Bear Market Trends

Each bear market is notably different than the last. The categories of projects imploding and the most significant opportunities all vary, but a common thread emerges.

The “hot thing” of the preceding bull market typically experiences an existential hit. This catalyzing moment provided the project or industry survives, is soon replaced by the next “hot thing” of the following bull market. 

The cryptocurrency market is known for its volatile swings, with bear markets often causing widespread panic and significant losses. While much has been written about the common trends during these downturns, such as declining prices and reduced trading volumes, several less obvious trends are equally important to understand.

A Brief Bear Market History

The first bear market (January 11, 2012 — July 11, 2012) saw Bitcoin’s future threatened due to the early exchange TradeHill shutting down due to regulatory issues and the Bitcoinica hack, which resulted in 18,000 BTC being lost. 

Ethereum was founded in 2013 by programmer Vitalik Buterin, and additional founders Gavin Wood, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin.

Members of the “Ethereum Mafia” would split off into their own ventures:

• Charles Hoskinson launched Cardano in 2017. 
• Gavin Wood founded Polkadot in 2016 and Kusama in 2019. 
• Joseph Lubin founded ConsenSys in 2014, helping build cohorts of dApps in a variety of smart-contract-enabled niches. 
• Anthony Di Iorio would launch Jaxx wallet in 2014. 

Bitcoin would experience another existential shock, birthing a “crypto winter” (November 29, 2013 — Jan 7th, 2015); shutting down of the Silk Road and the 2014 Mt. Gox hack of 740,000 bitcoin were the primary incidents. The Ethereum DAO hack in 2016 wasn’t substantial enough to cause waves across all crypto assets, but it’s worth mentioning. 

The bursting of an ICO bubble is often credited for accelerating the 2018 bear market; this was a time when projects were doing massive token sales with vaporware whitepapers and roadmaps– not too dissimilar to the NFT wave in 2020 and 2021. DeFi projects like Compound and MakerDAO would mature in this bear market, and new DeFi experimentations like Curve, Aave, and Terra would launch.

Further, the NFT boom started with marketplaces like OpenSea providing a user-friendly front end and a variety of other Layer-1s like Solana building around the NFT concept. 

1. Shift in Developer Activity

During bull markets, much of the attention is focused on price speculation and rapid project launches. However, bear markets often see a shift towards more meaningful developer activity. 

Beyond just an increase in developer activity, bear markets foster realignment and specialization within the developer community. Developers begin to focus on niche areas, creating specialized sub-communities around particular technologies or problems. 

For instance, while some might concentrate on scalability solutions like sharding or rollups, others might delve into privacy enhancements or cross-chain interoperability. 

This specialization leads to a rich, diversified ecosystem where innovation is driven by deep expertise rather than broad, generalist approaches.

This is a time when developers can focus on building and refining the technology without the pressure of riding a hype wave. 

Historically, bear markets have been periods where foundational work on major blockchain projects was done, such as the development of Ethereum 2.0 or the Lightning Network for Bitcoin.

2. Strategic Acquisitions and Talent Redistribution

Bear markets often lead to project consolidation within the crypto space. Weaker projects without solid fundamentals or sustainable business models tend to fail, while stronger projects acquire valuable assets and talent from these failing ventures. 

However, consolidation during bear markets is not just about stronger projects absorbing weaker ones. It often involves strategic acquisitions aimed at acquiring specific technological capabilities or entering new markets.

Larger firms may buy out smaller startups to gain access to cutting-edge technology or to acquire a talented team that can pivot the acquirer’s strategy. This redistribution of talent often leads to unexpected synergies, where the combined expertise accelerates innovation in ways that weren’t possible before.

This natural selection process helps strengthen the overall ecosystem by weeding out unsustainable projects and reinforcing those with real utility– or at least, deep pockets to incentivize developers. 

3. Increased Focus on Regulatory Compliance

In the throes of a bear market, there is often a heightened focus on regulatory compliance. 

Why?

Regulation moves slowly. Things that raised flags in a bull market are finally getting their time in the sun.

Projects that might have previously skirted regulations in the rush to market during a bull run find themselves needing to align more closely with legal standards to survive.

This period of increased scrutiny and compliance can lead to a more mature and regulated industry, which ultimately benefits long-term growth and investor confidence.

4. Emergence of Niche Markets

Bear markets can drive the emergence of niche markets within the broader cryptocurrency ecosystem. 

