Outlier Founder: Don't Rush to Define the Crypto Winter, the Market Is Far from Being as Bad as in 2018

Written by: Jamie Burke, Outlier Ventures

Compiled by: 0x11, ForesightNews

Last week, from Coinbase CEO Brian Armstrong to CoinDesk reporters, various sectors of the crypto industry reported that we are in a "crypto winter." But what is a crypto winter? How can we objectively measure a crypto winter? Jamie Burke, CEO of Web3 accelerator Outlier Ventures, answers these questions from the perspective of investing throughout the 2018 crypto winter. He provides a framework to help better define and assess the health of the industry as a whole, understand the differences between 2018 and now, and offer insights on what he believes is the direction of the industry's development.

What is a technological winter?

The term "winter" was first used in a public debate in 1984 to refer to the artificial intelligence community in the context of technological cycles, described as "a series of chain reactions that begin with pessimism in the tech community, then spread to the media, funding is severely cut, and serious research disappears."

This definition accurately summarizes everything that happened in the cryptocurrency industry from 2018 to 2020. It wasn't until DeFi Summer awakened the crypto community that capital began to redeploy into the industry. Like artificial intelligence, cryptocurrency, as an information technology, is expected to go through several hype cycles followed by periods of disappointment and criticism, and funding cuts, before regaining attention years later. The situation in the AI industry was worse, as it waited for decades.

Therefore, to objectively measure whether we are in a crypto winter, we need to consider these conditions: pessimism in the community and media, followed by severe funding cuts, and no serious research continuing. While I believe there is clearly a sense of pessimism in parts of the community, especially in the media, we still need to break down these views and try to find objective answers to help us determine whether we are currently experiencing a technological winter.

No ongoing serious research?

First, I believe that unlike the AI winter of 1984, cryptocurrency has undergone over 8 years of commercialization and has moved beyond pure R&D stages. In this case, we can measure the level of R&D funding through the capitalization of major protocols, the number of new Web3 primitives, and the launches of Layer 1 and Layer 2, or through the activity of Github repositories. As part of our R&D trend report, we continuously analyze the development activity of all major Web3 protocols, and these activity metrics show that code submissions continue to exist and, in many cases, have increased.

From another perspective of our accelerator, we see a large number of startups launching to bundle and commercialize blockchain infrastructure. Since the first quarter, we have received over 2,000 applications and have not seen any signs of a slowdown in the number of founders and developers entering the field. Job recruitment in the current early stage of the industry is also thriving, with over 200 job vacancies on our job board. Interestingly, we see that employees leaving large companies like Coinbase after layoffs received dozens of job offers on the same day. Similarly, we also see Web2 executives jumping to new roles from large tech companies at record levels (partly due to layoffs), as the stock plans of large companies are no longer locking in talent as they used to.

Severe funding cuts?

This is the next requirement for classifying an industry as being in winter: significant funding cuts. Here, I believe many people are making a mistake by only looking at part of the story rather than the whole.

It is evident that publicly listed cryptocurrencies have seen a significant decline in market capitalization. As of the writing of this article (June 16), the total market capitalization of cryptocurrencies has fallen from a historical high of over $3 trillion to just below $1 trillion, with 72 of the top 100 tokens down by as much as 90%. Borrowing from the traditional capital market concept of a "bear market," if the entire market, indices like the S&P 500, individual securities, or commodities decline by 20% or more over a sustained period (usually two months or longer), it can be confidently said that we have entered a bear market, but this alone does not indicate that the market is experiencing a winter.

To gain a more comprehensive understanding of overall financing, we cannot only look at publicly listed assets in the secondary market, but we also need to understand the activity in the primary venture capital market. It is here that Outlier, with the support of tools like PitchDeck, can provide deeper insights into the health of the industry.

While funding into early-stage startups from Pre-Seed to Seed to Series A has slowed relative to the first quarter, capital is still actively being allocated to new cryptocurrency funds and deployed. This year, funds explicitly allocated to Web3 investments have raised over $15 billion in total, up from $12 billion in the same period in 2021, with a new fund being launched almost every week.

Combining our token launch platform Ascent with the latest data from exchanges like CoinList, Kucoin, and Huobi, the number of newly listed cryptocurrencies has significantly decreased. Due to a sharp decline in returns, some platforms have completely suspended all token listing activities, while many others have temporarily postponed listings for several months. However, in the context of TGE (Token Generation Events), a long-term trend has emerged since 2017, where they are no longer fundraising activities from the perspective of products and communities, but rather network releases.

While the primary and secondary markets are certainly interconnected, the former requires the latter as a liquidity condition to realize returns for its LPs or to recycle profits back into the market. Although this cycle in the cryptocurrency space is shorter compared to classic equity investments, they still need to be supported by a healthy secondary market composed of retail and more actively managed institutional funds (such as hedge funds). This is where we see the most significant damage, as, in addition to demand exhaustion, cryptocurrency-native hedge funds like Three Arrows Capital are also under immense pressure.

How to create an objective framework?

Based on the above issues, will venture capital in the crypto industry exhaust itself before demand in the secondary market recovers, or will both eventually disappear for years?

An objective standard for measuring a crypto winter is as follows:

• What stage is the secondary market in: requires a continuous 6-month decline, down over 90% from ATH;
• Primary market: VC and private sales also need to show a continuous 6-month decline, down over 90% from ATH.

How likely is this, and what will happen next?

The results from surveying our co-investors indicate that the expected bear market in the primary market will be relatively short (averaging between 6-12 months), with only 20% believing it will last more than 12 months; additionally, it is expected that the valuations of crypto projects will only decline by an average of 25%, with the top 10 projects seeing smaller declines. If this is an accurate assessment, then there is enough patient venture capital allocated to the crypto space, and we will safely enter another bull market.

But the question is, how will the bull market occur? Where will new capital and demand come from?

Typically, crypto bull markets are driven by emerging innovation portfolios that create new forms of native assets and yields. 2017 was about ICOs, 2020 was about DeFi, and 2021 was about NFTs. It is difficult to pinpoint exactly what the next innovation trigger will be, but it is certain that Outlier has a sufficiently large think tank with strong motivation to solve this problem. We speculate that it could either be a native form of social graphs or an increasing number of programmable digital consumables.

That said, all previous crypto cycles occurred in more favorable macro environments, usually with quantitative easing attracting new capital. Many, including myself, believe that the current state of the crypto secondary market is largely driven by a deteriorating macro environment, similar to the malaise in the stock market. However, because cryptocurrencies are permissionless, 24/7, and have shallower liquidity, they exaggerate the impact of macro sentiment. This also has a positive side, as it means that cryptocurrencies are recognized by a broader market, but it also means that there are driving factors outside of industry control, and there is not the same type of macro environment.

However, unlike the periods when hot retail capital flooded into cryptocurrencies while ignoring fundamentals, as they are no longer the primary drivers of price, today's market will be driven by more professional capital trying to find real value. This means that during this relatively calm period, the crypto industry is expected to begin a process of developing fundamentals that will last until the next bull market. This trend is maturing, and combined with an increasing number of industry applications beyond DeFi, it may reduce the future correlation of cryptocurrencies with traditional asset classes, making them more resilient to pure external macro sentiment.

Considering all these factors, while the market is strongly bearish in the short to medium term, I can tell you that this is not a crypto winter; it is more like a summer sale.