2021 was a hallmark year for crypto. NFT projects were booming, gaming applications were on the rise, DeFi transaction volumes were spiking and crypto prices were soaring to all-time highs. Fueling the bubble were venture capital firms pouring obscene amounts of money into the industry. By the end of 2021, VC funding in blockchain technology had topped $14.8 billion, up 600% from the previous year.
With all this investment money flowing in from VCs, institutions and retailers, it seemed like crypto could only go up from here. Instead, the exact opposite happened.
Why is the crypto market down?
In just under a year, the global crypto marketcap had fallen over 70% in value, with billions of dollars wiped from the market. Bullish headlines of crypto turning people from rags into riches were suddenly replaced with frightening stories of investors losing their life-savings to hacks, scams and widespread market collapse. So how and why did this soaring industry suddenly go from boom to bust?
There are a number of macro and micro events that triggered the catalytic decline of the industry. For one, the whole global economy is currently experiencing a downturn market that feels eerily similar to the 2008 great recession. The repurcussions of the pandemic and waning foreign affairs tension resulted in abnormal interest rate hikes, rising inflation and growing unemployment rates. As the gloomy economic outlook pressures consumers, investors are suddenly exiting into safer or liquid assets like cash or gold, causing a widespread decline in riskier markets like crypto, stocks, bonds and real estate.
In addition to these macroeconomic challenges, 2022 was a year plagued with crypto hacks, ponzi schemes and bankruptcies. A number of black swan events triggered a cascade of systematic failures that resulted in platforms and token networks collapsing like dominoes one after the other. The sudden crash of the Terra/LUNA network ended up tanking the already unstable prices of crypto and wiped out an estimated $300 billion across the entire market. This forced major crypto leaders like 3AC, Voyager and Celsius Network to file for bankruptcy, causing a widespread mayhem of distressed investors to lose their life-savings.
Just as the market was showing signs of a possible road to recovery, crypto was setback again with the devastating collapse of major crypto exchange, FTX. The scandals revealed on how customer assets were mishandled spooked investors even more and broke the already fragile trust.
If you look at these specific events and the price action, it’s true, it looks like this could be the end for crypto. Trust has been broken, investors are frightened and the amount of customer funds lost is irrevocable. However, if you were to look at crypto beyond just a speculative asset, you’ll find that it’s far from dead. In fact, there is more need for it than ever.
Crypto beyond the speculation
Speculation will always be a primary driving force for any financial asset market. Especially for such a new and innovative industry like crypto, the exciting, speculative potential for mass disruption leads to the volatility of high hopes and disappoint. But purely looking at price action and celebrity endorsement can distract from the real applications being built.
Beyond its hype cycles, it’s important to understand that crypto is actually a product of a new decentralized economy that is backed by the underlying technology known as the blockchain. In this world, an immutable system of records is shared between a network of computers, rather than one central controller. Crypto is just one, and the most popular application of blockchain technology to decentralize the financial industry. However, virtually any industry can leverage the blockchain to build decentralized apps. Here are some use case examples by industry:
- Media and entertainment: Original ownership of any media content (photos, videos, audio, etc.) can be tracked on the blockchain to prevent piracy, fraud and theft.
- Retail: Inventory data and supply chain management can run on the blockchain to reduce risks of counterfeit and improve operational efficiency.
- Real estate: Home ownership can be fractionalized and expanded across markets to democratize access to investment opportunities.
To build these applications on a public blockchain, crypto is required to function and reward network participants. So, in other words, crypto enables the participation in a new internet economy where applications are decentralized, gatekeepers are redundant and every individual is an owner.
From this perspective, we should be excited about the endless possibilities of real-world applications built on the blockchain. But will all these platforms follow the same fate and collapse like these crypto lenders and exchanges?
The role of centralized companies in crypto
It’s important to note that most, if not all of the crypto companies that collapsed this past year are centralized companies and not truly built on the blockchain. FTX, Gemini, Blockfi, Celsius Network are just like any other traditional company operated and controlled by a central entity. Many of these collapses were ultimately a result of human-manufactured negligence and greed.
Decentralized platforms with no central authority or control would not face the same vulnerabilities. The recent crash of FTX and exposed companies was simply another reminder of just how much we need to build towards true decentralization.
But don’t be mistaken, this doesn’t mean that traditionally centralized companies shouldn’t participate and build crypto use cases. In fact, they play a critical role in driving mass adoption and onboarding new users into the decentralized web. The difference is that traditional brands are leveraging crypto for use cases beyond speculative trading and price action.
Despite the headlines circulating that “crypto is dead”, plenty of major traditional brands are continuing to build and launch crypto-related initiatives:
- Nike announced the launch of .Swoosh, a new NFT marketplace for virtual wear set to launch in early 2023.
- Adidas released their first-ever virtual gear collection to support the metaverse.
- Reddit launched its second collection of digital avatars that saw 2.8 million unique user purchases.
- Starbucks announced plans for their new project, Starbucks Odyssey that incorporates crypto into their popular loyalty members program.
For these large consumer brands, crypto is a tool for customer engagement. It’s a way to bring customers into the decentralized web and create aligned incentives that benefit both the business and the customer.
Where does crypto go from here?
As the year-end closes in, a cloud of uncertainty is looming over the industry. Many investors lost their life savings and will likely not see it again. Others have left out of fear. Where does the industry go from here?
Luckily, there is a path forward. As the industry rids of these faulty centralized companies, this gives us space to focus on what’s important:
- Decentralization: It’s time to return back to the root of blockchain technology and connect back to why crypto was created in the first place. The purpose was to decentralize authority so not one entity could hold all the power. 2023 will see the industry double-down on building truly decentralized applications.
- Onboarding people through traditional platforms: We expect more major brands to continue to integrate crypto experiences into their business. This is the most effective way to introduce the next wave of people to the space in a safe and non-intimidating way.
- On-chain transparency: Projects and token networks with little to no value will no longer be accepted. The standard for all platforms will be higher and endorsements made by celebrities, influencers and VC firms will no longer hold the same value. Only platforms that offer real utility and on-chain transparency should be considered.
With all this said and done, crypto has made it through these tough times before and will likely make it through again. No great, disruptive technology has ever emerged without great risk and failure. It’s time to double-down and move the focus from speculation to application.