“In life, we need to go through a naked tree season in order to turn nothingness into meaning.”
― Luis Enrique Cavazos
Just as most things do in life, financial markets operate cyclically. Both global and domestic economies experience periods of huge capital flow characterized by the risks perceived by financial players. This, coupled with financing and credit conditions, generate the cycles of boom and bust, also known as the "Bull and Bear" market. Bull markets refer to the condition of a financial market, in which prices are rising or are expected to rise. In bull markets, market sentiments are often optimistic and are marked by a relatively low fear and greed index among investors. Although bear markets often leave investors and builders with feelings of hopelessness, it’s never as bad as it seems.
Bear markets are normal
The term “bear market” describes the sentiment or attitudes associated with the fall in stocks, shares, cryptocurrency, and financial assets prices for a prolonged period. Investopedia characterizes the bear market as, “...a decline in prices, usually for a few months, in a single security or asset, group of securities, or the securities market as a whole”.
There are many speculations on how this repeated phenomenon in financial markets got an animal's name. Some people say it’s an old cautionary tale against investors who sold bear skins they did not yet own in expectation of a price decline. Others claim it refers to the way bears attack their prey; by swiping and slashing downward with their paws.
What constitutes a bear market?
Bear markets are not native to only cryptocurrencies as financial assets are tied to one another in some way, a continuous fall in prices in the cryptocurrency world often means the same for other financial assets like stocks and bonds. While this would mark the 5th bear market in cryptocurrency history, bear markets have occurred 26 times the S & P 500 Index, taking up only 20.6% of the 92years of market history. In a bear market, financial assets lose an average of 36% of their market value, and the average length of a bear market is 289 days or 9.6 months. In our most recent quarters, the cryptocurrency and global financial market have seen a dramatic downturn in prices and market sentiments fueled by macroeconomic factors, such as the Federal Reserve interest rate hikes, the war in Ukraine, a global recession, and market inflation.
Amidst all this, the cryptocurrency market value, which climbed as high as $2.9 trillion in November 2021, has now lost $1 trillion in value since the start of the year. A critical factor in this decline occurred on the 9th of May. As the crypto community and investors watched TerraUSD, an algorithmic stablecoin supported by big shot investors, lose its peg to the dollar and fall to 35 cents, while Luna, its sister token meant to stabilize UST price, also fell from $80USD to an under a few cents. This crash caused a domino effect in the decentralized financial markets and saw Dapps like 3AC, Celsius, and Voyager Digital seize users' funds and declare bankruptcy. A huge sell-off was prompted by whales and investors, leading the cryptocurrency market into yet another bear market where many have lost their entire net worths/life savings and plunged some into mental health crises.
Bear markets are perfect for building
“It’s time to build,”
These were the words of hedge fund and a16z founder Andressen Horowitz. Horowitz wrote an entire article highlighting the many ways the United States and other nations were ill-prepared for the coronavirus pandemic back in 2020. While Andressen's talking points were mostly focused on America’s lack of building or production culture, the underlying call to action rings true for all industries.
- Bear markets offer builders and investors alike a period of ideation, reflection, and execution as it flushes out all those who got in for just the money.
- It’s the perfect time for structurally sound projects to raise funds from VCs/investors who genuinely believe in the mission.
- During this period, the cryptocurrency market experiences less noise, distractions, and less pressure by the market to shill out projects that do not add any long-term or real value to customers.
- They’re also a great time for projects to stress test their project ideas, build sustainable communities, and find users who believe in and contribute to the success of their mission.
Many of the very successful products and projects in the current web3 space like Ethereum Ledger, Chainalysis, Uniswap, and OpenSea were all founded during the last two crypto bear cycles. The same can be said of web2 companies like Amazon, Dell, eBay, and Intel, all of which survived the dot com bubble, a period similar to the current crypto bear market, which saw a steep fall in stock prices and a dwindling federal reserve.
Amid current market conditions, investors are still funding credible crypto projects. Every week, there’s a record of at least one crypto project or another raising thousands and millions of dollars in funding. In June, Binance labs, a venture fund, raised a $500 million investment fund to invest in and boost projects boosting web3 adoption and expanding crypto use cases. In July, H20 Water Securities, a South African-based water infrastructure company, raised $150 million from the GEM Digital investment firm. Variant, another VC fund, raised $450M, to continue its mission of funding projects that enable ownership among users. a16z), the Silicon Valley venture capital firm, announced a $4.5 billion fund for blockchain companies in May 2022. Even more, a report from Messari showed that Cryptocurrency projects across various sectors raised over $30B in funding in the first half of 2022.
This data shows that there is an abundance of builders who are putting their heads down to do the work despite the market downtrend.
While web3 enthusiasts, builders, and investors alike are taking note from previous bear markets: keeping stock of what’s important and what can potentially catalyze crypto adoption in the next couple of years is crucial.
For more information on what projects building in the bear should focus on, check out the following suggestions from The Daily Hodl.