Crypto winter is here. After the spectacular fall of LUNA, cryptocurrency markets fell more than 50%. Bitcoin went from $42,000 to less than $20,000 in three short months. Washington Post analyst Jared Dillian thinks this winter will be long, cold, and harsh. Previous crypto winters definitely left a lot of projects buried and forgotten. An exhaustive list of over 1,700 defunct tokens can be found on deadcoins.com. New coins are added there every month, and since this downfall started, more than 120 coins have already joined the list. Soon, there will certainly be more.
However, we’ve already had two crypto winters — after the hype bubbles of 2013 and 2017. And now that the value of cryptocurrency and the proliferation of our ecosystem are both bigger than ever, this winter will also likely pass.
A lot of people would say this is the worst period of time to invest in crypto or build a new crypto startup. However, in the previous two downturns there were startups and investors that succeeded. There were those that grew their business or made off with big bucks, despite difficult market conditions — and we can learn from their stories.
This crypto winter began after the failure of LUNA. And the previous big freeze came after the failure of the ICO bubble.
In 2019, the crypto community came to a consensus that the Initial Coin Offering (ICO) boom that occurred over the previous two years turned out to be a huge investment bubble. As of August 2019, only 10.8% of ICOs were profitable for investors, while the median USD ICO yield was -87% and continued to fall. In other words, nine out of ten ICOs brought their investors nothing but disappointment and losses.
However, there are a number of projects that managed to build a successful business despite the drop in the value of their token.
One of them is Chainlink. Its functionality is similar to Polkadot: it aims to bridge the gap between smart contracts and real-world applications. The primary aim of Polkadot is to allow the exchange of any data between any types of blockchains. The vision of Chainlink is similar, but on a smaller scale: to act as a decentralized network connecting blockchains (primarily Ethereum and other Ether-based tokens) to information sources that are off-chain.
Chainlink has proven to be one of the best performers among ICOs launched in 2017. After collecting $32 million from investors, the initial price of LINK tokens climbed from $0.11 to $2.10 in less than three years, representing an all-time Return on Investment (ROI) of 1,809%.
Unlike most projects that were a part of the ICO boom, this company has fully completed the development of their product. The platform’s transaction volume is constantly increasing, and the support for advanced smart contracts on any blockchain provided by Chainlink has found demand among some major players. Chainlink has attracted some big names into its ecosystem in recent months. Deutsche Telekom’s T-Systems, Swisscom, and the Associated Press are now using the Chainlink blockchain. Accordingly, the price of its token managed to continue growing even four years after its initial ICO.
“When the ICO bubble burst, the value of the assets we issued as part of the ICO fell several times, which hit the token holders hard,” says Sergey Nazarov, founder of the platform. “A paradoxical situation is emerging: the project is growing at an enormous pace, while investors are suffering losses.”
But this situation is just that: paradoxical. Therefore, it cannot last very long. And after a few months, everything inevitably calms down and returns to its normal state. Today, Chainlink has a market cap of over $3 billion. The initial investors who stayed with the project saw huge returns of over 6700%. Everyone who invested $1,000 now has $68,000. All of this growth occurred despite the most terrible crypto winter of late 2017 to early 2019, during which the price of Bitcoin collapsed six times, from $19,497 to $3,252.
One of the main reasons for the success of Chainlink, when hundreds of seemingly more solid projects fell to the ground, is that it supported cross-blockchain interoperability. Chainlink offered a way to connect blockchain platforms in order to enable the exchange of messages, tokens, and specific operations. They were not dependent on any one project or one token, and it became more difficult to knock them down if any vulnerabilities were found in single technologies or in the market.
Because Chainlink allows blockchains to exchange data with off-chain systems in a way that is decentralized and tamper resistant, the Chainlink oracle network has many use cases. When some of the projects went bankrupt due to the crypto winter, the platform could easily switch to other markets and resources. Chainlink has been used to distribute non-fungible tokens (NFTs), gamify personal savings, and facilitate recalibrations of cryptocurrency token supplies, among other applications.
In 2021, the network reached more than $75 billion in value as it grew to include over 1,000 projects. It is very hard to bring down a platform that is so inherently prone to diversification.
This is a three-for-one. These three utility tokens were released around the same time, survived the worst, and are still going strong.
