What do tech layoffs mean for the crypto universe?

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Major layoffs in the crypto industry have become the norm. It seems like every day there is a new story of layoffs featuring cryptocurrency exchanges, Bitcoin mining companies (BTC -1.04%) or financial services companies involved in crypto assets.

There are of course two ways to look at this situation: the glass half empty approach and the glass half full approach.

Glass half empty

Let’s start with the glass-half-empty approach, as it has become the mainstream media’s favorite narrative. The story here is very simple: the crypto market implodes in 2022, the onset of the crypto winter begins, and companies struggling to survive begin mass layoffs. The implicit message, of course, is that many crypto companies will not survive, or if they do, they will play much less of a role in the current financial system. After the collapse of crypto exchange FTX (FTT -4.14%), regulators have little to no patience with bad actors and scammers who have somehow found a home in the industry of crypto.

Image source: Getty Images.

Of course, when it comes to crypto layoffs, many investors are focused on Coinbase (COIN 11.62%), which is one of the top crypto companies. The company has been remarkably transparent about the impact of the crypto market implosion on its business model. As 2023 approached, many analysts believed Coinbase had completed its string of layoffs that began in June. But in mid-January, the company announced another 950 layoffs, or about 20% of its remaining workforce.

The move was particularly disappointing as it signaled that Coinbase did not expect retail crypto investors to return any time soon. Why would you cut nearly 1,000 employees if Bitcoin could make an epic comeback soon? According to Chief Executive Brian Armstrong, this latest staff reduction was necessary to put Coinbase back on the path to profitability. But if you search social media, you can find many doomsday scenarios featuring Coinbase. And, indeed, just a week after those layoffs, Coinbase announced that it was closing its operations in Japan.

glass half full

However, there is a competing narrative that says the layoffs could end up being a good thing for the crypto industry. It may seem counter-intuitive, but this approach has its foundation 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 Polaroid’s loss of dominance in photography to the demise of your hometown newspaper. It can be summed up in one pithy sentence: “Out with the old, in with the new”. According to some economists, industries sometimes have to be turned upside down for the next round of innovation to take place. This may be what is happening with crypto right now.

A good example here is with cryptocurrency exchanges. The “old” model featured centralized exchanges such as Coinbase, while the “new” model will feature decentralized exchanges such as Uniswap (UNI 2.98%), PancakeSwap (CAKE -0.14%) and SushiSwap (SUSHI 0 ,18%). Centralized exchanges require people to do the day-to-day work; decentralized exchanges only require smart contracts and bits of computer code. Simply put, you won’t hear about Uniswap cutting people off, because there’s no one to cut when everything is decentralized. This new model is essentially a peer-to-peer trading model, where you trade cryptos directly with other market participants.

Or what about all the bitcoin mining companies scaling back operations and laying off staff? This could be a signal that the “old” model featuring proof-of-work cryptocurrencies such as Bitcoin is a thing of the past. Now that Ethereum (ETH -1.88%) has finally converted to a proof-of-stake cryptocurrency following The Merge last year, perhaps the long-term trend is towards blockchains green and energy-efficient using proof-of-stake validation? This model, in turn, will provide its own form of crypto staking-based innovation. These include innovations such as “liquid staking,” which flourished during the crypto winter.

Which scenario is the most likely?

Of course, maybe this glass-half-full approach is just hopium. Maybe all those million dollar price predictions for Bitcoin were completely ridiculous. Perhaps the crypto industry is destined to fade into obscurity. Maybe the meme coins are the Dutch tulip bulbs of that time.

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. Just like no one is bragging about working at Enron anymore (remember when they were “the smartest guys in the room”?) – no one will be bragging about working at FTX. Perhaps the next wave of tech talent will find something else to interest them, like artificial intelligence and new ways to create economic value via AI-powered chatbots. But I hope not, because the blockchain and crypto companies emerging from this crypto winter are going to need that talent more than ever.

Dominic Basulto has positions in Bitcoin and Ethereum. The Motley Fool has positions and recommends Bitcoin, Coinbase Global, Ethereum, and Uniswap Protocol Token. The Motley Fool has a disclosure policy.

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