Bear Market Champions
crossposted to InfinitySwap under the title “Building in a Bear Market”.
Let’s be frank, things don’t look great on a macro scale right now. The entire crypto market has been in a relentless downward trend since last November, the so-dubbed “crypto contagion” stemming from the collapse of Terra (UST — an algorithmic stablecoin) has spread to crypto lender Celsius and hedge fund Three Arrows Capital, triggering a domino effect that has yet to be fully realized, and insolvency rumors plague virtually every centralized exchange and lending/yield protocol left standing.
The economic forecast doesn’t look great outside of crypto either. When considering the war in Ukraine, global inflation, and COVID-related manufacturing issues still affecting the world supply chain, there seems to be very little positive sentiment about the crypto market making a speedy recovery back to the all time highs we saw last year.
Still, there are many reasons to be hopeful about the future of cryptocurrency and digital assets. It’s important to keep in mind that with every cycle, Bitcoin has established higher highs, and the scene has greatly evolved since the ICO boom in 2017. Real businesses and economic value have been established where there was once only speculation about what blockchain tech could do for the world.
While an extended bear market (or, as some refer to these periods, “crypto winter”) can be devastating to personal portfolios, a popular phrase within the crypto community is “bear markets are for building”; and indeed these cooldown periods are viewed by veteran investors as necessary. Well known entrepreneur and crypto investor Kevin O’Leary remarked in an interview last month that the drawdown “is very very healthy <…> this is actually a maturation process for the crypto market”.
Bear markets force builders to create meaningful products, and simultaneously force investment money to become smarter, strengthening and giving credibility to a nascent, developing sector.
Out of the REKTage
An extended bear market can be a time of tremendous opportunity for the individual investor. It may not feel like it when you check the current charts, but without the frenzy of “Up Only” euphoria, many grifters looking to make a quick buck remove themselves from the playing field. In other words, it’s easier during these periods to hunt for projects with strong fundamentals, with the potential to become superstars in the next bull run. Two such examples from the last crypto winter are Uniswap and OpenSea, both projects that built through painful economic conditions to become ubiquitous names in their respective categories.
Please note, nothing in this article is financial advice. All entities and assets mentioned in this piece are done so under historical, analytical, and speculative context — nothing is being recommended as an investment.
OpenSea’s Tidal Wave
NFTs were nothing more than a niche novelty in the previous cycle. CryptoKitties and Cryptopunks, both launched in 2017, were more experiments in code than expressions of art. Cryptopunks were originally created and released to explore the dynamics of scarcity and demand. However, they have come to gain so much historical prestige in the art world that famed auction house Christie’s brokered the sale of a 9 Cryptopunks lot in 2021, for a staggering sum of $16,962,500.
CryptoKitties, which was released four months after Cryptopunks, were the first NFTs to introduce the “breeding” concept, which allowed holders to generate a CryptoKitty with unique code “genetics”. Although CryptoKitties breeding mania reached a fever pitch by December 2017 to account for 20% of all Ethereum computations, they quickly became the butt of bear market jokes in 2018. They were seen as the peak example of bull market folly, and NFTs in general were dismissed by the majority of crypto survivors as nothing more than a punchline.
However, there were small pockets of people who believed that NFTs would have a future. Alex Atallah and Devin Finzer, two software engineers, saw a potential paradigm shift in what ownership could be when they discovered CryptoKitties. The duo stayed true to their conviction and raised $8 million dollars for OpenSea, quietly building their marketplace from their beta launch in December 2017 and persevering through bear conditions.
While NFTs are now wholeheartedly embraced by the larger crypto community, they were concepts far from being obvious investment vehicles during the last crypto winter. It took incredible vision and conviction for Atallah and Finzer to continue building but their hard work paid off exponentially. Now, Opensea is the largest NFT marketplace in the world, accounting for the majority of all NFT sales and hit over $5 billion of monthly transaction volume in January 2022 alone.
