01 Jul Why Bear Markets
Are For Building
Bear markets can be hugely stressful, but they can also be viewed as great opportunities to build industries and ecosystems, particularly the NFT market.
While it’s true that creators and promoters dread long and cold bear markets like the grim reaper, bear markets aren’t as terrible as they seem. This unpredictable period can present decent opportunities to build the NFT ecosystem and many “dip-buying” opportunities.
With skyrocketing inflation, a hawkish Federal Reserve in the US, a war in Europe, and a crypto market in freefall, the global economy is crumbling under the weight of many macroeconomic and geopolitical concerns. But, this also signals a new age of supercharged technical innovation that will likely occur within the next two years.
While the sentiment in the blockchain world is bleak right now, the market adjustment may ultimately be the best thing for the NFT industry, allowing legitimate projects with long-term ambitions to BUIDL to prosper.
What defines a “bear market”?
Basically, a bear market occurs when the values of the most valuable assets in a sector or several sectors continue to decrease over an extended period. Bear markets occur in traditional and cryptocurrency markets when the market falls by at least 20% from recent highs.
A bear market can be identified by the fall in the S&P 500, Nasdaq Composite, or Bitcoin price for cryptocurrencies. Due to the overall strong price correlation, small-cap and mid-cap assets suffer negative price losses as the price of the top assets falls.
As suggested by NFT Evening, NFTs are not entirely tied to the financial cycles of the stock market or the economy. While this may be true, NFTs are also facing a decline. NFT Evening noted a 40% drop in NFT sales in February, down from $4.4 billion in January. According to reports from Yahoo, experts attribute the drop not just to the broader market slump but also to the increased incidence of NFT scams and cyber threats in 2022.
Do bear markets last for long and how severe are they?
Since WWII, bear markets have (on average) taken 13 months to move from peak to trough and 27 months to return to break-even status. During bear markets in that time, the S&P 500 index declined by 33% on average. The S&P 500 fell 57% during the 2007-2009 bear market, which was the most significant slump since 1945.
From what we’ve seen historically, the faster an index enters a bear market, the shallower it tends to be.
In the past, it has taken stocks 251 days (8.3 months) to enter a bear market. The longest bear market lasted 61 months, terminated in March 1942, and reduced the index by 60%.
Why the bear market may be beneficial for creators and promoters
Bear markets may be scary for newcomers and seasoned market players alike—nobody likes seeing the value of their portfolios decline. Conversely, bear markets might present opportunities to back the market long term when assets are trading at a discount.
Typically, newbies enter the market due to social excitement or FOMO. Bear markets are good entry points for newcomers, as most projects trade at a discount.
Building in a bearish market
One essential consideration for NFT projects and creators during a market lull is community building, both internally and externally. The bear market allows for more focus on the community than on price. People may rally around a project because they like it rather than flipping something for a quick buck, which is ultimately what NFT projects and creators want.
Those wanting to get rich quickly have mostly left, while those who remain genuinely care about the causes they support and have a far more positive and uplifting impact on the community.
Fostering an NFT community is vital for keeping steady pricing in any market and developing community culture. The litmus test for a successful Web3 strategy is whether or not it supports the existing community, and creators should focus on establishing and expanding their community within the present market cycle.
The Difference Between Building An NFT Collection During Bull And Bear Markets
Michael Burry, famed for inspiring the film The Big Short and making his hedge fund clients around $700 million by anticipating the 2008 subprime mortgage crisis, has stated that the current speculative bubble is the largest in history.
This may be bad news if you are a passive collector in the market, but fantastic news in the NFT startup industry.
Even while a bear market makes access to finance considerably more difficult, cash is not the most crucial aspect in determining a startup’s success. According to a survey of 200 businesses, access to capital accounts for just 14% of the difference between success and failure, whereas market timing accounted for 42%.
“Put simply, the best time to start a business is on the heels of a recession.”
Scott Galloway (Professor, author, speaker, entrepreneur)
There are two reasons for this:
1. A recession creates more market space.
Companies that barely make a buck during a bull market frequently collapse during a bear market. While this, of course, is devastating for these companies and their stockholders, it may benefit the economy in the long run.
Think of it this way: The business failures induced by the recession are just like a beneficial forest fire: it consumes old, dry wood, disperses nutrients in the soil, and exposes the forest canopy to sunlight, which encourages new growth.
The failure of older enterprises creates room for new (more efficient) inventive businesses and new market segments. Also, the growth in unemployment due to the losses (and massive layoffs) enhances the temporary availability of affordable, high-quality employees. Both of these conditions are essential for developing startups that have innovative ideas and a promising future market for their products but are short on capital.
2. Recession Demands Innovation and Change
While a bull market is a fantastic signal that collectors and collections should continue doing what they are doing without risking much innovation, a bear market is a great indicator that the status quo isn’t working and things need some changing up.
Due to this, adaptability becomes the defining characteristic essential for success in such a market. Although large businesses may be exceedingly rigid due to the conflicting interests of their stakeholders and their large mass and inertia, startups are inventive, agile, and flexible.
Airbnb and Uber are excellent examples of successful startups that emerged during a bear market. Initially, many people felt it was bizarre for individuals to rent rooms in strangers’ homes or ride in strangers’ cars. However, the fact that everyone needed additional income during the crisis eliminated the stigma and helped both businesses recruit early consumers.
