The BEAR Just Showed Up
In the past two years, the entire crypto market skyrocketed as the total market capitalization reached around $3 trillion, in which Layer 1 also has grown continuously, attracting a large amount of money into its ecosystem. While Bitcoin and Ethereum blockchains have attracted huge investment, benefiting from being in the space the longest, developers have also been able to see where the problems are, building contemporary layer 1 solutions that offer decentralization, security and scalability.
However, monetary policy conditions are being tightened due to the fact that the FED (Federal Reserve System) raised interest rates with the aim of limiting inflation, minimizing risks of a global economic crisis. In addition, the geopolitical uncertainty between Russia and Ukraine has disrupted the supply of petroleum, causing the entire financial market to fluctuate greatly and be negatively affected. The cryptocurrency market is down 70% to $900 million so far.
When the bear market season has only begun for more than half a year since ATH reached Nov 2021. The top 10 market cap positions also had a lot of turmoil, almost down 70-90% capitalization. In particular, the collapse of the Terra blockchain made the whole market fall into a state of fear and panic. When the algorithmic stablecoin UST mechanism is not sustainable that leads to the loss of pegs and shocks every player in the financial market. A $40 billion market cap coin lost almost all of its value in just a few short days to nearly $200 million cap (at the time writing).
The question is whether the other Layer 1 projects, with the buzzword of “Ethereum Killer” or “Ethereum Challenger”, will fall into an unexpected ending like Terra? This article should provide some insight for better investment decisions.
The Market Gap
The advent of blockchains with the ability to execute smart contracts, by the original purpose of improving the scalability problem of the pioneer - Ethereum. The blockchain trilemma is a concept coined by Vitalik Buterin that proposes a set of three main issues “decentralization, security and scalability” that developers encounter when building blockchain, forcing them to ultimately sacrifice one aspect for as a trade-off to accommodate the other two.
The term “Ethereum Killer” is more likely as a buzzword than an actual coveted aim. The Ethereum ecosystem is by far the largest DeFi network around. Its demise would bring with its huge ramifications and consequences for the entire cryptocurrency industry, likely damaging the other Layer 1 blockchains. As can be seen from the below graphs, every number shows that the Ethereum network takes the spotlight completely when compared to its alternative.
Of course, we cannot deny the contributions to the last bull season when the Layer 1 ecosystems attracted huge funds from venture capital funds, for example Algorand had an incentive package deal of up to $900 million for its ecosystem. In November 2021, Avalanche launched a $200 million fund to support ecosystem growth on its blockchain. Polygon launched a $150M fund to bring DeFi to the masses and many many more.
To be honest, we still need the competitors that bring evolution. There’s a reason I wanted to bring up the case of the Internet. The wireless internet access on mobile devices, for example. According to the standard, 2G infrastructure allows downloading only around 0.1-0.3Mbit/s. 3G made a huge leap when it comes to speed, it was 420 times faster. 4G brought that number furthermore up, being 23 times faster. Right now, there’s a 5G network being introduced that allows downloading at speeds even as high as 1-10Gbit/s. That’s 10 times faster than the 4G and over 100,000 times faster than 2G.
Basically, this is just an evolution of technology. The top layer can only be as good as the layer underneath. If the Internet can be much faster due to the layer 1 advancements, we can transfer much more data and therefore provide completely different applications. So, the same is with blockchain. The top layer, smart contracts and applications can only be as good as the layer they are built on.
Which One Is Gonna Be The Survivor?
When choosing a crypto that will survive the bear market, the key is to invest in cryptocurrencies with real projects and communities behind them. Throwing back to the bear season of 2017-2019, take “giants” at the time as example, XRP, XLM, NEO, EOS, IOTA, etc. - that used to lay on the top 15 of the lists. NOW where are they? Some still, some down.
It is also understandable that a product that is no longer suitable will often be backward and gradually eliminated. Just like before, we used to use mechanical, physical keyboard phones, now what? - Smartphones. To watch your favorite songs/movies, you must collect DVD, CD disk, now what? - YouTube, Netflix, Spotify, etc. Or a legendary messaging and video calling tool YahooChat, now what? - A lot, Facebook, WhatsApp, LINE, etc. Therefore, the fact that the cryptos in this market are gradually replaced by potential candidates is the natural law of life. No surprise!
