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Digital Nugget: Crypto bear markets – a curse or a blessing?



The bear market pullbacks in a technological innovation cycle sow the seeds of extraordinary performance for the upcycle that follows.


Most traditional asset classes operate within the constraints of economic growth and interest rate cycles. An asset class that represents an emerging transformational technology follows a long-term trajectory that unlocks exceptional upside as the technology’s potential is realised.


The path for crypto assets has been, and remains, volatile. It is impacted by severe pullbacks as the technology hits roadblocks or as experimental business models need to be sent back to the drawing board. But every bear market low has been higher than the previous one, and every bull cycle high has been higher than the prior all-time high.


The chart below traces Bitcoin’s performance through downturns and bull markets since its earliest days.


Bitcoin bull and bear markets (logarithmic scale)


Sources: CoinMarketCap, StatMuse


Crypto bear market pullbacks

Crypto bear markets have been periods of intense innovation. The pressure of difficult market conditions pushed existing projects and their backers to focus on finding solutions and to operate with greater financial discipline. The softer job market allowed projects to employ high quality developers. As a result, the bar for new project funding was set much higher, filtering out the weaker propositions.


Many landmark projects in crypto were born during bear markets – with Bitcoin itself born out of the 2008 financial crisis, Litecoin during the 2011 93 percent crypto market downturn and Ethereum during the 2013-2015 crypto bear market. Many of today’s leading DeFi, Web3 and gaming projects were founded during the 2017-2018 bear market.


Bear market innovation sows the seeds of the next bull cycle

The bull markets that followed bear markets often delivered tens of thousands of percent performance. Even the most recent bull market that ended in November 2021 delivered a 2,056 percent return for Bitcoin and 2,213 percent return on the S&P Crypto Broad Market Index.


The crypto industry still has a long road ahead to fine-tune the technology, develop a broader range of use cases, and sharpen the decentralised business models; and each innovation cycle lays the groundwork for extraordinary performance to follow when sentiment turns.


The severe downturns that historically wiped out most of the market capitalisation not only get rid of the weaker projects and failed business models, but it also reduces valuations for strong projects. This lays the foundation for the next bull market to deliver all-time highs.


How much innovation upside lies ahead?


The crypto market is very far from being a mature asset class yet, and it still has a long way to go before its real-world uses proliferate and take substantial market share.


At this point, there are still technology challenges to resolve, experimentation with tokenomics models continues (especially in the application sectors), governance and business models are still immature and various ideas and models remain in a trial stage (such as algorithmic stablecoins or play-to-earn models).


In addition, the number of use cases is still relatively small. Even relatively more mature use cases, such as decentralised finance (DeFi) or blockchain-based gaming, continue to be limited in scope. For example, DeFi mostly constitutes overcollateralised lending and decentralised exchanges, while many traditional finance activities do not yet have a mature counterpart in the DeFi space. We also see emerging activity in decentralised social media currently, based on strong demand for alternatives to centralised social media giants and innovation related to privacy and scalability, such as the so-called “zero-knowledge” technology.


The blockchain and crypto innovation cycle has much further to go. Based on the typical pattern of emerging technologies and significant venture activity in the crypto and blockchain space, we expect that crypto bear markets could continue to provide extraordinary buying opportunities that will reward patient money.


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