May 13, 2022

Crypto Bear Market? What does this mean for the Web3 Ecosystem?

Gm DOers!

Let's start this week discussing the elephant in the room:Crypto is down bad 📉 The charts show nothing but red 🚨 So… Are we doomed? Was Web3 just a fad?Let’s be real, most of our investments are down 60%-80%+ since November 2021 (100% if it’s LUNA😞) But this is about much more than investments. The Web3 Academy community are DOers in this space.

Which means many of us have been impacted in different ways.Maybe you work for a Web3 company?Maybe you’re building a Web3 Company?Maybe you have Web3 clients?Maybe you get paid in crypto?At Web3 Academy we don’t typically talk about prices, but naturally the Web3 ecosystem is impacted systemically from price.So in today’s article we are answering the question: What does a bear market mean for the Web3 ecosystem? … and how do we weather the storm.

You can watch the episode below, or listen on your favorite platform: Spotify | Apple Podcast | YouTube

What does a bear market mean for the Web3 ecosystem? (… and how do we weather the storm)

First of all we need to understand that what is happening right now in markets is NOT just a crypto problem.It is a global monetary problem that is occurring across ALL markets (equities, crypto, gold, etc.). Big name stocks like Netflix are down more than 75% in the same timeframe 😱

Others like Peloton, Robinhood and Opendoor are down even more (80%+). It’s a mess out there!So let’s take a second to recognize that crypto is not tanking because of a problem in crypto (…while writing this UST – Terra’s Algorithmic Stablecoin – lost its peg to the dollar and Luna and its ecosystem imploded. This was big and has some contagion effect across the broader ecosystem, but overall not the reason we are where we’ve been the last 6 months).In fact, crypto and Web3’s fundamentals are better than ever. This space is growing in terms of adoption faster than the internet itself did at this point.Crypto is tanking because of the macro environment, which I am going to outline briefly below. I will outline this because it can help us to understand how long this might take and then dive into what this means for us in Web3.

FYI: I am not a financial expert so please do not take this as financial advice. I am however lucky enough to be working with some of the top financial experts in macro/crypto. This gives me an inside look into what the pros are saying and allows me to share this info with you. DISCLAIMER: Crypto is risky, you could lose it all. Ask Do Kwon if you don’t believe me (…too soon?)

Why Are ALL Markets Tanking?

I will break this down in extremely simplified terms for you to understand. There are some serious complexities here so let’s just keep it simple. Markets are tanking for the following reasons:

  1. Inflation is at highs we haven't seen in 40+ years.What this means is people have less dispensable money to put into investments AND to purchase goods in the real economy (ie. people are cancelling their Netflix accounts because they need to pay double in gas).Inflation is high because we printed trillions of dollars in the last 2 years AND because of supply chain issues with COVID and the war in Ukraine/Russia

  2. Interest Rates are rising.To fight inflation the FED needs to make it more expensive to borrow money. By raising rates it discourages borrowing and encourages saving, thus slowing down the economy and decreasing inflation.

  3. The US Dollar is rising. They call this the dollar wrecking ball. When dollars go up, assets go down. Simple as that.Why are dollars going up? Because people are selling assets due to inflation and interest rates rising.When people, companies and nations sell their assets they flee into the world's strongest currency… the United States Dollar. When the dollar goes up it impacts everyone and everything in the world.

So what happens next?

This is the million dollar question. No one really knows and there is A LOT of debate here.I highly recommend you watch for Raoul Pals Macro Masterclass for deep and timely understanding.There are many scenarios that may play out here, but the scenario that has happened for the last few decades, multiple times over, is the following (…this is also what Raoul explains in the video above):

  • The Fed (The Federal Reserve. You know… that one central organisation which decides if we will all be rich or poor every year 🤦) begins raising rates to fight inflation and the markets tanks (happening now)

  • Consumers spend less and companies start laying off staff (happening now)

  • Growth slows and the economy starts to sink into a recession (happening now in Europe, USA not far behind)

  • The Fed then decides they can't keep raising rates and reverses course.

  • The Fed also then decides they need to stimulate the economy to get out of recession and get things moving again. Aka The money printer goes "BRRRR"

  • USD begins to fall and assets go up.

  • Rinse and repeat 🔁

Long story short, The Fed won't (can’t) let the financial system implode. It would literally blow up everything.So the idea is they have no choice but to stop raising rates and stimulate everytime things crash.To say they are stuck between a rock and hard place is to say it very lightly. Essentially they need to decide between letting the global economy implode or inflate the world's reserve currency and make our hard earned $$ and savings worth less.They will choose to save the global economy from imploding every time… Hopefully?!

So how long does this take to play out?