The Four Phases of a Crypto Market Cycle
The bell curve from traditional market analysis can be used to identify the four phases within a market, beginning with slow accumulation, the quick run-up, the peak of price and the consequent drop down. This is a pattern that repeats time-by-time again across all markets.
The good news is, as this cycle completes, the next one begins. There are and will always be cycles. All financial markets have a natural tendency to follow this curve. The problem for many investors and this is especially true for traders is that they fail to recognize that markets are cyclical in nature and do not foresee or want to acknowledge the final phase of a cycle.
Visually see the chart above, we just finished the distribution phase and turned into the run-down phase, or the bear market. This is the most difficult period and highly emotional time for the majority of investors. And this seems to be one of the hardest lessons in the cryptocurrency community. Someone who survives through the bear will become OGs, someone who will leave the market. Just basic purification of any market.
Are We In The BUBBLE?
I think YES, we’re in a gigantic crypto bubble and so the bubble needs to burst. The market has been filled with juicy money due to the difficulty of the traditional business segment due to the COVID 19 pandemic, creating dozen, hundred- or thousand-times growth under a year for crypto price.
Back to the late 1990s, the dot-com bubble was caused by excessive speculation of the Internet-related companies, a revolution, a period of massive growth in the use and adoption of the Internet. The Nasdaq Composite stock market index rose 400%, only to fail 78% from its peak by October 2002, giving up all its gain during the bubble. Many online shopping companies (Boo.com, Pets.com) as well as communication companies (Worldcom, NorthPoint Communications) failed and shut down. Some companies that survived such as Amazon.com, Cisco, lost large portions of their market capitalization, but still growing in both business and stock price in the following years. Because of its well-designed business strategies, generating long-term revenue and expanding the market share. Refer to the stock price chart below of Amazon.
Fantom (FTM) did ~2050x, Solana (SOL) did ~260x, Avalanche (AVAX) did ~173x. Crazy gain. However, that growth is not simply just a “pump, dump and exit”.
Recently, layer 1 projects have tried to perfect its ecosystem with the first pieces being - DeFi with the first introduction of AMMs/decentralized exchanges, liquidity pools, lending/borrowing protocol or dApps, GameFi, etc. In the bull season, some projects had no product-market fit, poorly designed, poorly managed, poorly operated. In short, they are just “bad” projects. Sadly, some of these bad projects have a large number of users, often acquired through inflated incentives, “creative” marketing, or pure Ponzi schemes (X-to-earn) and cash grab. These should be dead. It can be said that projects that are not really effective in fundamental evaluation, without sustainable revenue, without real users will certainly not be able to survive this bear season.
To be honest, most of us are interested in other layers 1 because of the low transaction fees, faster processing speed. However, it is also a question for protocol developers when with such a cheap transaction fee (many networks are almost ~$0, e.g., SOL, ONE, FTM, etc), will their revenue be stable to support and maintain their business?
Should We Buy The Dip?
Many people who were not familiar with the crypto world believed that it was the end of the road for crypto. The truth is that there were no major negative events during this period. The market simply became overvalued and then corrected itself. You may be wondering if it’s a good deal to buy the dip. The answer depends on your personal circumstances and goals. When you see a dip, you can be tempted to buy more coins instead of selling them, it means that “buy low sell high” might be a good strategy for you in the short term. But in contrast, if your goal is long-term growth and stability, then waiting until prices go up again and slowly accumulate may be better for you.
"Out with the old, in with the new, make way for the young!" - Of course, when something is no longer suitable for the present, there must be successors to correct the shortcomings. The ideas are still relevant and will serve as an important foundation for a safe, scalable, upgradable Web3. Potential new players in the layer 1 world that can be mentioned are Aptos, Sui, Celestia, or Aleo.
The Bottom Line
In any industry, there are always more failed projects than successful ones. But you get the idea. Don’t perpetuate bad companies. Let them fail. Let other better projects take their place, and they will. Don’t let the “hopium” fool you. Protect your assets within this bear market. At the moment, “doing nothing is doing something”.
