Bear Market Pessimism

The bear market emerged again, bringing most crypto asset prices down by at least 60%-70% from their all time high. During bear market times, it's natural to feel pessimistic; and this bear market has been particularly disheartening since it followed a period where crypto adoption reached new heights. As the market continued to decline through the end of 2022, negative sentiment grew stronger as people were continuously bombarded with negative news. A few weeks into 2023, bad news continued to pour in to the point it became the norm.

Retail and institutional adoption of cryptocurrency had just experienced unprecedented growth, but it came at a cost. Many newcomers to the market were rekt by the bear, and they might not ever be able to recover their principal investment. Those who managed to survive are focused on recovering their losses or using their reserves to weather the storm. Additionally, experienced traders were also significantly affected; as shocking events such as the collapses of Luna and Terra, along with FTX, caused significant losses and forced many seemingly reputable entities, such as Three Arrows Capital, Voyager, Blockfi, Celsius Network, Genesis Lending and others, into bankruptcy.

The highly volatile market conditions have also been challenging for many new builders in the crypto space. Many GameFi builders, for example, are currently struggling to innovate and find a sustainable direction as P2E models are proving to be unsustainable. On the other hand, DeFi builders are facing difficulties growing their user base and generating yield on their platforms. Additionally, many recent projects have been delaying their final product launches due to bad market conditions, which in turn concerns their communities and further contribute to the overall pessimism.

Given the recent string of negative events, bear market conditions, collapses of both new and old projects, bankruptcies, and many investors getting rekt; it's not surprising that regulators are questioning the legitimacy and fundamentals of the cryptocurrency market. Scrutiny of the crypto world increases when negativity dominates the news, which is currently the case. Regulators may not be supportive of the crypto market during these times, and it might feel hard to remain hopeful and bullish.

Silver Lining

Despite the current market conditions, there are reasons to be optimistic about the future of the crypto industry. When we hit rock bottom, the only direction to go is up. In bear markets, it can be easy to become fearful, but bear markets are also an opportunity for builders to focus on improving their fundamentals and for long term investors to accumulate financially. If you take the time to research and identify quality projects with strong use cases and long-term potential, you can find the hidden gems, i.e. the undervalued ones that actually have good fundamentals.

It is important to remember that a bear market is a test of a project's strength and value. Projects with weak use cases, inactivity, and short-term vision are often the first to disappear; while those that survive and continue to build, market, and plan for the future are the ones to pay attention to. These projects demonstrate the resilience of the crypto industry and inspire others to continue to strive for innovation and success in the space. For example, Projects like Lido, RocketPool, Arbitrum, Optimism, Starkware, Uniswap, KyberSwap and several Layer 2 solutions are the ones to keep an eye on; as they are actively building and providing value to the ecosystem. These projects, with long-term goals in mind, are likely to weather bear markets and provide merit to an investment. Not all crypto projects focus primarily on token price; but instead on the quality and value they bring to the ecosystem in terms of technology, use cases, and overall impact.

Institutional investors are also likely to remain committed to the crypto space in the long term. They will, however, become more cautious and selective in their investments, focusing on projects with strong fundamentals and conducting thorough risk assessment before making any investments. Despite recent market fluctuations, they will likely continue to see the potential for growth and value in the crypto space beyond just token price.

The cryptocurrency industry is not immune to setbacks, such as market downturns or the collapse of major entities that we have witnessed in 2022. However, many of these issues involved centralized, custodial platforms; highlighting the risks and challenges associated with centralized finance. In contrast, major decentralized finance applications still work as designed and operate as normal. This further solidifies the importance and benefits of DeFi in the crypto industry, as it offers a safer and more secure alternative.

Untapped Growth

Despite rumors, negative news, and bear markets; I remain confident in the resilience and future growth of the crypto industry. Every year, there are notable advancements and progress in the field, which can be seen through research and analysis.

In 2017, the cryptocurrency industry began to gain significant attention and traction worldwide but for the wrong reasons; i.e. lots of people were onboarded into the ICO craze, hoping to get in on the next 10X-50X crypto tokens. Though many of the projects failed and a lot of people lost money; a number of high quality projects were launched by the end of the year, opening the door for more innovative ideas and developments.

In the years following, those projects have continued to grow and become the leading projects in DeFi (such as Aave, Uniswap, and Kyber) and GameFi (such as Axie Infinity, Gods Unchained, and Dapper Labs). Although the quality of projects may vary, the increasing abundance of new projects and ideas showcases the ongoing persistence and growth of the cryptocurrency industry. In every sector, from DEXs and lending protocols, to non-custodial wallets with better UI/UX, and to L2s with better scalability; there are multiple projects competing to offer a better product, competitive rates, and an easier experience for users.

The market capitalization of cryptocurrencies has seen significant growth over the years, and was significantly amplified in 2021 when it surpassed $3 trillion dollars. Thanks to new developments of new use cases (DeFi summer, play to earn games, NFT booms,…), better infrastructures and new supporting tools; we could attract a huge amount of new developers and investors, both retail and institutional. While the overall value of crypto may fluctuate, it is clear that the crypto industry is on a positive trajectory and continues to move forward.

