• Team Sygnum

Digital Nugget: A repeat of the 2018-19 Crypto Winter?

Despite parallels drawn based on the price action, the fundamentals of today’s crypto market are nothing like they were in during the previous Crypto Winter.

Below we highlight the key differences and dispel narratives that claim that the crypto market was a price bubble that burst and that the sell-off is proof that the decentralised economy does not work.

1. Quality of projects

Then: During the ICO boom, most investment came from retail investors who indiscriminately financed crypto projects, the vast majority of which had little to no validity and tokenomics models that rendered the tokens fundamentally worthless. Early-stage projects received funding vastly in excess of what they needed to get to proof of concept.

Now: The small percent of projects launched during the ICO boom that survived the Crypto Winter were the legitimate, cream-of-the-crop projects, battle-hardened by the difficult environment where both funding and user adoption were hard to come by. The projects that prevailed have done so through innovation, improvements and greater financial discipline and professionalism. As the open chequebooks for “anything crypto” were burnt, projects launched since have been subjected to far greater scrutiny and investor due diligence.

The “Ponzi” claims are based on some decentralised finance (DeFi) and centralised finance (CeFi) projects that attracted liquidity by complementing the lending rates earned with incentives funded by the projects’ treasuries, or some play-to-earn gaming projects with no economically useful activity that the earn is based on. These models, however, are intended as temporary incentive structures to grow the adoption to critical mass.

The lesson: Incentive schemes to get to mass adoption can be a valid and legitimate business practice; however, there needs to be a roadmap for transitioning to a sustainable business model. Projects that chase extraordinary growth through incentives (e.g. Terra, Axie Infinity) and are slow to plan for operating without them or to demonstrate value to users beyond the incentives are inherently fragile.

2. Reason for the sell-off

Then: The ICO boom was a bubble driven by bottomless retail demand. The fundamentals of value creation were still highly speculative and unproven, and the projects launched on top of blockchain platforms to cash in on the hype mostly lacked merit. The idea of tokens launched by applications and in some cases by for-profit corporations that had no link to the economics of the project – other than being the “currency used inside the ecosystem” – was fallacious as there was no incentive to hold these tokens, other than speculation. The vast majority of these tokens consequently lost most or all their value.

Now: The narrative taking hold last November, which suggested an inflationary, recessionary or rising rates environment, where growth assets with little or no sensitivity to interest rates should be sold, was irrational but ultimately self fulfilling. The sustained price falls triggered forced liquidations of leveraged positions and collateralised loans, resulting in more liquidations through falling collateral values. This eventually forced some projects with weak risk management into default. It also caused further dominoes to fall, as it started to deter users and halted and reversed user growth in some sectors, such as blockchain-based gaming or DeFi.

The lesson: When the market is irrational in either direction, there are always narratives offered up to justify it. When the narrative contradicts the fundamentals, the latter are expected to prevail over the medium term. However, sentiment-driven sustained market action can sometimes impact fundamentals.

3. Valuations

Then: It was nearly impossible to value crypto assets at the time. In part, because valuation methodologies had not yet been developed for this new type of asset. It was also extremely hard to make reasonable forecasts for future user growth and revenues when the technology was still in an early-stage (with issues such as scalability, transaction speed and transaction costs still unsolved and seemingly intractable). As a result, any platform revenue forecast had extremely high uncertainty around it, rendering valuations highly speculative.

Although the ambition for Bitcoin to challenge fiat currencies and gold has been there from the start, the market and the technology had to evolve and mature before this could be the basis for assigning a high value to crypto assets.

Now: Innovation resolving the critical technological bottlenecks has allowed much higher adoption expectations to become realistic. The fast user growth that followed also reduced the uncertainty around forecasts (in effect reducing the required discount rate for valuations). The emerging use cases saw real adoption in contrast to the nonsensical “token not required” use cases of the ICO boom era. As it became easier to value crypto assets, it also became clear that the asset class was undervalued even at its all-time high. This stood in stark contrast to the grossly overvalued state of most major asset classes.

The lesson: We can value cryptocurrencies in part as platforms where the transaction costs earned by the protocol count as earnings. When a platform uses transaction fees to buy back tokens, which are then burnt, the link to token value is straightforward, as it is for proof-of-stake protocols, (which the majority of platforms are today and what Ethereum is in the process of transitioning to) because validators need to invest in the token to earn the transaction fees. Using the example of valuing Ethereum as a smart contract platform, Ethereum’s running rate of annual network revenues of around USD 10 billion implies a price-to-earnings (P/E) ratio of 12 currently, if we assign zero value to Ethereum as a currency or store of value. The value of Ethereum as a currency and store of value is harder to estimate, but it is not zero, i.e. the network revenue-based P/E ratio is less than 12. This compares to the S&P500 P/E ratio of 18.59, the NASDAQ ratio of 21.45 (on 17 June 2021), or typical P/E ratios of high-growth stocks that can be 30 to 50, or more.

Valuing cryptocurrencies as alternatives to fiat currencies or gold requires estimating the market share that they are expected to take. This is harder to quantify, but the current less-than 1 percent of global GDP appears low as major fiat currencies are experiencing high inflation; and at the same time, payment providers and merchants are increasingly accepting cryptocurrencies. Taking some of gold’s 13 percent of global GDP can add to this as there are many advantages to a blockchain-based store of value such as divisibility, authenticity, portability and storability.

4. Centralised versus decentralised business models

Then: Although cryptocurrencies may have been designed to be decentralised, most of the projects that launched during the ICO boom were highly centralised, with many tokens issued by for-profit entities.

Now: The rise of decentralised governance for the application sectors has created a much more decentralised crypto industry, and the value of decentralised platforms has been demonstrated during the recent crisis. Decentralised exchanges and decentralised lenders continued operating, business as usual, and centralised entities, such as Celsius or Three Arrows Capital, encountered problems.

Of course, many centralised entities are managed to an extremely high standard. The point we are making is that the lack of transparency can allow problems to develop that the market will be unaware of and will have no input into correcting either.

The lesson: Transparency is very powerful and truly decentralised platforms are proving to be on balance more stable, resilient and antifragile.


In summary, there are many factors that suggest this recent market downturn was triggered by distinctly different factors than those responsible for bursting the speculative bubble of the ICO boom and leading to the Crypto Winter of 2018-2019. While the sustained nine-month sell-off has dampened the user growth fundamentals for some sectors, and this may persist until confidence returns and improvements are made, it has left user growth intact for other sectors.

Past setbacks have triggered cycles of innovation and enhancements that each time improved the fundamentals of the asset class. We expect the same during the current downturn, and we believe that the long-term growth outlook for the asset class is unchanged while valuations are extremely compelling, both on a standalone basis and in comparison to the major asset classes.

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