Cryptocurrencies are famous for their wild price swings, and in their short history they have endured multiple cycles of sweltering hot summers followed by cold, long winters. The latest downturn started in early 2018 and lasted about two and a half years.
Over the past three months, bitcoin has fallen from a high of $48,000 to around $21,000 as inflation has soared and recession fears have spread. Today, some top investors believe we are in for another painful, prolonged period of low prices.
“The next two years are going to be really tough,” said Avichal Garg, a managing partner at Electrical Capital, a crypto mutual 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’re seeing more and more high-profile founders. We’re seeing Web2 leaders coming in faster from Facebook and Google,” he says. But one big factor is making supporters particularly nervous: “It’s the first time crypto and Web3 have existed in a macro bear market environment that may see a recession next year,” says Garg. (Bitcoin was created in early 2009, just before the end of the financial crisis.)
Alex Pack, managing partner at Hack VC, a $200 million crypto venture fund (assets), agrees. “One to two years is what everyone says … And that’s what we tell our portfolio companies — make sure you have a two-year runway.”
Aside from broader economic worries and the recent collapse of “stablecoin” TerraUSD, major doubts have spread about crypto lending platform Celsius. Having recently frozen withdrawals, many are questioning its solvency. “Always be skeptical, even in a bull market, if any of these platforms promise really high yields,” said Linda Xie, co-head of crypto fund Scalar Capital. “Sometimes that 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 the many reasons for concern, crypto investors seem more optimistic so far than they were during the last downturn of 2018-2019. “Many investors and builders were seriously concerned that crypto as an asset class would not bounce back from the highs of 2017,” says Pack. That fear evaporated in December 2020 when Bitcoin surpassed $20,000. Pack and Xie believe the industry is in a stronger place now because there are more cryptocurrency use cases and users. For example, digital art NFTs (Nonfungible Tokens) have attracted millions of buyers. “Decentralized finance applications,” such as software that lets people earn interest on deposits, have grown steadily, though some have also burst into flames in spectacular fashion.
What has to happen for prices to recover? The stock market needs to recover, some say. “We would need to see stocks reverse before real capital flows back to bitcoin,” said Joshua Lim, a managing director and head of derivatives at crypto-prime brokerage Genesis. Tarun Chitra, a digital asset investor and CEO of crypto risk modeling startup Gauntlet, agrees: “I expect crypto and growth stocks to correlate for another 12 to 18 months.”