Along with Siacoin and Storj, Filecoin was seeking to compete with cloud storage services like Dropbox and Google Drive. Only this time, they would offer a fully decentralized solution. Storage would be provided by people, and other people (or companies) would pay for it, without even knowing who they are paying. No single person or organization could censor or deny access to data — not miners, not developers, nor any government.
Storage transactions were secured with smart contracts, potentially creating a more reliable and affordable offering when compared to traditional cloud providers. Tokens served as both an incentive for people to contribute storage capacity to the network — anyone who provides capacity gets tokens as a reward — as well as a means of payment for the service.
All three of these projects were released shortly before the spectacular fall of late 2017, and just barely survived the crypto winter. Siacoin is especially ancient by crypto standards, being released in 2016. Despite this, it managed to peak in the dead of 2018’s winter at almost $3 billion in market cap and nearly repeated this success in 2021.
Sia didn’t even conduct an ICO. It went the way of Bitcoin, not wanting to attract any extra attention from people only looking for the hype. In fact, its first coins were completely free. Filecoin, however, raised $257 million via an ICO in September 2017, which enabled it to build a larger community early on.
Filecoin became the most successful of these three projects with a market cap of over $1.6 billion (compared to $280 million for Siacoin and $230 million for Storj). At its peak, it was worth well over $10 billion, granting its investors almost 20x returns. However, it seems that, for these data storage solutions, unstable token prices are par for the course.
Today, the Filecoin network alone surpasses a combined storage capacity of 14+ exbibytes (more than 16 million terabytes) with the help of 3,600 storage providers from around the globe. In 2021, it welcomed over 400 new applications built by their community of 7,000 Filecoin developers.
What is interesting about these three projects is that they remained almost dormant throughout 2017-2020. They didn’t go bust, nor did they stop providing their services. In fact, all of them were making a decent profit. However, their token’s price, seemingly decoupled from Bitcoin, didn’t increase even when the market began to revive and crypto spring had begun. Their price remained about the same as in the first days after their coins’ launches, with the exception of Sia, whose price started from zero in the absence of a Token Generation Event (TGE).
It was only when people finally believed that cryptoassets were back in vogue and began to look around that they saw these old projects and realized that they were a safe investment. And just a few months after Bitcoin broke new peaks, the prices of Filecoin, Siacoin, and Storj tokens also went up.
However, they went up at a much higher rate! When Bitcoin grew six times, from $10,000 to $60,000, the price of Filecoin increased eight times during the same period. Storj grew 10 times, and Siacoin grew 17 times.
All in all, these are still not the most successful crypto projects. They do not bring unimaginable profits to their investors. These are not 100x or 1000x returns, but they have their own proven market. It’s safe to say that they will survive this crypto winter and the next one as well, occasionally — during periods of high demand — reaching new peaks.
Utility tokens are in demand as long as the underlying services are used by consumers.
Specifically, these projects provide services that will always be in demand, like data storage. The amount of data in the world is growing every year, exponentially so — and they need to be stored somewhere.
Of course, not every service is suitable for the crypto market. For example, there were many startups that tried to combine crypto and healthcare — to save medical records, sequence DNA, or operate on hospital data. There were Patientory, Iryo, Doc.AI, Nebula Genomics, Health Care Chain, and many others, all released in 2016-2017. Today, they are all dead. All of their tokens went bust immediately after release.
How can all healthcare crypto startups die, and all data storage startups survive? We can talk about how this sector is not ready yet or how the healthcare industry demands safety and risk mitigation, which is pretty much the opposite of what crypto can provide right now, but the real reason is the user base. Decentralized data storage can be adopted from the bottom up. It doesn’t need big institutions (hospitals and governments) to embrace it. It can start to generate value on its own. Every crypto project that relies on its audience and does not depend on the opinions and interests of large organizations will inevitably have an easier time achieving wide-scale adoption.
There is a stable market for Filecoin, Siacoin, and Storj. They benefit their core user group. They do not promise incredible heights, they only want to disrupt current cloud storage approaches, which are too centralized. The developers couldn’t care less about the hype factor of their coins. Instead, they have a clear vision of how their technology will develop over the next few years.
These are infrastructure projects, and there will always be a market for them. Even 10 or 15 years from now, millions of people will likely be storing their data using Filecoin, Sia, or another similar product.
This project launched in early 2019, when the grip of winter was still strong. At the time, investors were quite squeamish with their funds. If projects in 2017 collected tens or hundreds of millions of dollars, Polygon’s launch managed to collect only $5.6 million. This was barely enough to continue operating. Fortunately, creators of Polygon (back then it was called Matic Network) were from India, where development and marketing costs were not as high.