Next Goal: 1 Billion Users

There are several crypto startup unicorns out there, but the significant and rapid increase in DeFi adoption from 2021-2022 tested our industry’s current limits on scalability; and none of these projects have been able to onboard and serve a billion users. The long term goal for the whole space is to make blockchain technology and crypto assets part of users’ daily lives. That is when people can stop questioning the legitimacy of the whole industry.

One of the main obstacles that has prevented many people from getting involved in the crypto industry is the complexity and confusion surrounding the various platforms and resources available in the web3 space. Understanding blockchain technology and crypto can be challenging, especially for new users. Factors such as lack of knowledge, high fees, and unfamiliar terminology can all contribute to this complexity.

In recent years, there has been a growing effort to make crypto more accessible and user-friendly. With more intuitive information available and wallets like Zerion, Krystal, and Trust offering simpler ways for users to enter the crypto space, the barriers to entry are gradually being lowered. As a result, more and more people are discovering the potential and value of crypto.

Low scalability and high transaction fees have long been a major concern for users in the crypto industry, deterring both new and experienced users from making transactions, and preventing large scale adoption. With recent developments in Layer 2 (such as zkrollups and optimistic rollups) and new blockchain designs (such as Avalanche, Solana, and Aptos); the question is no longer how many transaction a public blockchain can process, but what could be an interesting app to build.

Trust But Verify

Trust plays a significant role in our daily lives, whether we realize it or not. We trust that the school bus will safely transport our children to school, that the food we eat at restaurants will not harm us, and that our friends and family will keep our personal information safe. Without trust, we would live in constant fear and uncertainty. The crypto industry, particularly Bitcoin, has long championed the motto "don't trust, verify." While this has been a powerful and compelling narrative, it has become increasingly difficult to scale and has developed certain limitations. The internet industry has grown exponentially by relying on a web of trust, not a web of verification. Expecting every retailer to thoroughly verify every aspect of crypto they interact with is unrealistic.

To achieve mass adoption, crypto must recognize the importance of trust and security in society and how human nature operates. The world values trust and security above all else. People should be able to trust crypto and crypto providers while also having the ability to easily verify these trusted assumptions. Trust can take many forms, from business licenses from governments and other accredited sources that provide authenticity, to public data of company metrics ensuring transparency, to proper audit certifications that provide quality and security of any given platform. Verifying these various aspects provides a level of integrity and trust between the company and users, which is essential for widespread adoption.

What We Plan to Invest & Build

I personally feel excited about a few of the following topics, and am looking for builders who are interested in any of these topics or are already building out some good ideas on these tracks. We are happy to either invest or build together with you at Kyber Ventures.

• DeFi. I think there are still a lot of DeFi primitives that we can work on. A DEX with an efficient decentralized orderbook is still missing from the space, and private trading hasn’t even been explored. Non-secure loans are probably the holy grail of DeFi, but it looks like it will not happen soon given all the recent incidents with centralized lending platforms. Staking and liquid staking platforms (such as Lido and Rocket Pool) are on the rise, but they mostly serve ETH staking at the moment since other assets have relatively much smaller markets.
• zk-evm and zk-enabled applications: Recently, there has been a lot of focus (both in terms of finance and talent) on zk technology. Interestingly, most are still using zk-tech for scalability and general purpose layer 2s (zkevm). We will start seeing more privacy platforms and application-specific zk-enabled platforms moving forward. For example, a decentralised identity system with Soul Bound Tokens will use zk proofs to update, certify & verify users’ information.
• Decentralized social networks and communication platforms. This area is still in a very early stage, and also hard to penetrate and bootstrap. However, the world is moving from a couple of huge social networks in which 1-2 big tech companies control the entire world view and communication into multiple sovereign niche communities. Digital property rights ownership is also getting traction; in which content creators, or internet users in general, will demand their ultimate ownership over the content or assets that they create.

• Data and analytics platforms for blockchains. It is getting more crowded, but there is still room for new players, especially when more and more data is pushed onto blockchains thanks to all the scalability tech.
• Wallets and onboarding tools. Crypto needs to reach 1B users in the next wave, and we need a better way to onboard them than the existing status quo. We crypto native users are too familiar with platforms and tools like Metamask and Ledger; but these are a huge challenge and learning curve for non-tech savvy and non-crypto users. Tools like Web3Auth are a good start, but we need a lot more other user journey simplification.

The Show Goes On

In conclusion, I am confident that the crypto market offers more reasons for optimism than pessimism. Despite its volatility and risks, crypto continues to grow and demonstrate its potential to positively impact the world. I continue to witness many quality projects emerge, showing that there are dedicated teams working diligently to contribute valuable solutions and innovations to the ecosystem.

Crypto has already made a significant impact on society through technology and innovation, and it is undeniable that it still has huge potential for growth. The world of crypto is constantly evolving, and there is much to look forward to in 2023.

Thanks to Sasha Mai for proof reading the earlier version of this post!