Bitcoin, the world’s first cryptocurrency, emerged in 2008. At the time, cryptocurrencies were a response to an overwhelming distrust of banks and centralized financial institutions.
A small group of online activists took it upon themselves to create decentralized, unregulated, digital currencies in response to the global financial crisis of 2007-08 and the subsequent Great Recession (2007-09).
After years of slow and steady growth, crypto hit the mainstream.
Now, hundreds of millions of people invest in crypto and include crypto assets in their financial portfolios.
As crypto prices kept rising, the future looked bright. Crypto insiders predicted that the price of 1 Bitcoin (BTC) would exceed $100,000.
That is, until prices started to drop.
The value of the entire crypto sector has crashed from a peak of $3 trillion in November 2021 to just over $1 trillion in June 2022. Cryptocurrency’s future isn’t looking so bright anymore; the ‘Crypto Winter’ has arrived.
Naturally, this reopens the question as to whether cryptocurrencies and other related decentralized assets and investment opportunities are still the Future of the Internet or merely speculative hype?
Let’s explore this debate.
What is the ‘Crypto Winter’?
“Begun, the Crypto Winter has” (say that in the voice of Master Yoda, and you’ll know the Shroud of the Dark Side has fallen).
In a Bloomberg article, Oliver Jones, a 29-year-old software engineer who’s been trading crypto since 2020 said, “There’s so much fear right now in everything. It feels like throwing money into a fire.”
Nikole Vicente, a 30-year-old Canadian crypto trader, went full-time into crypto trading after profiting from the sale of a startup she worked for. When the crypto sector took a dive, 50% of her $30,000 portfolio was wiped out.
“With the recession looming and inflation, everyone has this fear and everyone in the crypto market also reacts to that fear,” Vicente said in an interview, “That’s scary when holding on for dear life.”
These are only two examples. Over 300 million people have been affected worldwide.
This includes full-time investors, crypto sector startup founders and employees, day traders, those with crypto loans, and anyone currently holding cryptocurrencies and tokens in wallets.
The value of those holdings and investments has dropped dramatically.
The impact of this crypto winter is deep and far-reaching:
- One of the world’s largest cryptocurrency exchanges, Coinbase, is laying off 18% of its workforce — around 1,100 staff.
- Crypto sector companies, like BlockFi and crypto.com, are either making staff redundant or pausing their hiring activities.
- The world’s largest and most widely traded cryptocurrencies, Bitcoin and Ethereum, have plummeted in value since the start of 2022.
- Ethereum is down 70% from its peak of $4,700 in November 2021 to just over $1,000 now.
- Bitcoin has taken a similar dive. The world’s largest cryptocurrency by volume and market capitalization has dropped 55% since the start of 2022, down from over $67,000 in November 2021 to around $21,000.
- Thousands of other cryptocurrencies and tokens have wiped out their value and market capitalization since November 2021.
- Overall, the total market capitalization of cryptocurrencies was at a high of $3 trillion in November 2021. It’s now down to under $1 trillion.
- In May, 2022, $60 billion in value was wiped off the LUNA stablecoin (a cryptocurrency pegged to the United States Dollar), created by Terra, a crypto startup. Some lost their life savings.
- Crypto lenders, Celsius Network, and Babel Finance have stopped customers from withdrawing funds, according to crypto media outlets. Banks can take the same action if there’s ever a risk customers will withdraw more than they’re holding in liquid capital reserves. It’s rare — but a sign there are problems with those lending platforms and their liquidity pools.
What caused the ‘Crypto Winter’?
What’s happening in the crypto sector is a symptom of broader economic challenges.
These factors are contributing to current global macroeconomic trends:
- Inflation and the rising cost of living
- Gas and energy prices are climbing
- Food prices are increasing globally
- Supply chain problems, contributing to inflationary pressures
- Interest rate rises (the cost to borrowing goes up and access to credit tightens)
- The ongoing impact of the Covid-19 pandemic
- Low productivity — particularly in Europe
- Consumer and business confidence is down
- Real estate valuations and house prices are starting to fall (clear signs the real estate bubble is also bursting)
- The Russia/Ukraine crisis
Crypto is not alone in suffering the shocks from a wider economic fallout. Stock markets, currencies, futures, bonds, commodities — and tech stocks in particular — have been hit hard.
In response to a reduction in investor funding and the increased chances of a recession, Y Combinator urged startup founders to “plan for the worst.”
On a global economic scale, the IMF Chief, Kristalina Georgieva, warns the global economy faces the “biggest test since second world war (sic).”
That’s the context for the Crypto Winter.
As much as crypto believers and investors hope that crypto is immune from the wider economy, that foundational belief has been proven wrong. Far from being immune, crypto’s collapse demonstrates how integrated cryptocurrencies are with the broader economy.
Like it or not, many retail investors treat crypto as another investment vehicle; a chance to make quick profits on their bets. Unfortunately, many new investors in crypto are discovering that when the economy weakens and shares and commodity prices on Wall Street collapse, cryptocurrencies take a running leap off a cliff.
