There's No Time Like a Bear Market to Build Breakthroughs
Heed the Lessons of the Web2 Boom Following the Dotcom Crash
By: Hatu Sheikh •Op-ed
In the 1990s, the dot-com bubble drove a five-fold jump in the value of technology stocks and the Nasdaq index. But the bubble burst in 2000, leading to a crack up that felt like the end of the great dream of the internet.
But it was only the beginning.
The dot-com crash, and more importantly, its aftermath, taught us essential lessons about the challenges and opportunities of a bear market. Companies such as Dell, Cisco, Intel, Amazon.com, and eBay not only weathered the storm, they reaffirmed the conviction that promising technology sustains itself in the long run, weeding out unnecessary frills.
In many ways, the dot-com bubble is similar to the current scenario in the blockchain-cryptocurrency industry.
Investments In The Crypto Sector
There’s no doubt the crypto industry is going through a terrible phase. The market has lost $2T, about 67% of its value, since all-time highs in November.
While bear markets are considered a period of stagnant conditions, widespread panic, and low investor confidence, they are also an ideal time to build and to make investments. “The time to buy is when there’s blood in the streets,” said Nathan Rothschild, a 19th-century British financier and member of the Rothschild banking family.
Indeed. Smart money is continuing to flow into the crypto sector from retail and institutional investors to fund the industry’s latest innovations and technical developments.
For example, Andreessen Horowitz (a16z), the Silicon Valley venture capital firm, announced a $4.5 billion fund for blockchain companies in May 2022. This is not the first time a16z invested during a bear market. Four years ago, during the ‘crypto winter’ of 2018, the firm launched its first crypto fund worth $300 million. The partners at a16z firmly believe in blockchain technology’s potential and consider bear markets opportune investment moments.
Just as the dot-com crash created ideal conditions for groundbreaking Web2 innovations, the current bear market can be conducive to a similar story in Web3. Developers can focus on building the latest technologies rather than getting distracted by exorbitant price activities.
Andreessen Horowitz is not the only firm investing during a bear market. Binance Labs, the venture capital arm of one of the world’s largest crypto exchanges, raised $500 million to invest in Web3 companies. The firm intends to capitalize on the bear market to find dedicated developers willing to build the next big tech in Web3. Binance Labs will distribute its capital across pre-seed, early-stage, and equity, investing in project tokens and shares.
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Institutional investments encourage retail investors to fund crypto startups, with total investments worth $10 billion in the first quarter.
Investors can book higher profits when the market metrics are worse off than usual. Warren Buffett, the billionaire investing legend, embraces contrarian investing. “Be fearful when others are greedy, and greedy when others are fearful,” he said.
A sizable section of investors have grasped this investment ethos and are leveraging different strategies for buying the dip. Some of them are resorting to dollar-cost averaging (DCA) to distribute their funds across several projects over a period of time. DCA is ideal for investors with limited expendable money and a low-risk appetite. Other investors use a Relative Strength Index (RSI) indicator and RSI divergence strategy to invest in the right project tokens.
The Path Towards Intelligent Investing
Just like the dot-com crash ultimately didn’t interrupt the forward march of internet technology, the current bear market won’t halt Web3.
Blockchain and cryptocurrencies will survive this cycle, emerging more robust than ever. The bear market calls for cautious optimism while presenting the opportunity to devote the energy and resources necessary for building sustainable, market-ready solutions with genuine utility.
By shifting the focus towards fundamental technology development, the ongoing crisis will perhaps make the crypto ecosystem more resilient in the long run. There might also be a significant move away from shady money-making projects to high-quality innovations that can solve real user problems. However, investors must be wise to find suitable projects, now more than ever.
It is necessary to identify the market segments which have the potential to grow in the coming years. One such segment is decentralized finance (DeFi), along with its lending-borrowing, yield farming, derivatives trading, and other banking protocols. The other segments include NFT-based gaming projects, payment platforms, and remittance protocols.
In sum, though, investors must do their research and conduct due diligence before investing in a project. For example, to understand the revenue generation mechanism, they must analyze the project’s technology through whitepapers and GitHub repositories. Additionally, they must research the developer team and closely monitor the project through social media channels. And thus, despite a bear market, intelligent investors can contribute significantly toward promising Web3 projects that will sustain in the long run.