The Most Important Bear Market in Crypto History

This down cycle poses a question some crypto longtimers have never seriously considered before: What must be done to ensure there actually is another bull market?

AccessTimeIconSep 23, 2022 at 2:19 p.m. UTC
Updated May 11, 2023 at 3:52 p.m. UTC
AccessTimeIconSep 23, 2022 at 2:19 p.m. UTCUpdated May 11, 2023 at 3:52 p.m. UTCLayer 2
AccessTimeIconSep 23, 2022 at 2:19 p.m. UTCUpdated May 11, 2023 at 3:52 p.m. UTCLayer 2

I spent Thursday at Messari’s Mainnet conference, which was certainly bustling but, it must be said, slightly subdued compared with CoinDesk’s Consensus festival in June. That’s not to knock Messari. If Consensus didn’t exist, Mainnet might be the best all-around crypto conference. The difference is mainly a matter of timing: Consensus caught the trailing edge of a frenetic bull market, and now we’re definitively in the season of the bear.

Every bear cycle in crypto is greeted with a degree of relief by founders, engineers and other insiders, because they’re freed from the hamster wheel of chasing deposits, users and mainstream attention, and instead able to focus on building for the long term, both technologically and strategically.

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Mainnet offered a few glimpses of where projects are focusing their off-season energy this time around. One major theme is the financial and engineering push for more capital efficiency in decentralized finance (DeFi) and other on-chain services – that is, finding ways to safely get more leverage or liquidity out of less collateral. That could be a huge competitive differentiator in the future - though the competition is also certain to produce some overreach and blowups.

Another goal (however obvious) is building much more user-friendly front-ends for crypto applications. There are also major unanswered security questions, highlighted by yet another round of huge hacks this week. That’s a particularly ideal bear-market project: Without the pressure to move fast, you can take more care to build things that aren’t easy to break.

Of course, you have to fund that kind of development, and both revenue and retail speculation have substantially shrunk. The good news is that venture investment is definitely continuing. One founder who completed a recent raise told me, though, that in the bear market, bigger bets are going to fewer entities. In essence, VCs are still going long crypto and blockchain. They’re just a lot more selective than a year ago.

That’s all well and good, but it’s not enough. Thanks to the combination of macroeconomic pressures like inflation and the broad losses suffered by retail speculators, the big challenge for this bear market – and an unknown that I find myself considering for the first time in my decade covering crypto – is making sure there even is another bull market.

Extreme cyclicality has been a hallmark of the crypto industry since its inception. That’s certainly not unique – we found out this year that the broader tech market can still experience painful drawdowns, three decades after AOL sent out its first CD-ROM. But the cycles in crypto can be particularly sharp and painful because not only is this still largely a speculative technology, it’s one that retail investors can dabble in with few restrictions or safeguards.

That’s why the current bear market may be the most important in crypto’s history. In the unprecedented bull market from 2020 to 2022, a critical mass of retail investors was enticed by the past returns of the asset class. Exchanges, non-fungible token (NFT) producers and others focused on retail were more than happy to court them with Super Bowl commercials and major media appearances. And then, by and large, retail got severely burned, by the bursting of a transitory bubble (BTC and ETH) or, far worse, by the collapse of deeply flawed and even fraudulent projects.

I moderated a panel at Mainnet about the strategic balance between catering to big-money whales, day-trading degens and “newbs,” aka normal human beings. The trap for many crypto projects is that while the big, easy returns come from whales and degens, those users are also hyper-agile “rotator capital,” willing and able to pull up stakes and move their entire net worth to a new system for a few extra basis points of APR.

More importantly, degens and whales are speculators and liquidity providers, not “users” proper. To eventually reduce market cyclicality, crypto projects need to find actual use cases where they can beat existing services. For now, the obvious cases are still pretty limited: cross-border payments (mostly meaningful for BTC), NFTs (mostly meaningful for ETH) and, to a lesser extent, gaming – where there is a huge market, but the actual advantages of crypto are a bit less clear.

There will be a lot more real end-user services and products to add to that list. Some won’t come along until the technology has advanced further, whether in terms of throughput or user interface. But the industry needs them yesterday. One final clear advantage of a bear market is that, with speculators in retreat, it’s much easier to find and test the demand for real products that offer real benefits. That’s the task that lies before blockchain entrepreneurs right now.

Finally, a couple of blind items for those who stuck with me to the end. Word on the street is that the Walton family (as in Walmart) have a nascent interest in decentralized autonomous organizations (DAO). And a layer 2 blockchain company is just weeks away from announcing a fundraise of staggering proportions. Bet on it.


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David Z. Morris

David Z. Morris was CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, and small amounts of other crypto assets.