Let’s put this Crypto Winter into perspective.
The crypto sector previously experienced a widespread crash. Between 2017 and 2018, Bitcoin collapsed, with 80% of its value wiped away, and most cryptocurrencies suffered a similar sudden crash. It took the sector 18 months to recover from that blow.
This time, the impact is different.
Since the crypto crash of 2017-18, millions of new retail investors who didn’t understand cryptocurrency — or investing — threw their hard-earned money at crypto and have seen their portfolio values destroyed.
Since the previous crash, new asset classes have emerged, such as NFTs (Non-Fungible Tokens) and new investment opportunities have come to the fore, such as Web3. Retail investors have been equally enthusiastic, putting their hard-earned money into these opportunities — with NFTs in particular seen as the perfect “get-rich-quick” scheme.
Let’s investigate what the crypto winter means for those niche sectors.
How does the Crypto Winter impact NFTs & Web3?
Unlike the previous crash of 2017-18, a much larger ecosystem is affected.
This sector encompasses two new asset classes and investment opportunities: Non-Fungible Tokens (NFTs) and Web3 (also known as Web 3.0) startups.
A leading figure in the Web3 ecosystem, Mathieu Nouzareth, CEO of The Sandbox — a market-leading Metaverse platform — is confident that this downturn won’t impact Web3/Metaverse companies.
Speaking at the NFT.NYC conference, Nouzareth said: “The Sandbox hasn’t really been impacted, and the reason I think is because we’re a game, and games are less impacted by a macroeconomic environment. People come because it’s really a ton of fun. I’ve seen five of these [downturns]. But if you keep your head down and focus on building, in two, three years, we will see some massive, amazing companies that will emerge after this.”
But, for early-stage Web3 and Metaverse startups, this downturn could impact their ability to raise investment from Angel, Venture Capital (VC), and crowd-sourced investors (through Initial Coin Offerings (ICOs)).
We expect fewer new companies to emerge in this market, at least until the investment environment improves.
NFTs are a different story. NFT proponents and owners consider them an investment opportunity and asset class. As the crypto market fell, NFTs suffered accordingly.
One year ago, NFTs sold at lower volumes and lower prices. That was before the NFT market accelerated.
In August 2021, NFT sales spiked to over $420 million, and volumes and prices stayed high for several months until demand began to falter in January 2022.
NFTs have continued to fall in value and volume (apart from a brief spike in May 2022), with sales currently around $21 million (as of writing).
After looking at the impact of the crypto winter, let’s consider two arguments:
Are cryptocurrencies, NFTs & Web3 startups speculative, or do they remain the future of the Internet?
Are crypto, NFTs & Web3 speculative hype?
On numerous occasions, the entire crypto ecosystem has been compared to a speculative investment bubble; no better than a large-scale Ponzi scheme.
In other words, crypto is unregulated fraud; unchecked capitalist greed at its finest.
Bernie Madoff, the infamous financier, operated one of the longest-running and most ‘successful’ Ponzi schemes in history.
Of the $20 billion verifiably invested in Madoff’s investment funds, $14B has been recovered and redistributed to victims of his fraud.
Robert McCauley, a senior fellow at Boston University’s Global Development Policy Center, said comparing cryptocurrencies to “a Ponzi scheme is unfair to Ponzi schemes.”
McCauley argues that “Bitcoin is bought not as an income-earning asset but rather as a zero-coupon perpetual. In other words, it promises nothing as a running yield and never matures with a required terminal payment.”
Hitting the point home, he says that “Bitcoin resembles a penny-stock pump-and-dump scheme more than a Ponzi scheme.”
McCauley stated: “In a pump-and-dump scheme, traders acquire basically worthless stock, talk it up and perhaps trade it among themselves at rising prices before unloading it on to those drawn in by the chatter and the price action. Like the pump-and-dump scheme, Bitcoin taps into the pure desire for capital gains.”
Anyone with a passing knowledge of penny stocks and cryptocurrencies (or who’s watched The Wolf of Wall Street) would struggle to argue with McCauley’s assessment of the crypto ecosystem.
Arguably, the most famous analogy to modern speculative investment bubbles is that of “Tulip Mania” from the Dutch Golden Age.
Between 1634 and 1637, Tulip Mania gripped the Netherlands and Europe. At the peak of this speculative financial bubble, the value of one tulip bulb was 10x the annual income of a skilled artisan.
You could buy a sizable townhouse in Amsterdam for the price of a single tulip bulb.
“Tulip Mania” is now used to describe any economic bubble where the price/value of something deviates dramatically from its intrinsic value. You could easily say the same about cryptocurrencies.
Before the most recent dip, David Rosenberg, chief economist at Rosenberg Research, told CNBC’s “Trading Nation” that Bitcoin is, “the biggest market bubble right now.”