The innovative nature and flexibility of startups make them ideally equipped for economic crises.
How The Bear Market May Accelerate Web2 To Web3 Migration
Web 3.0 is growing in popularity and has become the new buzzword for the crypto movement. A16z, an influential crypto VC firm, defines Web2 as social platforms (like Facebook, Twitter, and WeChat) where users can only “read and write,” whereas Web3 is the blockchain-enabled internet where users can “read, write, and own” their digital assets and a portion of the network infrastructure.
Since the beginning of 2022, crypto’s bear market has wiped away about a trillion dollars’ worth of market cap. So, the question remains, will the bear market affect the transition from Web2 to Web3?
The recent fall in the value of multiple crypto assets has once again exposed the vulnerabilities of token-driven financialization while also highlighting the necessity for Web3 applications to find use cases and solve problems in the real-world economy, which is the backbone of Web2 enterprise success.
Web3 enthusiasts were convinced that Web2 applications would be replaced as the crypto market experienced a bull run between 2020 and 2021. As the market went bearish, however, they began to recognize that the benefits of Web2 applications such as PayPal, YouTube, and Tiktok being widely used are still relevant today.
Despite the skepticism of Web2 businesses regarding Web3, no other narrative is as brilliant as Web3, a decentralized internet that unites the interests of builders and users. The license-free and globalized nature of Web3 make it a rare space devoid of geopolitical intervention, especially for domestic businesses.
Web2 entrepreneurs have an excellent opportunity to play a significant role in the subsequent wave of Web3 innovation.
The migration from Web2 to Web3 also creates a significant opportunity for crypto-native teams. Web2 businesses and investors require partners to master blockchain infrastructure, tokenomics, and the dynamic communities that operate under a DAO (decentralized autonomous organization).
Andreessen Horowitz makes a case for Web3 and its sectors’ exponential expansion, including decentralized finance (DeFi), DAOs, non-fungible tokens (NFTs), blockchain gaming, and the metaverse in “State of Crypto 2022,” predicting better days for Web3. The report’s prediction for the sector over the next decade is exceptionally bullish.
In addition, the report asserts that crypto is still in its infancy in response to opponents who claim that crypto has not yet provided the public with significant services.
The research compares the current progress of Web3 to the state of the internet in 1995. Many individuals did not “get” the internet possibilities at that time.
Another consideration is that almost all markets are declining, not just crypto. According to the WSJ (17/06/2022), the S&P 500 has fallen about 23%, while the Nasdaq plunged 32%, leaving some tech firms down 80%.
Compared to the 1970s, when all asset classes took a knock, the broader economy is seeing declining growth and soaring prices. Bonds have also suffered as interest rates have risen to combat inflation.
As we consider the future of Web3 firms and Web3, it is essential to remember that tech stocks have been falling for months. The recession is not a direct indictment against Web3.
Crashing markets create anxiety and negativity. Yet, some Web3 companies will produce their finest work during this lull because they can concentrate on what’s most important. And that entails developing greater technology without distractions.
During bear markets, companies can establish themselves as market leaders because they are forced to place a greater emphasis on sound fundamentals than during periods of abundant investment capital.
Essentially, Web3 enterprises that survive and develop during these difficult times will emerge ahead of the competition after the dust settles.
Parallels to the Dot-Com Crash
This phase of Web3 enterprises may resemble the period immediately after the dot-com bubble burst. Any online transaction was suspicious. During the dot-com collapse of 2000, thousands of technology companies perished. This was the first generation of web-based businesses, and many failed.
Twenty years later, some of the world’s largest corporations emerged from that time’s ashes. Many of these titans did not begin operations until the crash period.
In addition, several concepts that failed during the boom were reworked and achieved great success years later. The internet is currently the global economic and social platform.
Existence after the crypto crash
Any financial collapse is inevitably followed by irrational pessimism. Similarly, irrational optimism is prevalent at market peaks. This period is no different in crypto. Depression looms for individuals who overextended themselves and bought late after the hype pushed prices to record peaks.
Those seeking a fast buck ended up purchasing high and selling cheap, and they will be the first to criticize Web3 upon their unpleasant exit.
However, for those who recognize Web3’s promise and are in it for the long haul, price fluctuations are a regular occurrence before widespread acceptance.
Remember that only five years ago, in May of 2017, the price of Bitcoin was around $1,800. Even with the current market meltdown, it is worth approximately twelve times as much. In contrast, Bitcoin’s use case is frequently likened to gold. This classic inflation hedge has declined by more than 3% in the same period.
As the tide of liquidity recedes, bad ideas and scams will be the first to be washed out of Web3. And, unfortunately, some ahead-of-their-time concepts will also become obsolete. Even so, a new team will energize them as capital returns throughout the subsequent growth period.
Those optimistic about Web3 infrastructure expect it to continue to evolve with more enhancements, resulting in a robust long-term prognosis for Web3 enterprises and Web3 jobs.
The Future is Bright For Those Who Keep Building
In the face of what could become a catastrophic global recession, now is the moment for long-term-minded builders to participate in the growth of the crypto economy.
This approach was vindicated during the last bear market cycle for those who dared to invest in NFT infrastructure during a period when fear trumped greed in the digital asset market. Investors with the courage and patience to stick it out will likely be rewarded when this bear market ends, as all bear markets eventually do.