Stepping back for a broader view, we see 26 bear markets recorded in the S&P 500 Index throughout the history of our modern financial system – and 27 bull markets. Within this cyclical pattern, enterprises poised to grow can utilize bear markets to gain market advantages while waiting for bull markets to take hold.

Since the start of 2022, the S&P 500 has fallen 22%, with TradFi markets in a bear market since last June. At the same time, we are experiencing a crypto winter in the cryptocurrency industry. Legacy financial institutions, investors and traders recognize the natural pattern of market trends, which regularly produce bear markets as part of a cycle. Cryptocurrencies are a young asset class, and many who have engaged with them may not have experience in traditional capital markets, so they may not have a history or understanding of market cycle principles.

In what many consider a current market downturn, this may be a suitable time for enterprises to seek out partners focused on building a business that uses innovative technologies to meet the real-world needs of the financial sector, including: 

• Securing instant, global payments
• Reducing the costs (and time) of security settlement
• Eliminating ATM, interchange fees and wire fees 
• Decreasing the volume and costs of failed or erroneous transactions
• Increasing inclusivity in the global economy

These currently relevant challenges will likely be as important to solve in the next bull market.

Differences Between TradFi and Cryptocurrency Markets

Looking long-term, we see that the future of digital assets and blockchain technology is not in doubt. The “crypto winter” coinciding with a recession-like environment does not diminish the historic opportunities these innovations offer. 

Basic economic principles tell us diversification of assets across different markets is always important to consider and should be relative to institutional goals and risk tolerance. These risk mitigation principles apply to traditional assets and cryptocurrencies, enhancing their trustworthiness. 

Several factors come into play and define those cryptocurrency exchanges that fail when easy money disappears, the economy slows, and investors get more conservative. Often these exchanges are less well-funded, carry too much leverage, are poorly managed, premised on a flawed business model, or, most importantly, need to meet existing regulatory standards. Regardless of the reasons, the failure of an asset or a company is a loss of trust. 

Prudent regulation means more stability in market downturns

Before the crypto winter, some of the most principled cryptocurrency companies sought to implement standards and safeguards similar to those used by the traditional financial system to ensure regulatory compliance by banking institutions. These practices, cited below, are attempts to provide regulatory oversight of an industry in which few companies with guaranteed protections exist. These protections are vital to enterprises as trustworthiness is key to securing growth during bear markets.

However, proper regulatory oversight and adherence are not about a regulator’s ability to confer licensed abilities and authorities. A prudential regulator ensures, among other requirements, that a company is transparent with customers, is well capitalized, is effectively managed, is mitigating risk and that its management is credible. To this end, those best equipped to thrive as the markets stabilize and move from bear to bull market are the companies that most closely resemble the well-regulated, trusted business model of enterprise financial institutions, reflecting the growing trust of their investors.

One indication of the safety and reliability of a cryptocurrency issuer is whether the company is structured and regulated (licensed) by a primary prudential regulator, such as a state or federal securities or banking regulator. In assessing a company’s regulatory status, one would want to understand if the company has a lead regulator who can look into all aspects of the business across borders and boundaries and hold the company to a comprehensive set of standards. 

Prudential oversight defines the allowable activities of the company and how it must protect its customers. In addition, a prudential regulator can perform comprehensive background checks on management, regularly examine financial records, and ensure that the company holds appropriate regulatory capital and properly manages its risks. Regulation can be a steadying foundation to build from and help enterprises survive and thrive through a bear market. 

For example, while many issuers of asset-backed tokens, or stablecoins, claim to be well-backed, safe and regulated, changes to their customer user agreements demonstrate where those claims have been less than complete. A bear market allows enterprise customers and consumers time to closely examine the legal and user agreements of firms with whom they work or may work.

A regulated trust company issuing tokens must ensure its tokens are truly backed 1:1 by cash and cash equivalents. Therefore, when a customer needs their money, it is readily available. An unregulated issuer can change their backing whenever they want and reserve the right to slow down or stop customer redemptions – in some cases, even legally refusing to return customer assets if they fail. 

Other issuers may say their customer assets are held bankruptcy-remote. However, the truth is that without a recognized trust, their customers could still be exposed to creditor claims in bankruptcy court if the issuer went bankrupt. Conversely, the assets held by a licensed trust company are truly bankruptcy remote. Even if the company fails in a bear market, customers’ assets are returned outside the corporate bankruptcy process. In this way, a customer’s dollars can be returned to the customer almost immediately upon redemption of their cryptocurrency, quelling investors’ fears, which could prevent a bank run.

Regulated trust companies are required to control their blockchains and use specific anti-money-laundering and bank secrecy procedures to onboard customers, minimizing the risk of illicit financial activity. Given a regulated trust company’s stability, integrity and security, value extends beyond the current crypto-centric world – it’s useful as a reliable real-world system of payments by enterprise institutions. 

Relevance is indicator of success for blockchain in bear markets

Bear markets provide the opportunity to diversify one’s portfolio and, in this case, bridge the gap between the traditional and cryptocurrency markets, reallocating to businesses and markets in which legitimacy and trust supply confidence. Continuing with this notion, while the failures of weaker players are painful for the business partners, customers and investors of the least effective companies at the macro-economic level, this results in the redirection of new capital into better-positioned firms. 

Ultimately, the more successful digital asset companies in bear markets will likely be those who recognize the long-term potential for the utility of blockchain technology and stablecoins within the greater financial ecosystem. Companies that can provide and manage the infrastructure necessary to support a payment system within the greater economic system have a competitive advantage. The companies that can best withstand the instability of short-term downward trends are those facilitating the movement of payments to a safer, more transparent, less costly and more efficient process than is currently available – because trust is timeless.

Market forecasters tend to emphasize the challenges of bear markets when discussing market economies, especially for consumers. However, bear markets can be an opportunity to boost innovation and growth for many enterprises. Timing and trust often help determine enterprise success in bear markets.