No other asset class moves up and down as much as cryptocurrency. Rosenberg rightly points out that, “The parabolic move in Bitcoin in such a short time period, I would say for any security, is highly abnormal.”
Unsurprisingly, the Securities and Exchange Commission (SEC) is leading the charge toward regulating the sector.
On March 9, 2022, U.S. President Joe Biden signed an executive order, calling for federal agencies to more closely assess the risks and benefits, and investor protections, for anyone who invests in cryptocurrencies.
SEC Chair Gary Gensler is taking action to regulate the sector.
In August 2021, Gensler said, “If somebody is raising money selling a token and the buyer is anticipating profits based on the efforts of that group to sponsor the seller, that fits into something that’s a security.”
Reuters reported that the SEC and other federal agencies are investing time in preparation to regulate a sector known for its Wild West behavior.
Crypto prices have crashed, and the sheriff is coming to town. For anyone hoping to make quick, easy, and unregulated money from crypto, the party is over.
Regulatory oversight would change the very nature of the crypto ecosystem, making it less speculative and safer for those who invest with hopes of making a profit.
Are crypto, NFTs & Web3 the future of the Internet?
Several of the world’s largest investment and tech companies see things differently.
Andreessen Horowitz (a16z), raised a $2.2 billion fund dedicated to Web3 and crypto startups. Another prominent VC firm, Paradigm, raised a $2.5bn fund for the same market.
Numerous others are raising funds to invest specifically in this market, seeing Web3, Crypto, and the Metaverse as the Future of the Internet.
Tiger and Sequoia, among other Silicon Valley and global VC firms, are either investing in early-stage deals or getting involved in late-stage equity deals.
According to Crunchbase data and Galaxy Digital, $32.8bn was invested in the crypto and Web3 space in 2021.
Despite the relatively early stage of growth in this market, 65 companies have already reached ‘Unicorn Status,’ with 40 crypto unicorns created in 2021. A further 50 crypto and Web3 startups raised over $100 million in the same year.
Tech giants — such as Facebook (now known as Meta, underscoring its 10-year, $10bn commitment to the Metaverse), Google, and Microsoft — are investing billions to make the new Web3 ecosystem the Future of the Internet.
Meta CEO, Mark Zuckerberg told CNBC: “We hope to basically get to around a billion people in the metaverse doing hundreds of dollars of commerce, each buying digital goods, digital content, different things to express themselves, so whether that’s clothing for their avatar or different digital goods for their virtual home or things to decorate their virtual conference room, utilities to be able to be more productive in virtual and augmented reality and across the metaverse overall.”
Meta (and some of the world’s most successful investors) is making a huge bet on the Future of the Internet.
The future that thousands of entrepreneurs and investors envision is a Web3-based Metaverse powered by cryptocurrencies and built on Blockchain technology. Regardless of the current Crypto Winter, investments in this version of the future aren’t slowing down.
What do industry insiders say about crypto?
During our research, we interviewed several marketing and investment company founders who are active in the crypto sector.
On the condition of anonymity, here’s what they told us:
The founder of a marketing agency with dozens of crypto sector clients says:
“Very few actively working inside the sector are as worried as the media is saying. Projects are still going ahead. If anything, we’ve noticed an increase in the volume of work coming through. Crypto, NFT, Web3, and Blockchain startups are still raising money, still need marketing materials.”
He went on to say, “It’s business as usual. If anything, winter or not, we are busier now than ever.
Partners we work with say the same; their clients are still investing in the future they know is around the corner.”
A crypto sector investment broker said:
“Investment activity is not slowing down. Yes, we’ve noticed a change in what investors are willing to put money into. No one’s buying into speculative hype anymore, but crypto, NFT, and Web3 startups with a solid value proposition, a clear route to market, a strong product and team, are still raising money.”
Another Web3 startup founder commented that:
“The hype is over; the party is calming down. But, long-term, most people I speak to in the sector are hopeful. Founders are still busy building. Projects are still moving forward, and investors are still actively investing. It’s a short-term correction, not the end of the road for Web3, Crypto, Blockchain, or NFTs.”
Overview: Overhyped speculation or the future of the Internet?
It’s a difficult call to make.
The arguments are strong on both sides.
You’ll note that the same thing was said about internet companies in the wake of the Dot-com bubble, and subsequent crash in 1999 – 2002. And yet, look at the growth of tech companies and the entire tech sector since that time.
Now, a whole worldwide ecosystem exists around these models. It’s worth trillions of dollars, employs millions, and touches 5 billion of the world’s population.
Would this have happened if entrepreneurs and investors had given up on the “Internet” after the first serious crash?
None of the major companies you instantly recognize today would exist without a continued, collective faith in a brighter future.
The world would be less connected and poorer on many levels.
Can we say the same about Cryptocurrencies, NFTs, Web3, and the Metaverse?
But a short-term crash probably won’t wipe out the future that millions of us are working hard to build.
What do you think?
Let us know in the comments below.