Crypto Winter is Here but Will Not Last Forever: A Survival Guide for the Tech Industry
Beyond the headline numbers, we have witnessed the collapse of what was once one of the largest ecosystems, Terra, which wiped out US$45 billion in market cap in mere days. The largest companies, such as Coinbase and Gemini, were also not spared as layoffs and pulling of job offers hit the newswires.
If that sounds ominous, we are still amid leverage unwind, with companies like Celsius hanging on a thread and probably an unknown number of funds blowing up behind the scenes.
Despite the doom and gloom, it is always darkest before dawn, and bad times do not last. However, are we nearing the light, or will there be an extended period of darkness before we can see the light?
Is the Dreaded Crypto Winter Bad?
Earlier in June, the Winklevoss twins, the founders of Gemini, put out a note describing that “This is where we are now, in the contraction phase that is settling into a period of stasis—what our industry refers to as “crypto winter.”
The crypto cycle happens every four years, which is highly influenced by Bitcoin’s 4-year halving cycle. In the previous cycle, the crypto winter lasted from January 2018 to March 2020. The phase was marked by a sharp decline in prices, with Bitcoin losing -60% in value in four months and finally settling to a low after losing over -80% over a year.
That period was marked by general apathy towards the asset class, which was a depressing period for participants in the industry. However, the period was very much needed.
In late 2017, we saw the proliferation of ICOs and companies changing their names to include the term “blockchain”. Most of these young startups and companies failed to produce what they claimed to do, and there were many scams. It took time, but vapourware projects were eventually flushed out of the system. In place, we saw some of the best projects and protocols lay the building blocks for future success, such as the DeFi pioneer Aave.
However, before getting there, we must first survive the winter.
What is Different this Cycle
Although crypto winters occur every cycle, each cycle is marked by different conditions. The crypto winter for this cycle promises to be challenging due to macro conditions.
Due to a mixture of supply chain disruptions, underinvestment in productive capacity, over-stimulated demand, and the Russia-Ukraine conflict, we have had the highest inflation in the past forty years.
At the same time, with global yields near-zero, central banks have exhausted their primary tool for dealing with a recession, and it increasingly looks like central banks will have to tighten into a recession.
It is not only crypto companies that have been affected. Even major public tech companies such as Facebook, Uber, and Snap have announced job cuts and hiring freezes.
As such, even though there has been a deluge of venture capital funding, we must be prepared for a crypto winter that is harsher and longer than in previous cycles.
Crypto Winter Survival Guide
In business, cash is oxygen. To secure at least two years of runway, you must examine your cost structure and optimize your processes, particularly given today’s inflationary environment. You can first look at reducing research and development costs, marketing expenses, and vanity projects.
After that, painful decisions will have to be made, particularly around staffing and other important trade-offs. However, for companies that have managed to raise substantial sums just before the crash, you have the opportunity to recruit top talent who may have been let go.
Secondly, given that a protracted winter is likely, you must be able to secure financing to survive this period. However, the financing landscape has changed dramatically. Today, there is a difficult conversation around burn rates and margins.
Given the turmoil in the equity markets, especially around high-growth tech, venture capitalists are likely no longer given free rein around valuation discipline by underlying institutional investors, and sustainable growth must be demonstrated.
Finally, as central banks attempt to bring inflation down via demand destruction, you may need to re-examine your product-market fit and either refine or pivot entirely.
The best companies are born from the crucible of fire
The next one to two years will be challenging for both the crypto and broader capital markets (both equity and bonds), as no one knows how high central banks will hike rates to bring inflation under control. Further, we need time to correct the excesses in the financial system while hoping that broader geopolitical tensions do not blow up.
However, tough times provide good companies the best opportunity to become even stronger. At the same time, bad companies are eliminated, and the path is thus cleared for unbridled growth in summer.
Vadym Synegin, Сo-founder and Vice president of IR at WeWay – a Web3 ecosystem