Again, million dollar question and we don't know.But with each one of these cycles it seems to happen faster and more aggressively. Those I have spoken to say that higher inflation from the war/covid + raising rates has sped this process up like crazy.The expectation is that by summer the Fed will stop increasing rates and soon thereafter begin stimulating the economy (…this is not consensus by the way, the markets are actually pricing the other scenario 🚨)That said, I’m on team Fed saves the day. So excuse me for 1 second as I quickly google when the first day of summer is…Ah, June 21st! One more month! One more month!I’m kidding, it’s of course not that black and white. But here’s the situation:If these insights are correct, then we have until the end of June/July (…let’s leave some wiggle room) until markets might begin to heal.It’s also very possible that this continues for much longer and things get worse, at this point nobody knows (…except the FED)Not to mention, with the collapse of Terra Luna last week and its contagion effects still unfolding, it’s anyone’s guess as to when we see the crypto markets begin to trend higher.(I’m more on the optimistic side though… Don’t fade the ETH merge coming in the next couple months 👀)

So what does this mean for the Web3 ecosystem?

Like any industry, when we fall into a recession and consumers have less money to spend, business is impacted.In the traditional world, most businesses deal in USD (…or any fiat currency). Their treasury (aka savings) is in USD, they pay their employees in USD, their capital investment is in USD and their products are sold in USD.

However in Web3 things work a bit differently. Our ecosystem deals in tokens (aka assets).

The difference here is that when markets tank like they are now, we don’t just have a problem with less consumer spending…

It means our treasury may have just tanked by 60-80+% versus the USD too.

It means employees' salaries may have just taken a hit.

It means our capital investment might be a lot less than it once was.

Whether you're involved in a Web3 native company like a Dapp, a DAO, an NFT project or providing a service for any of these… price action makes a big difference!

The other issue is that Web3 companies need continued adoption of new users entering the space to sustain and grow. When prices go up, we have no issue bringing in new users.

However, when prices go down, not only do we have a limited number of new users, we also have existing users who lose interest and leave. Unfortunately, because the industry is so new and experimental it still heavily relies on speculators as users.

In summary, at the moment the Web3 ecosystem relies HEAVILY on the markets. Which means that currently a lot of projects, workers and founders are hurting. Many will not make it until the next bull cycle… even if that’s just a few months away.

How do we weather the storm and make it?

In difficult times we need to go back to the basics. We need to forget about going to the moon, the potential and the speculation and remember that at the core of this whole thing, we are still just building businesses (albeit in very different ways with very different tools).

Just like any business, you need to provide value. You need to solve a specific problem. You need to improve people’s lives.If your business does not do this, then I’m sorry but it likely won’t make it through tough times. It’s as simple as that.The problem with bull markets is that any product/business can succeed. It’s all hype and FOMO.But when the dust settles and the party stops, the projects that will make it out the other side are the ones which focus on:

  • Building for long-term sustainability, rather than hype and incentives

  • Create real value/utility and solve real problems for users

  • Focus on creating a strong community

So at this moment, whether you’re a founder, builder, worker or investor, you should ask yourself if the projects you’re involved in fit the criteria above.If the answer is no, then now is the time to make moves. Find a new community, get involved in a new project, find new clients or alter your investments.If the answer is yes, then now is the time to dig even deeper, to work harder or to double down on what you’re doing.Just remember, quality always wins in the long run.

It seems that the people of Crypto and Web3 need this reminder frequently.

So… Are WAGMI?

No, unfortunately we are not ALL going to make it.Sure, this goes against one of the popular Web3 memes. But let’s be real here…We’re reinventing the internet and creating permissionless, open and transparent markets. Where business and human interaction is free from government intervention or centralised control.I’m sorry but in a free market there are always winners and losers. That’s the entire point. So absolutely not, we are ALL not going to make it.The sooner this industry understands that fact and realises that in order to “make it”, we need to create real long-term value that solves problems for people, the sooner we can go back to delivering the true promise of Web3.A fair and equal internet for the world!

Final thoughts

Web3 is a once in a lifetime opportunity. It’s exciting, there is no doubt about it (…I’m obsessed too). But it’s also very consuming for many.The nature of this industry is very addicting because everything is an asset and has a real time valuation.This can really impact our thoughts and mental health.Recognize that there is a lot more to life than money and technology. In times like this it’s very helpful to unplug and focus on things outside of $.If you’re struggling, my best advice is to journal.Write down your thoughts, how you feel, etc. I recommend this because next time the markets tank by 50%+ (Yes, it will happen again) you can revisit your past thoughts and learn from them.Some of the top investors and entrepreneurs in the world recommend this practice.Stay strong friends, we will get through this and come out the other side stronger!

Kyle ReidheadFounder of Web3 Academy & Impact Digital MarketingTwitter

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