Uniswap’s DeFiant Rise
The AMM (Automatic Market Maker) model is one of the most innovative inventions to emerge from DeFi, having no TradFi equivalent. It’s hard to imagine the landscape of DeFi without AMMs, and it’s no wonder that AMM pioneer Uniswap has remained king of the DEXs though many have come for the throne. Uniswap is still the gold standard, an exemplar demonstration of simple, sleek functionality.
The path to dominance wasn’t always clear, however. Uniswap was created by 25 year old Hayden Adams after reading a Reddit post made by Ethereum founder Vitalik Buterin about a conceptual new method to solve the liquidity problem on cryptocurrency exchanges. At the time, Adams had been fired from his engineering job at Siemens and living with his parents, with no clear idea of what he wanted to do in life. Prior to 2017 he had no experience with writing smart contract code, nor any in-depth understanding of the financial markets and how the mechanics of economy really worked.
Adams was surviving on crypto gains he had made during the 2017 boom but was rapidly running out of funds by early 2018 when he was working on Uniswap in earnest, after learning how to code and reaching out to friends working in crypto. He decided to take a wild chance and booked a flight to South Korea that April for Deconomy, a crypto conference he didn’t even have tickets for. There, a happy twist of fate led to an introduction with Vitalik Buterin, who reviewed the Uniswap code from Adam’s phone.
From $65k to $1 Trillion
During that brief but fateful meeting, Buterin suggested that Adams apply for an Ethereum Foundation grant. A few months later Uniswap was awarded $65,000 and the DEX was launched in November 2018. The crypto markets at the time looked very bad, having chopped down for the majority of the year, but it would get even more bleak after Uniswap’s official debut. It was arguably one of the worst times to launch a cryptocurrency exchange.
Adams never gave up and continued to improve Uniswap, disregarding the terrible market action. From that humble $65k grant, he was able to grow Uniswap over the years to eventually surpass $1 trillion dollars in trading volume this May.
A key factor that can’t be discounted in his success story is his conviction. He believed in Ethereum and the future of cryptocurrency for more reasons than his personal financial well-being, and that sustained him.
I began thinking about Uniswap not just as a learning tool for myself — but one for others. I could not imagine a world where it competed with “real” projects. You know — the ones that raised between $20,000,000 and $150,000,000 in Summer 2017. But maybe it could serve as an example of an application that truly embodied Ethereum.
-Hayden Adams, A Short History of Uniswap
A Common Thread of Conviction
As the saying goes, hindsight is 20/20. The success of both OpenSea and Uniswap seems inevitable because we have the luxury of historical perspective to analyze what they did right. We can apply this knowledge to determine what current projects are likely to be successful when the market begins to reverse.
OpenSea and Uniswap had many things in common that contributed to their eventual dominance. They were founded by crypto natives who were first immersed in the culture, with a point of view that extended beyond their contemporary market conditions. In other words, the founders truly understood the space.
Furthermore, these founders understood the importance of robust funding. Although many crypto “degens” are skeptical of VC involvement, it should go without saying that it’s crucial for businesses to have sufficient operating runway. It costs money to build, and especially in times of market turbulence, it’s important that a project has enough funding to keep the lights on until conditions improve and it can become self-sustaining.
OpenSea’s initial $8 million funding was enough to carry its development through the last crypto winter, and although Uniswap began with a small $65k grant, Hayden Adams secured close to $2 million in early 2019 in a seed round from Paradigm that undoubtedly made a big difference, as the funds were acquired within the few critical months after Uniswap’s unfortunately timed November 2018 launch.
Most importantly, the founders operated with conviction. OpenSea was created because Atallah and Finzer saw potential in the future of digital asset ownership, and Adams grasped the necessity in figuring out a better liquidity solution for the entire crypto field.
This combination of clear understanding of a market sector, sufficient funding, and unshakeable vision is a formidable trifecta. What projects can you uncover with the same traits during this crypto winter?