Major layoffs across the crypto industry have become the norm. It seems like every day there’s a new story of layoffs featuring cryptocurrency exchanges, Bitcoin (BTC -1.84%) mining companies, or financial services firms involved with crypto assets.
There are two ways of looking at this situation, of course: the glass half-empty approach, and the glass half-full approach.
Let’s start with the glass half-empty approach, since this has become the favorite narrative of the mainstream media. The story here is very simple: The crypto market implodes in 2022, the onset of crypto winter begins, and companies struggling for survival begin mass layoffs. The implicit message, of course, is that many crypto companies won’t survive, or if they do they will have much less of a role in the current financial system. After the meltdown of crypto exchange FTX (FTT -3.78%), regulators have little to no patience with the bad actors and scam artists who somehow found a home in the crypto industry.
Of course, when it comes to crypto layoffs, many investors focus on Coinbase (COIN 11.62%), which is one of the most prominent crypto companies. The company has been remarkably transparent about the impact of the crypto market implosion on its business model. Heading into 2023, many analysts thought that Coinbase had completed its round of layoffs that started back in June. But then in mid-January the company announced another 950 layoffs, or about 20% of its remaining workforce.
The move was particularly disappointing because it signaled that Coinbase didn’t expect retail crypto investors to return anytime soon. Why would you cut nearly 1,000 staffers if Bitcoin might stage an epic comeback soon? According to Chief Executive Officer Brian Armstrong, this latest staff reduction was needed to get Coinbase back on a path to profitability. But if you search social media, you can find plenty of doomsday scenarios featuring Coinbase. And, indeed, just a week after those layoffs, Coinbase announced it was shutting operations in Japan.
However, there’s a competing narrative that says the layoffs might end up being a good thing for the crypto industry. It might sound counter-intuitive, but this approach has its basis in an economic theory dating back to the 1950s (but still taught in business schools) called “creative destruction.” This theory has been used to explain everything from the loss of Polaroid’s dominance in photography to the demise of your hometown newspaper. It can be summarized in a single pithy phrase: “Out with the old, in with the new.” According to some economists, industries sometimes need to be upended for the next round of innovation to take place. So that might be what is happening now with crypto.
A good example here involves cryptocurrency exchanges. The “old” model featured centralized exchanges such as Coinbase, while the “new” model will feature decentralized exchanges such as Uniswap (UNI 4.20%), PancakeSwap (CAKE 0.46%), and SushiSwap (SUSHI 3.26%). Centralized exchanges require people to do the everyday work; decentralized exchanges only require smart contracts and pieces of computer code. Simply stated, you won’t hear about Uniswap cutting people, because there’s nobody to cut when everything is decentralized. This new model is essentially a peer-to-peer trading model, in which you are swapping cryptos directly with other market participants.
Or what about all the Bitcoin mining companies that are now slashing operations and laying off staff? This could be a signal that the “old” model featuring proof-of-work cryptocurrencies such as Bitcoin are a thing of the past. Now that Ethereum (ETH -1.42%) has finally converted into a proof-of-stake cryptocurrency as a result of The Merge last year, maybe the long-term trend is toward green, energy-efficient blockchains using proof-of-stake validation? This model, in turn, will provide its own form of innovation based around crypto staking. These include innovations such as “liquid staking,” which has blossomed during the crypto winter.
Which scenario is more likely?
Of course, maybe that glass-half-full approach is merely hopium. Maybe all those $1 million price predictions for Bitcoin were completely ridiculous. Maybe the crypto industry is destined to fade into obscurity. Maybe meme coins are the Dutch tulip bulbs of this era. Maybe the belief that mathematicians and cryptographers could create cryptocurrencies out of thin air will be this generation’s version of medieval alchemists thinking they could transform lead into gold.
That would be disappointing, of course, because it would mean that the best and the brightest would no longer want to work in the crypto industry. Much as nobody brags about working at Enron any more (remember when they were “the smartest guys in the room”?) — nobody will brag about having worked at FTX. Perhaps the next wave of tech talent will find something else to interest them, such as artificial intelligence and new ways of creating economic value via AI-powered chatbots. But I hope not, because the blockchain and crypto companies that emerge from this crypto winter are going to need this talent more than ever.