Cryptocurrencies are notorious for their wild swings in price and, in their short history, have gone through multiple cycles of scorching summers followed by long, frigid winters. The last recession started in early 2018 and lasted about two and a half years.
Over the past three months, with inflation rising and recession concerns spreading, bitcoin has fallen from a high of $48,000 to roughly $21,000. Today, some major investors believe we are in for another prolonged and painful period of low prices.
“The next two years are going to be really tough,” says Avichal Garg, managing partner at Electrical Capital, a crypto investment fund with more than $1 billion in assets. His fundamental views on the promise of the industry have not changed. “New software developers are coming in and we are seeing more and more high-quality founders. We see Web2 execs from Facebook and Google coming in at a faster pace,” he says. But one important factor has backers particularly nervous: “It is the first time that cryptocurrencies and Web3 have existed in a macroeconomic bear market environment, where there is a possibility of a recession happening next year,” says Garg. (Bitcoin was created in early 2009, shortly before the financial crisis ended.)
Alex Pack, managing partner of Hack VC, a $200 million (asset) crypto venture fund, agrees. “One or two years is what everyone says… And that’s what we’re telling our portfolio companies: Make sure you have two years of experience.”
Beyond broader economic concerns and the recent collapse of “stablecoin” TerraUSD, major doubts have spread over crypto lending platform Celsius. After it recently froze withdrawals, many question its creditworthiness. “Always be skeptical, even in a bull market, when any of these platforms promise really high interest rates,” says Linda Xie, co-head of crypto fund Scalar Capital. “Sometimes this sounds too good to be true, and that’s because it is. There can be a lot of leverage and high-risk activity behind the scenes.”
Despite many reasons for apprehension, crypto investors appear to be more optimistic so far than during the last recession of 2018-2019. “There was genuine concern among many investors and builders that crypto as an asset class would not come back. . from their 2017 highs,” says Pack. That fear evaporated in December 2020, when Bitcoin topped $20,000. Pack and Xie believe the industry is in a stronger place now because there are more crypto use cases and users. For example, digital art NFTs (non-fungible tokens) have attracted millions of buyers. “Decentralized finance” applications, such as software that allows people to earn interest on deposits, have grown steadily, though some have also skyrocketed.
What has to happen for prices to recover? The stock market needs to recover, some say. “We would have to see stocks turn around before real capital flows back into bitcoin,” says Joshua Lim, managing director and head of derivatives at cryptocurrency broker Genesis. Tarun Chitra, a digital asset investor and CEO of Gauntlet, a crypto risk modeling startup, has a similar view: “I expect growth and crypto stocks to remain correlated for 12-18 months.”