Last week, multiple segments of the cryptocurrency industry, from Coinbase CEO Brian Amrstrong to CoinDesk reporters, reported that we are in a “crypto winter.” But what is crypto winter? How to objectively measure the crypto winter? Jamie Burke, CEO of Web3 accelerator Outlier Ventures, answers these questions from where he was investing throughout the 2018 crypto winter. He provides a framework to help better define and assess the health of the industry as a whole, understand how 2018 differs from now, and provide insights on where he thinks the industry is headed.
What is a tech winter?
In a public debate in 1984, “winter” was first used to refer to the AI community in the context of the technological cycle, and it was described as “a chain reaction that started with pessimism in the tech community and spread to The media, funding was severely cut, and serious research disappeared.”
This definition accurately encapsulates everything that happened in the cryptocurrency industry from 2018 to 2020. Until DeFi Summer awakened the crypto community, capital began to redeploy to the industry. Like AI, cryptocurrencies as an information technology are expected to go through several hype cycles, followed by periods of disappointment and criticism, funding cuts, before returning to attention in a few years. The AI industry is even worse, waiting decades.
So, in order to objectively measure whether we are in a crypto winter, we need to consider these conditions: pessimism in the community and the media, followed by severe funding cuts, and no serious research going on. While I think there’s clearly a sense of pessimism in parts of the community, especially in the media, we’re going to dismantle these views and try to find objective answers to help us determine if we’re currently experiencing a tech winter.
No ongoing serious research?
First of all, I believe that unlike the winter of 1984 in artificial intelligence, cryptocurrencies have been commercialized for more than 8 years and have moved beyond the pure R&D stage. In this case, we can measure the level of R&D funding by the capitalization of major protocols, new Web3 primitives, the number of Layer1 and Layer2 launches, or by the activity of the Github codebase. As part of our R&D Trends report, we continuously analyze development activity across all major Web3 protocols, and these activity metrics show that code commits persist and, in many cases, grow.
From another perspective of our accelerator, we see a plethora of startups being launched to bundle and commercialize blockchain infrastructure. We’ve received over 2,000 applications since Q1 and don’t see any signs of slowing down in the number of founders and developers joining the space. Job postings are also booming in the early stages of the current industry, with more than 200 vacancies on our job panel alone, interestingly, after we saw layoffs at major companies like Coinbase, leaving employees received dozens of jobs on the same day job opportunity. Likewise, we’ve seen record levels of Web2 executives jumping from big tech companies (in part due to layoffs) because big companies’ share plans don’t lock in talent like they used to.
Severe cuts in funding?
Here’s our next requirement to classify an industry as winter: a big cut in funding. Here, I believe a lot of people are making the mistake of looking at only part of the story and not the whole.
It is clear that there has been a significant drop in market capitalization among publicly listed cryptocurrencies. At the time of writing (June 16), the total crypto market cap has fallen from an all-time high of over $3 trillion to just under $1 trillion, with 72 of the top 100 coins down as much as 90%. Borrowing from the traditional capital market concept of a “bear market”, if the market as a whole, an index such as the S&P 500, or an individual security or commodity falls 20% or more over a sustained period of time (usually two months or more), it is safe to say that Saying we’re in a bear market doesn’t mean the market is going through a cold winter.
To get a fuller picture of overall financing, you need to look not only at the publicly listed assets in the secondary market, but also at the activity of primary VCs. It is here that Outlier, powered by tools like PitchDeck, can provide some deeper insights into the health of the industry.
While funding into early-stage startups has slowed relative to the first quarter from Pre-Seed to Seed to Series A, funds are still being actively allocated to new crypto funds and deployed. Funds explicitly allocated to Web3 investments alone raised more than $15 billion in total funding this year, up from $12 billion in the same period in 2021, with a new fund launching nearly 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, with some platforms completely suspending all token listing activities due to the sharp drop in returns, many Listing activities on other platforms are currently delayed for several months. But in the context of TGE (Token Offering Events), there has been a secular trend since 2017, from a product and community perspective, they are no longer fundraising events, but web launches.
Although the primary market and the secondary market are of course linked, the former requires the latter as a liquidity condition in order to realize the benefits of its LPs or to recycle profits back to the market. While in the cryptocurrency space, this cycle is short-lived relative to classic equity investments, they still require a healthy secondary market of retail and more actively managed institutional money such as hedge funds. This is the biggest damage we’ve seen, and in addition to drying up demand, crypto-native hedge funds like Three Arrows Capital are under enormous pressure.
How to create an objective framework?
Based on the above questions, whether venture capital in the crypto industry will dry up before secondary market demand recovers, or both will eventually disappear for a few 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, with a drop of more than 90% from ATH;
Primary Market: VC and private equity sales also declined for the sixth month in a row, down more than 90% from ATH.
How likely is this, and what will happen next?
The results of our joint investor sentiment survey is that the expected bear market in the primary market will be relatively short-lived (between 6-12 months on average), with only 20% believing it will exceed 12 months; On average, values will only drop by 25%, with the top 10 items falling by a lesser extent. If this is a correct assessment, there is enough patient venture capital allocated to the crypto space and we will be safely entering another bull market.
But the question is, how will the bull market happen? Where will the new funding and demand come from?
Typically, crypto bull markets are driven by a combination of emerging innovations that create a new form of native asset and yield. 2017 was ICO, 2020 was DeFi, and 2021 was NFT. It’s hard to say exactly what the next innovation trigger will be, but what is certain is that Outlier has a big enough think tank and strong motivation to solve this problem, we guess it is either the native form of the social graph, or the more More and more programmable digital consumables.
But having said that, all previous crypto cycles have been in a more favorable macro environment, usually with quantitative easing attracting new capital. Many, including me, 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, since cryptocurrencies are permissionless, 24/7, and have shallow liquidity, it overstates the impact of macro sentiment. This also has a positive side, as it means that cryptocurrencies are recognized by the wider market, but it also means that there are drivers outside the control of the industry and that the same type of macro environment does not yet exist.
However, unlike a period when hot retail money poured into cryptocurrencies ignoring fundamentals as they were no longer the primary driver of price, today’s market will be driven by more specialized money trying to find real value. This means that during this relatively quiet period, the crypto industry is expected to begin a process of developing fundamentals that will continue into the next bull run. The maturing of this trend, coupled with the growing number of industry applications beyond DeFi, may reduce the future correlation of cryptocurrencies with traditional asset classes, making them more resistant to purely external macro sentiment.
Taking all these factors together, 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.