Polygon is a scaling solution that runs on top of the Ethereum blockchain (the so-called “layer 2”). It aims to provide distinct Ethereum-compatible blockchains that can easily exchange value and information. It’s the answer to some of the challenges faced by Ethereum today — such as heavy fees, a poor user experience, and low transactions per second.
The idea for Matic Network was born during the famous “CryptoKitties” period, one of the first NFTs to become popular among enthusiasts. CryptoKitties took off in late 2017 and early 2018, and it managed to flood the entire Ethereum blockchain due to the very high number of transactions causing numerous disruptions and heightened gas fees. Matic was intended to solve these problems. The goals were to ensure low transaction costs, high speed, and general usability of the dApps on Ethereum.
Polygon (Matic) network was one of the first and most successful cases of an IEO (instead of earlier ICOs). Money was collected by users from Binance. Similar NEAR and Solana protocols, released a year later, had a heavy presence of venture capital and were able to do a lot of institution-led marketing. Polygon started before all this, in the olden way, collecting funds bit by bit from individual users. And only after the first success, made by the hands of casual investors, everyone else joined the party — from Coinbase to Mark Cuban.
Today, Polygon enables the building of scalable, cheap, and user-friendly dApps. The Web3 applications built on this chain offer low fees, high scalability, and high security. More than 19 thousand dApps have been built on Polygon thus far, mostly for NFTs and DeFi, including such projects as:
Last year, in December, Polygon’s market capitalization managed to reach $20.41 billion, briefly making it a top-10 crypto project worldwide. Early adopters grew their initial investments by 820 times: the price of MATIC token rose from an initial $0.0035 to an all-time high of $2.8768. Those that participated in the IEO made one and a half times more (1104.89x). A hundred dollars invested in Polygon turned into more than $110 thousand just two years later.
Even now, the team is determined to go even higher. Its founders have ambitious plans to make it the third-largest crypto project, following Bitcoin and Ethereum. To achieve this, in February they raised $450 million from Sequoia Capital India, SoftBank, and Tiger Global.
Polygon was answering a real need that existed: to reduce the high gas fees of the Ethereum ecosystem.The team was very frugal and used its funds exceptionally well. Jaynti Kanani, co-founder of Polygon, in an interview with TechCrunch recalls, “Unlike Silicon Valley projects, we had to do a bottom-up grind, full Indian style. I think that’s also more sustainable in the long-term”.
However, the project didn’t really reach its stride until 2021, when it blew up and made billions.
The reason is simple: Polygon is extremely good when the markets are up. Amid increased congestion on the Ethereum network and its rising costs, Polygon’s astonishingly low fees instantly gained new traction. With an increased demand for scalability networks, Polygon can onboard more dApps and easily incorporate them. Scalable layer-2 projects like these are very important as networks like Ethereum and Bitcoin continue to grow.
However, when winter arrives, this is not beneficial. When gas fees are dropping and new projects are not being added on, scalability solutions are not as important. Polygon is in a unique position to fully benefit from Ethereum’s growing number of users, projects, and transactions — but it isn’t needed when there is no growth.
And here we have another success factor worth considering in crypto winter: having your own ecosystem, one that does not have many connections to external stimuli. This could be a problem, as it is a bit more difficult for such projects to get funding from the open market. But sometimes it can also be a good thing, as it’s easier for them to stabilize when the whole market collapses.
The opposite is true for Polygon: when Ethereum falls, Polygon takes an even bigger hit. It truly is scaling for whatever happens to the Ethereum network. That is why with the fall of LUNA, despite having no clear connection to it, MATIC token dropped almost 50% — because Ethereum went down 25% and there were fears of the market starting to shrink.
It’s far from over for Polygon. It’s still huge, it’s used to working on a budget, and this winter will almost surely not knock it down. However, the lesson here is a valuable one to remember: the more a project depends on others, the easier it is for it to fall when everyone else is having a hard time. And vice versa: the more a project relies on its own independent ecosystem (Polkadot, for example), the easier it is for it not to succumb to the influence of the general trend, be it a positive or a negative one.
In short, these projects are real. They offer a product that works and don’t rely on huge promises to sell their tokens. They spend most of their money on building their team and underlying tech, so they always have a stable foundation to fall back on when times are tough.
