Hi 👋🏻 denze’s digest is fortnightly-ish series where I curate & share the most interesting and useful crypto content I’ve consumed recently. You can also find me on Twitter (@_denze).
With crypto markets crashing, today’s digest will help you:
understand the different stages of bear markets; and
determine which projects will survive and thrive in the long run
The 3 stages of a bear market
This thread by Jason Yanowitz breaks down the different stages of a bear market:
Stage 1) The Unwind - prices start to pull back to more realistic valuations, but the general excitement & greed from the bull market is still there, so everything seems fine
Stage 2) Forced Capitulation - prices crash violently, people lose their jobs, and people/companies sell not because they want to, but because they have to
Stage 3) Bottomless Exhaustion - prices move sideways or slowly down, and things go quiet as talent/investors/companies leave
He also shares Fred Wilson’s piece What Bear Markets Look Like, which gives provides some great perspective on what it’s like investing into a new technologies/sectors, using Amazon as an example.
The lesson in short - Stage 3 is the toughest to survive, but zoom out, and don’t lose sight of the big picture.
A framework for assessing crypto projects
In Is It a Ponzi?, Nat Eliason provides different ways of categorising crypto projects/businesses, to understand if they have a future; an important skill during a bear market. Here’s a summary of the framework:
1/ Does the project have real spending or not?
A great signal of legitimacy for a project is where there’s real and meaningful amounts of spending from users. Think about who’s spending, how much they’re spending, and if this spending is greater than the project’s expenses.
2/ If there’s no real spending, where is the money coming from?
Projects can be categorised as:
Pyramid schemes, where people need to pay money to enter an ecosystem, and where participants primarily make money directly from the people they convince to join
Ponzis, deliberate cases of fraud where there’s no real business. The trick with ponzis is that money from later participants are used to pay/reward early participants, creating the illusion that something real exists
Tulips, things that have value because people collectively believe they have value, which can create a cycle of speculative investment
3/ Is the project living or dying?
Projects are living if they’re earning more money than they’re spending. There’s real revenue and product.
However, projects are dying if they’re spending more than they’re earning. Maybe there’s no real spending, or they’re paying out unsustainable rewards to draw users to their products.
Being in the dying phase doesn’t mean a project will die, especially since projects tend to start in the dying phase. The goal is for them to figure out how to switch to living and operate sustainably.