For example, during the 2018 crypto winter, security token offerings (STOs) gained traction as a compliant alternative to initial coin offerings (ICOs). 

Similarly, decentralized finance (DeFi) and non-fungible tokens (NFTs) saw significant development during periods of broader market downturns, indicating that innovation continues even when overall market sentiment is bearish.

5. An Aggregation or Compiling of Services:

You’d be hard-pressed to find a well-established centralized cryptocurrency company that doesn’t offer a wide variety of features– everything from a crypto exchange, wallet, NFT marketplace, and yield-generation features built into a single app. 

Customers also don’t want to download a dozen cryptocurrency apps just to get into crypto; “super-apps” offer exchange services, wallets, opportunities to earn yield, new project discovery, and education.

In DeFi, we’re seeing collections of disparate parts, like DeFi aggregators, NFT marketplace connectors, and so on. DeFi is its own maze of interconnected apps and chains, and we predict there will be further development or absorption of “aggregation” tools.

1inch, for example, is a decentralized exchange evolving to be a one-stop shop for a variety of earn mechanisms (pools, staking, farming), and links to bridges for cross-chain transfer of assets. 

Aave is a decentralized liquidity protocol enabling people to earn interest and borrow assets on a variety of chains.

Crypto super-apps and aggregators are mostly “feature-agnostic” and hell-bent on acquiring as many users as possible. We’ll keep seeing “Fortune Favors the Brave” commercials targeting mass retail audiences. 

There’s no shortage of “big fish eat small fish” acquisitions.

5. The Boring Governance Work Gets Done

Bear markets drive projects to enhance community governance structures and decentralization efforts– you know, the stuff in the whitepaper that sounds cool but projects rarely prioritize in bull market frenzies. 

A greater focus on building robust governance frameworks allows for meaningful community participation. This period often sees the introduction of more sophisticated voting mechanisms, better transparency in decision-making processes, and initiatives to distribute governance tokens more equitably among active participants rather than passive investors.

6. A Standardization of Crypto Yield 

The 2022 UST depeg was a hurricane that terrorized the cryptocurrency community for a week; the weakest and most dependent infrastructure was left tattered, and fragile businesses masquerading as secure operations were exposed.

To quickly recap the UST depeg’s impact on crypto yield: Anchor Protocol, a dApp on Terra, gave users around 20% APY for their UST. This lasted for about two years, which is a large enough time window for a myriad of startups launching to attempt to arbitrage the yield

Celsius, BlockFi, 3AC, and many more went down in infamy. 

But, there is a silver lining– Anchor Protocol was still largely unexplored by the vast majority of consumers and institutions. It was a niche product nestled into a very new ecosystem, so its collateral damage was limited. It also serves as a lesson to cryptocurrency entrepreneurs to both build for bear markets and to adequately disclose the risks of digital assets to their users, should they be taking in user funds. 

And if they dont, let us be the first to warn you that cryptocurrency is a very volatile ecosystem– don’t invest in anything you can’t afford to lose. 

It’s not that these startups launched with malicious intent (at least compared to some NFT rug pulls, which are literal theft), but the lack of regulatory clarity or frameworks for disclosing risk in cryptocurrency entrepreneurship leads to a proliferation of startups, dangerous when dealing with people’s money. 

7. Mental Health and Investor Behavior

An often-overlooked aspect is the impact on mental health and investor behavior. Bear markets can be incredibly stressful for investors for obvious reasons. 

On a psychological level, bear markets foster resilience and a long-term mindset among investors and participants. 

Those who remain engaged during downturns often develop a more nuanced understanding of the market’s cyclical nature and become more adept at managing emotional responses to volatility. 

In other words, it’s a transformative moment for any HODLer. 

This psychological resilience is crucial for maintaining a steady hand during future market upheavals and can lead to a more mature, less reactionary investor base.

For example, Bitcoin’s lows tend never to be lower than its previous lows– signalling that many people aren’t threatened by what they view as temporary bear market dips. 

Final Thoughts: Bear Market

A cryptocurrency bear market is more than just a collective panic of “oh no, number go down!” It’s a peek into a landscape rich with strategic realignments, many of which are not obvious until the most successful projects emerge in the following bull market. 

These periods are not merely downturns but phases of consolidation, innovation, and maturation that set the stage for the next wave of growth.