Is crypto dead?

With prices lagging, auctions stalling, and Bitcoin below $20,000, many are speculating that crypto is dead. But, we think the opposite: Crypto is alive and thriving.

Andrew MilichSeptember 30, 2022
Skull picture with red x's over eyes.

With prices lagging, auctions stalling, and Bitcoin below $20,000, many are speculating that crypto is dead. But, we think the opposite: Crypto is alive and thriving.

In the last year, crypto has fallen precipitously, prompting market analysts to predict a prolonged “crypto winter” and possible further declines. Bitcoin’s 60%+ drop appears healthy when compared to the steep decline in other currencies (90%+), complete project collapses (Luna), and unfortunate hacks or scams that have plagued certain projects.

The most prominent reason is the loss of faith in these asset classes by nervous investors. This loss of faith is due to a number of factors, including the lack of regulation, the volatile nature of these assets, and growing but generally weak mainstream adoption.

Another major reason for the crash is overall market conditions. With minuscule interest rates ˜and spending high in 2021, crypto prices soared as individual and institutional capital alike sought returns via crypto investments. Speculation was rife as investors “mooned” dubiously credible assets, such as Dogecoin and OHM (Olympus), before their inevitable crash.

However, the global economy is currently facing a number of challenges, including the ongoing pandemic and the resulting economic recession. This has led to a decrease in demand for risky assets, such as cryptocurrencies and NFTs. Beyond the crypto market, the stock market has experienced significant falls to the point of plunging into a bear market recently. Finally, there has been a recent increase in supply of these assets. This is due to a number of factors, including the launch of new ICOs and the increase in mining activity. After original NFT projects - Punks and Apes in particular - soared in value, thousands of projects spawned, some with large communities and utility - and others promoting scams, malware, or other “rug” maneuvers to steal funds from participants. This increase in supply has outpaced the demand, leading to a decrease in prices.

Crypto’s explosive growth

Crypto became popular because it gave people the ability to trade digital assets without the need for a bank or other financial institution. The value of crypto assets is determined by supply and demand, rather than by a central authority. This makes crypto a decentralized asset class, which many people find appealing, due to additional censorship resistance and distributed authority.

The first crypto asset, Bitcoin, was created in 2009. Since then, thousands of other crypto assets have been created. The total market cap of all crypto assets is now approximately $1 trillion (with a peak at almost three trillion USD). Bitcoin is the most well-known crypto asset, but it is not the only one. There are now thousands of different crypto assets, including Ethereum, Litecoin, and Monero. Each of these assets has a different purpose and use case. Crypto assets are often bought and sold on exchanges, such as Coinbase, Gemini, or Binance. These exchanges allow people to buy and sell crypto assets using fiat currencies (like US dollars) or other crypto assets.

The popularity of crypto assets has grown exponentially in recent years. This is due to a number of factors, including the following:

1. The rise of Bitcoin: Bitcoin (BTC) is the first and most well-known crypto asset. Its popularity precipitated the rise of other crypto assets for a number of reasons, including increasing faith in the crypto market and a growing talent pool of developers (such as Vitalik Buterin, who contributed to Bitcoin before founding Ethereum).

2. The increasing use of blockchain technology: Blockchain is the fundamental technology layer that powers crypto assets. The blockchain can be considered an immutable, distributed database that is secure and transparent. For financial institutions and transactions, this distributed ledger of all participants adds an immense amount of trust and verifiability with decentralized control.

3. The increasing awareness of crypto assets: As more people learn about crypto assets, their popularity will continue to grow.

4. The increasing acceptance of crypto assets: More and more businesses are accepting crypto assets as payment. This is a trend that is likely to continue, particularly as crypto assets are accessible on mobile devices and operating systems.

5. The increasing regulation of crypto assets: Governments around the world are starting to regulate crypto assets. This is a positive development that will help to legitimize the industry.

In 2021, a number of factors led to an unprecedented rise in crypto prices, activity, and speculation. This includes the federal reserve maintaining many of the lowest interest rates in history as well as aggressive government spending during COVID that led to trillions of dollars injected by governments into economies. Many governments, including the US government, wrote checks to give citizens hundreds of dollars of funds for discretionary spending.

As crypto prices soared, and the country stayed at home, new crypto innovations powered waves of growth and innovation. This includes the vast rise of the metaverse, from games and digital real estate to virtual reality and art exhibits.

