What does a bear-market ‘cleanse’ actually mean?

In his monthly crypto tech column, Israeli serial entrepreneur Ariel Shapira covers emerging technologies within the crypto, decentralized finance (DeFi) and blockchain space, as well as their roles in shaping the economy of the 21st century.

The post-mortem consensus on the crypto market crash among industry leaders ranging from Polygon co-founder Mihailo Bjelic to billionaire crypto investor Mark Cuban is that bear markets are a healthy way of cleansing the market. The latter even referred to a line used by long-time crypto critic Warren Buffet to express his opinion of the matter.

“Only when the tide goes out do you discover who’s been swimming naked.”

Of course, no one in the industry would dispute the claim that bear markets weed out the weak, or, in this case, the nakedly corrupt. But we’d be mistaken to leave the analysis at that as if more than $700 billion being wiped out overnight is something we should continue to accept from crypto markets. It’s important to understand the major factors in this last bull run that led to its massive demise, and how to foster a more stable market going forward.

NFTs: Blessing or bygone?

We’re five years out from the first monumental crypto crash spurred by the infamous initial coin offering (ICO) boom of 2017. As an industry still in its infancy, most of the projects sprouting during this period and driving investment were random coins claiming to be the next Bitcoin (BTC). The industry has developed quite a bit since then, and this time, other applications of blockchain drove the hype.

So, what was the last bull run’s version of scammy ICOs? Several factors contributed to the latest market boom that propelled Bitcoin to almost $70,000 per coin. But perhaps the most similar at their core — and yet often more ridiculous — to the ICOs of yesteryear were nonfungible tokens (NFT), a market that reached a whopping $25 billion in 2021. The industry perhaps reached peak hype when the NFTs from the Bored Ape Yacht Club (BAYC) collection were selling for hundreds of thousands — and later millions — of dollars in Ether (ETH). Celebrities got involved, as well as industry icons such as Adidas, Coachella and even the Super Bowl.

Then it all went south when everyone discovered more than 80% of the NFTs created for free on OpenSea were either frauds or scams. The cash-grab culture was put on full display in person at the NFT.NYC event in late June.

That being said, it’s not as though many in crypto deny that the technology behind NFTs will redefine ownership and play a major role in Web3. But how can we move toward that future without sams riding innovation’s coattails?

It’s actually quite clear-cut. A path forward for NFTs and the technology behind them is to tie them to desirable physical assets and harness their ability to authenticate and secure products.

For instance, companies in the luxury goods industry have been exploring utilizing NFTs as a means to combat the proliferation of counterfeit items. Projects such as the Aura Blockchain Consortium, headed by luxury behemoths LVMH and Prada Group, harness the power of NFT technology for product authentication, supply chain transparency and data ownership for their physical products.

It’s not necessarily about selling a digital sneaker but enhancing the product and brand experience for their affluent clientele. Jewelry company Yvel, for example, launched a securities and trading platform tied to fine jewelry and precious metals as guarantees — actually pegging the NFTs to tangible products instead of JPEGS.

Blockchain’s greener pastures

Surviving the bear market is not just an imperative for NFTs, but for more foundational crypto assets as well — which, by the way, haven’t totally corrected for their tendency toward scams either. The collapse of algorithmic stablecoins is likely to cause a serious aversion for casual holders and companies from meaningfully exploring how to tie crypto to traditional assets, but that does not mean all hope is lost. The path forward here really does lie in focusing on creating a product that meets a real, tangible market need — not unsimilar from the solution to the NFT market collapse.

That’s a take we’ve all heard before. So, how do we meaningfully get there this time? It all goes back to the basics of business. To thrive, startups need to find a problem that they are trying to solve, and that problem can’t simply be that the founder isn’t wealthy enough. So, what are the sectors on which meaningful coins can focus?

Minimizing environmental impact and operating sustainably has long been a white whale for crypto and blockchain projects. A recurring critique of crypto and the blockchain as a whole are that they cause serious harm to the environment due to the emissions caused by token mining and other crypto byproducts. As of now, a majority of projects have been unable to shake off this stigma, but new developments can help spearhead a substantial change to this narrative.

In the wider business world, sustainability has quickly become a core value for a modern company to embody. While many of these corporate commitments are either superficial or encompass a nebulous promise to reduce carbon emissions by a certain year, there are more concrete steps that crypto can borrow from. One such development has been the adoption of corporate carbon credits, which, while imperfect, are a worthwhile way for corporations to offset their emissions and ecological footprint.

Though there have been major blockchains leading the charge on eco-friendly operations, such as Cardano and Algorand, allowing crypto holders the option to join in on the carbon market is another way to encourage sustainable development. Projects offering crypto-specific carbon credits or tokens tied to external carbon credits, such as CC Token, which opens access to investing in carbon credit futures for businesses and individuals, provide investors tangible value. Others are working to make the second-largest blockchain by market capitalization, Ethereum, more eco-friendly.

The crypto and blockchain industry has been defined by its rambunctious nature and revolutionary ambitions. While any emerging industry is bound to be subjected to volatility, downturns and roadblocks, the latest bear market should send a clear signal to projects: It’s all about finding a problem that needs to be solved, and actually using your product to solve it.