What to Learn From the Recent Crypto Crash

We’ve been witnesses to the Great Crypto Mayhem of May. And for those who have been involved in the crypto market, we all took a hit a hit, worse than you’d like to admit.?

Generally, I don’t talk about the cryptocurrency market and only stick to my field which is the metaverse. But the enormity of the event makes it impossible to ignore and I can see how we all in the web3 community are maturing through another crypto winter. No matter if you’re into crypto, DeFi, building blockchains, Metaverse, or NFTs, there’s a lesson for all of us here.?

Before I begin with my learnings from the crash, I would like to create a timeline of events that built up to this circumstance.?

The Crypto Bear Market of 2022 and What Followed

After the crypto and NFT boom of 2021, we entered 2022 with sort of a prolonged bear market, with minimum to negligible movements on the charts. At the beginning of January 2022, BTC was hovering around $47K. Then it took a tumble and spent the next three months under that mark recovering in early April to the previous value. But soon after that it took a plunge and touched the pricing charts in the mid-thirties and finally went down below the? $30K-mark on the second week of May.

As you know, the average movement of the altcoins imitates Bitcoin’s trajectory. So it wasn’t good news for them either. However, in the midst of all this, one coin was rising unreasonably high, and that was LUNA. LUNA touched $98 in late March, which was almost double the price it had at the beginning of the year.?

How was LUNA achieving this result? I wouldn’t go into much detail as others have already covered it pretty well. In simple ways, LUNA was leveraging products like Anchor Protocol that guaranteed a 20% return on investment. Naturally, people flocked over there for free money, and the price spiked. What they didn’t realize is that free money eventually ends.?

When a product is hyped for its marketing and public stunts, and not because of a robust product, it is bound to come down. And it came down hard.?

LUNA’s primary product was the algorithmic stable coin UST. Algorithmic stablecoins aren’t backed by fiat currencies and they sort of hang from a thread that is constantly adjusted according to the price fluctuation.?

So if holders lose confidence in the peg, they can exit the system by redeeming their UST and minting LUNA. If enough do this at the same time, it causes LUNA to lose a significant portion of its value and a "bank run" in the form of mass redemptions. This in turn causes LUNA to hyperinflate, losing more of its value, and trapping UST holders.

And that’s exactly what happened. An event larger than Lehman Brothers in 2008 when LB went from $60B at its peak to bankruptcy. Luna's market cap fell from $50B at its peak plus an additional $30B in total value locked (LVT) in its stable coin UST as well as its native token LUNA, to merely a fraction of that.

Obviously, there’s more than one reason why it happened, and some of them are fairly technical. On the other hand, there might be a fair share of lack of responsibility from the core team, and unrealistic expectations of gaming the market is what brought down the Terra team. While Luna was in search of a gimmick, the projects that survived did the right things to create a robust ecosystem that actually can survive tough times.

So what learnings should we take from this incident?

Utility Before MarketCap

Oftentimes, what crypto projects don’t realize is that in the beginning days of web3, you’re basically creating value out of a roadmap. Crypto is to Web3 what Kickstarter Funding was to web2. So to justify the token price you’ve to bring your value to the table. And that value depends on the utility of your project. Whatever sector of web3 you’re in,? you actually are creating enough value for people to stick with you even when their portfolio shows red digits? Otherwise, whenever you slow down or take a hit, your community is going to jump ship in the blink of an eye, because their motivation was purely financial and it wasn’t their fault.?

The crypto ecosystem has a lot of weak projects (was about to write unwanted scammy projects - but I did not :-)) that are toxic to the crypto body. As a result, every few months, it runs a detoxing program in the form of a bear market or a crypto winter to wash out unwanted projects. That’s how I see the whole crypto ecosystem! The crypto economy isn’t stable when the market is booming, only when the market is down and people are still talking about your product, that’s what creates strong projects. BTC and ETH are the most trusted projects because they’ve survived all the bear markets and still are intact to their core.?

Community is Good, Blind Faith is Terrible

The Terra community was as strong as you could imagine, when LUNA and UST were falling, many of them still kept put. They discarded every criticism like blasphemy and they followed Do Kwon to annihilation.?

Whether you’re building a project or you’re part of a community, don’t aim for something like that. Healthy criticism and questioning everything is what keeps an actually thriving community. Otherwise, it’s nothing more than a herd because all they do is follow orders from the genesis team.?

A good example of this will be metaverse platforms. The new and upcoming metaverse platforms live and die based on community involvement, their brand partnerships, and extensive identity expansions. Projects that focus on creating engagement and co-creation mechanisms will pass the test of time and crisis.

Whereas many projects that joined the game because of the hype are already giving up. Metaverse is a long-term investment and it can never run on hype if there’s no substance to it. And if there’s meaning and substance to a project, the community engages more freely and it becomes a positive-sum game.

If you’re building a metaverse project, make sure your product is your USP and everything else should be secondary. Only that way an active community will come to co-create and expand the platform.?

Conclusion

Similar to what happened in the late 90s, where startups raised millions of dollars with minimum to no actionable plans on how to actually produce a finished product and turn a profit, crypto projects with weaker business models received overwhelming responses from the people. As a result, more “product-lean” projects joined the queue and thus started the cycle of pumping money to run the wheels.?

But once the money stops coming in from the VCs or the retail investors, it’s extremely difficult to keep the same vibe going. That’s what happened with the long-standing crypto bear market in place. However, we should also focus on the positive sides of things. While a few projects lost their ground, many projects are working in the background relentlessly to create the best value for the market.

The web3 space is a fairly new one, with its own challenges and obstacles. But one thing is for sure, after the dot.com burst, the internet gave birth to dozens of tech companies that have defined web2. This is exactly the phase in which we are in right now for web3 … just on steroids, And I am bullish to be part of it! Are you? Curious to hear your thoughts!?