How crypto has fallen

Crypto action today is significantly below 2021 peaks. Across all crypto markets, from Bitcoin and Ethereum prices, to NFT sales and DeFi trading volume, activity has plunged. As an illustrative example, OpenSea on-chain trading activity has declined across all networks - Ethereum, Solana, and Polygon - between 75% and 90%. In this section, we walk through three principal reasons for crypto’s decline.

Macroeconomic downturn: It is no secret that the current global economic state is tenuous, and nations are either facing an economic downturn or rising interest rates. Signs of a downturn are evident in a variety of ways, such as a slightly increasing unemployment rate, the decrease in housing prices, and stagnation in consumer spending. Beyond unemployment rates, housing prices, global supply chain issues, and war, one of the main factors contributing to this economic downturn is the rising interest rates.

As interest rates rise, it becomes more expensive for consumers to borrow money. This, in turn, leads to a decrease in consumer spending, as people are less likely to take out loans for big-ticket items when they know they will have to pay more in interest. Additionally, rising interest rates make it more difficult for businesses to expand or even maintain their current level of operation, as they must pay more in interest on their loans. This can lead to layoffs and further decreases in consumer spending. Finally, this also impacts stock prices, as business growth rates may lag with less capital to devote towards growth.

This change significantly impacts crypto prices as consumers have less money to spend on investments or purchases (such as crypto assets, tokens, or NFTs), and businesses recalculate their interest in investing in cryptocurrencies, or in owning crypto on their balance sheet. With less money to borrow and spend on new investments, crypto startups and new projects also struggle as the whole market slumps. This is a key driver of a prolonged crypto winter.

Scams: Scams, hacks, phishing, and other security problems are perhaps the most damaging and infamous drivers of crypto skepticism. Notable hacks include Axie Infinity suffering a $620 million dollar loss to hackers, Luna’s collapse (hurting the entire Terra ecosystem), and the Poly Network losing $610 million to hackers. Unfortunately, thousands of hacks have also triggered consumer mistrust, from fake charity tokens to NFT projects with pseudonymous creators who suddenly disappear.

Speculation: Speculation on digital currencies and assets dominated the 2021 market rise. NFT prices skyrocketed, and DeFi protocols processed trillions of dollars in trade volume as newcomers flooded crypto markets. Celebrities participated actively in this promotion, with hundreds promoting NFT projects with varying levels of utility. Others promoted speculation on social platforms, perhaps none more notable than Elon Musk’s offhand Dogecoin promotion that triggered 1000%+ price spikes in only days. Today, as consumers have less money to spend and prices flatline, far fewer celebrities are participating in this movement, further suggesting that we’ve moved into a crypto winter.

Other uses for wallets, tokens, and NFTs

Innovation and adoption accompanied this rise in speculation and scams. As many “crypto native” individuals suggest, a crypto winter is the best time to build high utility products that survive volatility in market prices and deliver true value to consumers. These projects replace critical workflows or apps on the internet with crypto-native protocols or features, thereby adding new levels of privacy, decentralization, or censorship resistance to existing products used on the web.

Status, a messaging app that integrates with Ethereum. Status includes chat functions, a crypto-native web browser for using decentralized apps (dapps), and a wallet for owning digital currencies and assets.

IPFS, the InterPlanetary File System, for distributed, censorship-resistant file storage. IPFS is a storage layer powering a new generation of sites and webapps, from file storage to online encyclopedias.

ENS, the Ethereum Naming Service, maintains a product used in thousands of crypto-native apps as well as a decentralized autonomous organization (ENS DAO) that manages the protocol. ENS names add human readable names to Ethereum address, converting a long hexadecimal string (0xBC...19) into a simple name (skiff.eth).

Skiff, privacy-first, end-to-end encrypted mail, collaboration, and file storage built with wallet login and decentralized storage. Skiff has been adopted by hundreds of thousands of individuals and allows for 10 GB of free storage for all signups.

What’s next for crypto

The future for many individual crypto projects is shrouded in uncertainty as asset prices fluctuate and decentralized organizations struggle to retain talent and interest from their users. However, crypto maintains a market cap of one trillion USD, and hundreds of millions of people and devices now have access to crypto browsers, wallets, and assets.

During this crypto winter, new projects will add greater utility to these wallets, networks, storage providers, and tokens. During the next crypto summer, these innovations will power a new wave of growth, making crypto more consumer-friendly, useful, and capable of delivering on its true founding promises of data ownership, privacy, and decentralization.

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