Lessons from the Bear Market and When Will Winter End?

Lessons from the Bear Market and When Will Winter End?

Source: AdobeStock / rustamank

Lex Sokolin is Chief Economist at major blockchain company ConsenSys.

To say that the cryptocurrency market is on a rollercoaster ride would be an understatement. In January 2021, barely nine years after it started trading, the total value of the cryptocurrency market reached $1 trillion (USD) – the fastest asset to reach this milestone by many standards. Ten months later, on November 10, 2021, the asset class nearly tripled to $2.9 trillion as several tokens hit all-time highs.

Rocks and pixels regularly sold for millions, profile pictures twitter Laser washed eyes and Euphoria had no limits.

But just one month later, its market cap fell -21% to $2.3 trillion. By mid-June 2022, the entire market class had dropped more than -70% from its all-time high to a market cap of $800 billion.

take away? Crypto winter is here, so much of the enthusiasm has evaporated to anguish and bewilderment.

With apologies to Mark Twain, his reports Web3His death was greatly exaggerated. We went through this path of volatility in 2011, 2013 and 2018 just to bounce back. But the question is not whether the light will appear at the end of the tunnel, but when.

Lessons from the crypto winter

An important takeaway from this latest bull run is that exaggerated narratives and the high-yield drive encourage “greed” among investors. While this is often assumed to be associated with retail investors, this cycle has shown that even the most blue-blooded investment firms engage in dangerous and unhealthy behavior.

Second, it turns out that most token design principles that prevail in the Web3 ecosystem need to be sound. For example, tokens that rely on the continued growth of the network to support the price have been found insufficient, and governance needs to be improved as a token’s primary purpose function.

Token holders need and deserve more.

Additionally, investors need to understand that cryptocurrency has yet to fulfill its narrative of being an alternative asset class, as it is closely linked to traditional asset classes. For example, crypto market cap, Federal Reserve (fed) kept rates close to zero, similar to stocks. However, as soon as the Federal Reserve telegraphed its intention to raise interest rates, valuations began to collapse.

A recent failure is the creation of many protocols within the space to work as money “Lego” to achieve an unsustainable return rather than having a real-world use case. As a result, such protocols are especially useful in decentralized finance (DeFi), disbanded. A protocol should have a function to maintain use and grow over time.

Despite extremely stressful market conditions and low prices, DeFi protocols (eg. aave, to connectand ConstructorDAO) remained resilient while retaining their credit-value values. Investors who were slow with these protocols were protected by smart contracts that automatically forced borrowers to repay their loans. This does not mean that DeFi protocols are 100% safe, but the risk parameters to protect investors worked as they should, at least in the best lending protocols. In addition, each of these examples had a clear and valuable function, and users were drawn to them for a specific purpose.

The most important lesson to be learned is that despite the winter winds sweeping the streets of Web3, there is no indication that developer activity or interest in Web3 is slowing.

Ethereum (ETH) continues to be one of the most robust ecosystems for developer talent and builds that trust.Combining,” the most critical upgrade in blockchain history. Solana (SUN) and Space (ATOM) ecosystems are also gaining incredible traction. Competition for developer talent continues with new tier one ecosystems such as the following. Appropriate it’s coming out.

when will winter end

Of course, no one has a crystal ball on how long the Crypto winter will last. While it is impossible to predict the future, we can gather insights from past cycles and current developments to guide the next wave of enthusiasm.

As mentioned earlier, the Web3 market is closely intertwined with traditional market cycles. Therefore, it is safe to assume that depressed prices will continue as the Fed and other central banks around the world maintain a hawkish monetary policy in response to the current economic environment.

However, we can expect an upward trajectory when the stability and reverse trajectories of the three key factors driving asset prices (growth, inflation and politics) are present.

In addition, all contamination must be fully resolved. world dollar and Moon collapseand any accompanying questionable risk management decisions, e.g. Three Arrow Capital (3AC), Centigradeand traveler. Many techniques are currently showing that sellers are exhausted, but we can continue to see new lows without solving these critical issues.

[Editor’s note: the article was written before the collapse of the FTX crypto exchange.]

What’s next for crypto?

It’s bound to happen sooner or later. It will be a broad-based acceptance. blockchain technology increases demand for block space and advances the next wave of users Adoption.

Risk management in DeFi is still in the early stages of development when compared to traditional finance. I expect the development of “pure” risk management tools above the primitive layer of DeFi protocols.

Leading protocols in DeFi will likely continue to go through iterations to keep up with market forces and stay relevant.

Those who form the basis of the ecosystem will have critical qualities such as technical innovation, high security and confidence demonstrated by the amount of capital locked in. smart contracts.

DeFi protocols will leverage multi-chain strategies or focus on platforms that connect crypto markets across all chains to create more open finance, and seek new approaches to help strengthen their balance sheets and token prices.

A variety of revenue sources will be critical to keeping up with dynamic market cycles.

For example, Aave’s recently approved crypto-backed fixed money will accrue interest on its treasury and allow it to continue to finance future projects, a strategy that other protocols can follow.

Crypto winters are a reminder that volatility is an integral part of financial markets. Given Web3’s grand vision, it would be wise to proceed cautiously. The results of the dot-com bubble confirm that innovative organizations and technologies have weathered the storm. The story will be the same as Web3.


Learn more:
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Rich Dad Poor Dad Author Robert Kiyosaki Says BTC Will Bottom At This Price, Not Worried About Crashing

Shark Tank Superstar Believes Crypto Bull Market Will Start After This Single Event
Crypto Expert Believes This Single Catalyst Could Trigger New Bull Market – Is Market Rebound Coming?

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Galaxy Digital’s Novogratz Suspects Bitcoin To Pass $30,000 Soon

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