Cryptocurrencies are collectively down 45% since the start of the year — squarely in bear market territory for the first time in three years.

As with crypto’s previous downturn spanning 2018 and 2019, layoffs are beginning to strike. 

Employees at crypto exchanges have been the first on the chopping block – the likes of BitMEX and Gemini have vowed to cut staff since April, while Coinbase plans to rescind accepted job offers to cut costs.

Without naming specific firms, Blockchain.com CEO Peter Smith at Amsterdam’s Money20/20 conference this week said a lot of crypto companies grew too quickly, without focusing on becoming profitable.

“We’re the smallest crypto company of its kind by headcount —others have thousands of employees pre-profitability,” Smith said, noting that multiple firms unsustainably spent up to $800 million on marketing costs through this cycle.

Added Smith: “A lot of that has to wash out of the space, not just in crypto but fintech more generally. We’re going to see a fundamental rotation from growth to free cash flow.” 

Smith said investors had pushed Blockchain.com, founded in 2011, to spend more on marketing and grow faster throughout the previous mania. Bitcoin surged from $9,000 to nearly $62,000 between the second half of 2020 and November 2021, triggering explosive growth across the crypto sector. 

“Every company that pursued that strategy has had a dramatic rearing of their business – large growth rounds collapsing, companies are now raising at down-round prices – it’s going to be difficult for them to adapt,” Smith said. Earlier this week, reports surfaced that crypto lender BlockFi was looking to raise funds at a $1 billion valuation, down from $3 billion at its previous round in March 2021.

The three epochs of crypto bear markets

In Smith’s estimation, the current bear market has been going for nine months — leading to more possible pain on the horizon if past patterns repeat. 

It’s up for debate, however, whether a bear market equates to the dreaded “crypto winter.” 

After all, the previous bear market lasted significantly longer than nine months, and the depths of crypto winter saw bitcoin sink to almost 90% below its 2017 peak. 

In an interview with Blockworks, Smith outlined what he dubs the three epochs of bear markets: the beginning, which is hard to sense; the middle, where despair kicks in; and the new normal. 

“We’re entering the second epoch [despair], which is my favorite,” Smith said. “I’m a free market capitalist, and I enjoy the cleansing power of the market.” 

Otherwise known, he said, as the chapter where tides go out and we all see who’s wearing pants, echoing Warren Buffett from a 2001 Berkshire Hathaway earnings call. Buffett is a vehement crypto skeptic.

This stage is also defined by the ability to differentiate quality projects, to the benefit of customers, teams and shareholders. 

“The last stage is when everybody looks around and says, ’Oh, this is crypto now, and we’re all going to figure out how to make this thing work.’”

Blockchain.com exited its LUNA position before the crash

Blockchain.com never listed Terraform Labs’ failed stablecoin UST, although the platform did offer LUNA. Smith resisted UST, describing the decision to avoid the stablecoin as “not a popular choice.” There was some internal pressure to offer it so users could unlock up to 20% APY on lending platform Anchor.

“Consumers love 20%, but consumers also hate zero,” Smith said, referring to LUNA and UST’s collapse. 

Blockchain.com, though, was an early investor in LUNA, long before UST. Smith said he had doubts about the Terra ecosystem’s sustainability and ultimately exited the position before the crash.

“Anything that goes up too fast worries me,” Smith said. “Solana also went up too fast.” Solana currently changes hands for $41 —85% below its $260 record high recorded in November.

Smith also doubted algorithmic stablecoins, despite investing in a few. He said it would be “very cool” for one to work, but by default is inclined to believe they won’t and wants to be proven wrong.

Still, the crypto veteran scoffed at the idea of taking Justin Sun’s new algorithmic stablecoin, Decentralized US Dollar (USDD), seriously. USDD’s circulating supply has skyrocketed from zero to beyond $700 million since the start of May.

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