The “crypto winter” is coming – but how bad will it be?

Like all market crashes, this one hitting crypto is uncomfortable at the moment – but the community is trying to take advantage of it.

It may seem like the days of crypto success stories are over. Bitcoin, the most popular cryptocurrency, is currently trading at around $18,000 – a price last seen in 2020 – and prices are falling across the market.

But crypto startup founders and investors aren’t all pulling their hair out. After all, they started their companies in a highly volatile and unregulated market where every business must prepare for the worst.

And with the total value of all crypto down to $900 billion from an all-time high of $3 billion, founders are rushing to turn the crisis into an opportunity for their businesses.

Prepare for the worst

“The first rule of crypto winter is to be ready for crypto winter,” says Ruslan Kolodyazhnyi, CTO of London-based fintech Wirex, which has developed an online banking system that – among other features – enables buying crypto.

For Wirex, this is not the first “like-the-dotcom” crash. The company already survived the collapse in 2018, when bitcoin prices fell more than 80% and the market lost nearly $700 billion of capitalization. This time, Kolodyazhnyi says, Wirex’s reaction was quicker.

When Terra’s then-$18 billion stablecoin collapsed in June, Wirex immediately removed it from the platform to prevent investors from losing money. Crash of Terra and Luna cryptocurrencies spark over $500 billion in losses in the crypto market.

Zug-based sports tech startup Blocksport, which recently entered the NFT market, is taking a different approach to reassure investors and users that it can weather the storm. “We try to entertain our users with quests and quizzes and reward them with tokens or NFTs – it helps,” says CEO Vladimir Liulka.

Last year, Blocksport raised $6 million from 40 investors in an initial coin offering. Frightened by the crypto winter, some investors asked for their money back, even at a discount, says Liulka. “I told them to take it easy and wait for better times to sell the assets,” he tells Sifted.

Kolodyazhnyi says it’s also important to focus on the product and how users interact with it, “rather than how much they talk about it.” The crisis has dissuaded investors from trusting hyped products that provide no value to users, he says, and taught them to pay more attention to a company’s financial performance and number of customers.

Oleg Malenkov, a partner at Ukrainian firm TA Ventures, echoes this view: “We try to avoid investments in hyped early-stage pre-product companies, whose performance did not meet a stated valuation of $100-200m in the first round.”

Mass layoffs

Last year, many startups overestimated their potential. Coinbase’s stock, for example, was worth more than $340 in the fourth quarter of 2021, but fell to $54 in June of this year. To cut costs and prepare for the crypto winter, many startups have announced layoffs.

Coinbase cut 18% of its workforce (or about 1,100 people); Crypto.com laid off about 260 workers, or 5% of its workforce; Gemini crypto exchange made almost 10% of its staff redundant; and Austrian crypto trading platform Bitpanda cut the number of employees by a third — from 1100 to 730 people.

“As a hyper-growth company, we experienced growing pains,” Bitpanda wrote in a blog post to employees. “Looking back, we realize that our hiring rate was not sustainable.”

But not all crypto companies have been affected. Crypto platform Moonpay tells Sifted that it is looking to double its headcount this year, while Wirex plans to expand its team from 400 to 600 people by the end of the year.

Find opportunities

The founder of the Ukrainian cryptocurrency exchange Kuna, Michael Chobanian, calls the current situation a “market cleansing”. “Those companies that have an efficient business and provide value to people will survive the crisis, while profiteers and fraudsters will die out,” he says.

Ukrainian investor Igor Pertsiya says he believes mature, reliable teams with a B2B focus are likely to stick around.

Malenkov bets on blockchain-based infrastructure projects. “They are more protected from cryptocurrency price fluctuations,” he says.

Startups also see promise in this niche. US-based Solana, for example, launched a Web3-focused mobile phone, while Ukraine-founded startup Near Protocol launched a blockchain-based music production platform in July.

What investors say

Big name crypto investors are trying to take advantage of the falling prices in the market.

In June, French crypto startup Ledger teamed up with US-based Cathay Innovation to launch a $110 million crypto fund. US VC Andreessen Horowitz (a16z) also raised a $4.5 billion crypto fund in May to take advantage of bargains in a bear market. “The markets are seasonal; crypto is no exception,” a16z’s partners said at the time. “Progress made by builders in dark days eventually sparks optimism again when the dust settles.”

Other investors, who had already raised crypto funds, also say they are ready for the crisis. “This is not our first crypto bear market,” said Baptiste Cota, a founding partner at London-based blockchain VC firm LeadBlock Partners. “We will be announcing new deals soon and continue to see very active teams building the future of Web3.”

The crypto crisis has not dampened the firm’s appetite to invest in the sector – although they are now more conservative in terms of start-up trajectory, cash burn and valuations, says Cota.

“The winners of the next bull run will be built this year,” says Cota. “But entrepreneurs should focus their team on core technology and use the myriad of dev tools available to avoid reinventing the wheel.” This will help them control cashburn, extend the runway and enable entrepreneurs to have more to show for the next round, “which is key in the current funding environment”.

Last year, crypto startups were the darling of VCs, attracting a record $70 billion in November alone. But in May 2022, global crypto venture funding fell below $40 billion for the first time in more than a year, according to Crunchbase data.

That doesn’t necessarily mean investors don’t have money to pour into crypto startups, Pertsiya says — they’re probably just investing more slowly and cautiously.

Pertsiya launched its $25 million crypto fund Hypra amid Russia’s invasion of Ukraine. The war did not deter his plans – on the contrary, life amidst destruction and uncertainty led to more interest in virtual currencies than real estate or physical assets.

From the end of February to May 2022, Ukraine received more than $125 million in cryptocurrency donations. Due to the market crash, cryptocurrency donations to Ukraine have now slowed down, says Oleksiy Meretsky, co-founder of the charity crypto fund Unchain, which raised over $9.3 million in cryptocurrency as of June 29 – but he remains optimistic.

“After the crash, the crypto market will rise again,” he says. “Cryptocurrencies, like the Internet, have already become a part of our lives – therefore they will not disappear anywhere.”

Daryna Antoniuk is a tech reporter based in Kyiv. She tweets from @daryna_antoniuk