This is the beauty of a bear market. Now is the perfect time to see which projects are the real deal and are here to stay. In the bull market, everybody grows. Certain coins’ growth trajectory might have nothing to do with the value of a particular product. In the downswing, on the other hand, only the strongest startups with an effective and balanced financial strategy survive.
“Crypto winter is a time when manipulation stops, projects created for quick profit disappear, and you can see which products are actually long-term”, said Ethereum founder Vitalik Buterin in an interview with Bloomberg.
John Wu, president of Ava Labs, a team that supports the development of the Avalanche public blockchain, had a similar statement:
“The biggest successes in the [crypto] space were built when the markets were down, and I’ve never believed more in the long-term thesis being correct”.
So now is the very best time to analyze your potential investments and to discover those products which are truly built to last.
We cannot tell you exactly which projects will be on top next summer, but they will most certainly have these three vital success factors:
The good news is that there are a lot of projects combining all three of these success factors today. The crypto market is strong. Previous crypto winters have killed thousands of projects with nothing but hype and funny token names propping them up, and as time went on there were less and less such projects around. This time we have a chance to get through the winter with much fewere tangible losses.
If you want to find a project that will become successful after the end of winter, or you want to create such a project yourself, you can think about whether its token has the mechanisms of reducing circulation supply in an organic way. This can be especially important during winter.
In some cases, the reduction in a token’s supply could be achieved by staking. It is a relatively safe strategy. Staking is essentially locking your cryptocurrencies on the blockchain for an amount of time to generate passive income. Unlike a savings account at a traditional bank, staking can help users maximize their money and make a profit, sometimes as much as 10% YOY.
Staking can be done through exchanges such as Binance, Kraken, or Coinbase, or even through a software or hardware wallet. Decentralized exchanges can use funds acquired through user staking as a way of providing liquidity, launchpads (as proof of credibility), nodes (to allow their system to function), etc. For users, it is also a way to increase exposure to a platform or asset that they strongly believe in.
What’s more important, even if it’s a stable coin, is that the project must contain some organic deflation mechanisms — so that the price of the token can rise (or remain stable, at the very least). Aside from staking, deflation can also be achieved through token use cases, introducing a token cap, burning tokens (BNB, Ethereum), halving the amount of tokens mined (Bitcoin), or through a reduction in token supply in some other way. This deflation could stabilize the price of the token during volatile times and allow the project to more easily attract users and buyers in the future.
Don’t blindly panic, and don’t believe the hype. Stay calm and develop your own strategy.
What went wrong this winter? As always, it boils down to flawed human emotions: crowd mentality, greed, lack of due diligence, haste, and “Fear of Missing Out” (FOMO). If CZ, the owner of Binance, invests most of his savings in UST, and people say LUNA is too big to fail, then it must be safe, right?
Having your own ideas, and testing them, is important. Even if you make mistakes, you can think of it as paying for your own studies. The money won’t be wasted.
And, to avoid losing a lot, experts suggest using Dollar Cost Averaging — an investment strategy, the essence of which is to divide the amount to be invested, and then invest in a particular asset (such as stocks or cryptocurrency) at regular intervals, regardless of whether the market is growing or falling. This is a useful strategy for the bear market, which allows you to gradually and safely expand your portfolio and avoid taking unnecessary risks.
We are not giving investment advice. This material is mostly for founders hoping to make successful products even during these harsh times. However, creating new crypto projects is also a form of investing: you need to choose the platform, the chain, and the token to align your life with.
Here we can look at advice from Benjamin Graham, one of the most influential economists to ever live. His books Security Analysis and The Intelligent Investor illuminate the calmest path for any person looking to enter new markets. His main idea is to insist that all of us need to know whether, on a fundamental level, we are investors or speculators. The difference between the two is simple: investors commit to the business, while speculators chase gains without attributing any intrinsic value to the asset at hand. In short, investors strive to help develop a company’s ecosystem, while speculators are in it only for the money.
Right now is not the time for speculators. Markets are very unpredictable, and there is too much fundamental instability in the world. Nobody knows when this will end. A speculator can catch a large black swan at any moment. However, it is a perfect time for investors, who, instead of searching for a golden ticket, contribute to the services they themselves can gain value from.
Regardless of what crypto-pessimists might tell you, the market has matured enough for there to be actual real-life, honest-to-goodness useful products which offer reasonably reliable long-term returns. As long as you’re in this field for the right reasons, you’ll find yourself winning the war, even if it takes losing some battles at first.