with the flow than against it.

Cryptocurrency and the broader Web3 space cannot be ignored now, and doing so may even be politically unwise given its unbannable nature. Previous regulatory discussions to ban cryptocurrencies usually resulted in crypto prices crashing, but crypto has become anti-fragile to such threats.

Web3 innovation is moving at a faster pace. Corporate organizations are slow-moving, slow-moving, risk-averse giants that tread carefully so as not to disrupt the comfortable status quo. The bull market boosts public credibility and removes the organizational inertia and skepticism that hinders corporate growth.

“Will cryptocurrency prices recover?” was a common question during previous bear markets.

“When will cryptocurrency prices recover?” is a question more appropriate for today’s bear market.

That’s the crux of it all. The existential threats many of us faced in previous bear markets are not possible this time around. Even crypto skeptics can see what we’ve built.

Bear markets are a hard pill to swallow

Market corrections are painful. But they also represent a necessary precursor to economic progress.

If you’ve taken any economics classes, you understand that market competition is often treated as a given, with firms acting as “price takers” under the assumption of “perfect competition.” These models provide useful insights into how different economic variables interact with each other under other conditions, but they also obscure the most important factor of all: that markets are an efficient process for testing what works.

Free markets allow a thousand flowers to bloom, but most are rotten apples in disguise. Profit and loss signals are an important mechanism for weeding out the rotten apples: unsustainable, debt-ridden losers who want to take shortcuts to outperform the winners. Without the trial and error of market competition—what economists call creative destruction—we will never gain the necessary knowledge to understand what works or doesn’t work.

David has previously referred to this as a “bear wash cycle” where economic contraction forces developers to return to fundamentals. The path pursued by many competing L1s is one of unsustainable growth subsidized by hyperinflationary token releases. During bull markets, these strategies were masked by massive capital injections. But in hard times, this ugly strategy is exposed.

Booms and busts show the health of the market. After each "bust," the market is better able to learn what works and what doesn't.

Conclusion

Analysts often make bold predictions about market trends.

These types of forecasts are extremely difficult to get right given the large number of macroeconomic variables in the equation.

For every one they get right, they get it wrong a dozen times — and then are quickly forgotten. The truth is, no one can foresee when the crypto market will recover.

However, a sober look at the current cryptocurrency landscape reveals many objective reasons for optimism and patience. In all respects, the “fundamentals” of the current bear market are much stronger than those of 2018, and the industry is better positioned to escape its current predicament.