Users and investors are re-evaluating token-based companies amid the broader cryptocurrency downturn.
4 min
The cryptocurrency rout has spread to startups that offer users digital tokens, pushing down digital asset prices and driving away hordes of users.
The startups—part of what has been called Web3—allowed users to play virtual games and collect digital assets, and the companies’ growth was hinged on interest from people eager to wade into blockchain-based assets. The broader cryptocurrency downturn this year is causing a downturn in users in many Web3 companies, and players and investors are re-evaluating the utility of token-based business models.
“Many crypto companies can only exist by engineering speculation,” said Adam Fisher, a Tel Aviv-based partner at VC firm Bessemer Venture Partners. “The utility of Web3 is not clear at all.”
Investors in 2021 poured more than $4.5 billion into blockchain-based gaming, digital media and commerce companies—popular sectors of Web3 investment—compared with $197 million in 2020, according to data from Crunchbase. The increase mirrored the rise of cryptocurrency investing in Silicon Valley: Last year, venture capitalists invested about $17.9 billion into blockchain-related startups, compared with $2.1 billion in 2020, according to Crunchbase.
Axie Infinity is an online game where users can make money by breeding virtual pets and earning other digital assets on the blockchain, which they can then sell for cash on crypto exchanges. Axie Infinity’s parent company, Vietnam-based Sky Mavis Ltd, along with digital-art creator Yuga Labs and fitness app StepN, offered services they said were part of a new iteration of the internet that distributed ownership and power to users in the form of digital tokens. Venture firms such as Andreessen Horowitz and Paradigm raised billions of dollars in new funds dedicated to crypto startups.
Andreessen Horowitz led a $152 million investment into Sky Mavis in October, valuing it at about $3 billion. General partner Arianna Simpson touted Axie Infinity as part of a “play-to-earn revolution,” saying the ability to own and sell in-game digital assets would drive loyalty to the platform. Daily platform users reached a high of 2.7 million in November, according to data from Sky Mavis.
As the crypto boom has crumpled amid inflationary fears and a broader market downturn, the prices of Axie’s in-game tokens crashed, and Axie users fled the platform. As of July 4, the site had 368,456 daily active users, down 86% from November, a drop that came after hackers stole more than $500 million worth of cryptocurrency from the game in March.
Sky Mavis co-founder Aleksander Larsen said the company is in the process of phasing out the older version of Axie Infinity, so future users will have the option of using digital tokens or playing without them.
Proponents of Web3 say the blockchain is a new way to shift economic power from dominant companies such as Facebook parent Meta Platforms Inc. and institutions like central banks. Over the past few years, it has fueled the rise of sectors such as decentralized finance, where people are able to buy and sell cryptocurrencies validated automatically on the blockchain instead of relying on financial middlemen.
StepN is a fitness app that allows people to earn a token called Green Satoshi based on how much they walk or jog. Users, who earn the tokens after they buy a nonfungible token, or NFT, representing a pair of sneakers, flocked to the platform as the price of the Green Satoshi token increased in the first few months of the year.
In the past two months, the token price has crashed, and the number of monthly active users on the platform dropped more than 30% from May to June, according to data from Dune Analytics. A spokeswoman said the data excludes active users who don’t transfer their tokens for other cryptocurrencies and thus “does not represent the full picture for active users of StepN.” StepN, based in Adelaide, Australia, announced in January it raised $5 million from investors including Sequoia Capital India
Some Web3 companies’ difficulty in keeping users amid the plummeting prices of its tokens has validated some crypto sceptics’ beliefs that there aren’t many instances where consumers have a true use for blockchain-based services.
“What subset of things created in this cycle are going to work? A small subset,” said Haseeb Qureshi, a managing partner at crypto VC firm Dragonfly Capital. “That’s normal,” he said. The role of venture capital “is to try and find a lot of big ideas, and a few of them work and end up changing the world.”
Some well-funded crypto startups have introduced tokens before they have developed the products associated with those sales. The approach led to early revenue as users bought and started to trade the tokens, driving up their value.
One-year-old startup Yuga Labs and its partners, including gaming firm Animoca Brands, made more than $300 million in revenue by selling a collection of NFTs at the end of April representing unique plots of land in virtual world Otherside. Yuga Labs still hasn’t released Otherside to the public. Since the launch, the NFT’s floor price, or the cost of the cheapest NFT available for sale, has declined more than 70%, according to data from CoinGecko.
The declining price of the NFT for Otherside tracks a broader selloff in the market for NFTs, which were held out last year as a new way to own digital items but so far have been a way to buy luxury items popular within the crypto community. OpenSea, the world’s largest marketplace for such assets, saw $697 million in trading volume in June, down from $4.9 billion in trades in January, according to Dune Analytics.
“I believe that many of these NFTs are just temporary fads and are going to disappear,” said Marcos Veremis, a partner at Accolade Partners, which invests in crypto venture funds including Andreessen Horowitz. He thinks it will take time for NFTs to mature but remains optimistic.
“The current washout that’s happening is very healthy,” he said.
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Multinationals like Starbucks and Marriott are taking a hard look at their Chinese operations—and tempering their outlooks.
4 min
For years, global companies showcased their Chinese operations as a source of robust growth. A burgeoning middle class, a stream of people moving to cities, and the creation of new services to cater to them—along with the promise of the further opening of the world’s second-largest economy—drew companies eager to tap into the action.
Then Covid hit, isolating China from much of the world. Chinese leader Xi Jinping tightened control of the economy, and U.S.-China relations hit a nadir. After decades of rapid growth, China’s economy is stuck in a rut, with increasing concerns about what will drive the next phase of its growth.
Though Chinese officials have acknowledged the sputtering economy, they have been reluctant to take more than incremental steps to reverse the trend. Making matters worse, government crackdowns on internet companies and measures to burst the country’s property bubble left households and businesses scarred.
Now, multinational companies are taking a hard look at their Chinese operations and tempering their outlooks. Marriott International narrowed its global revenue per available room growth rate to 3% to 4%, citing continued weakness in China and expectations that demand could weaken further in the third quarter. Paris-based Kering , home to brands Gucci and Saint Laurent, posted a 22% decline in sales in the Asia-Pacific region, excluding Japan, in the first half amid weaker demand in Greater China, which includes Hong Kong and Macau.
Pricing pressure and deflation were common themes in quarterly results. Starbucks , which helped build a coffee culture in China over the past 25 years, described it as one of its most notable international challenges as it posted a 14% decline in sales from that business. As Chinese consumers reconsidered whether to spend money on Starbucks lattes, competitors such as Luckin Coffee increased pressure on the Seattle company. Starbucks executives said in their quarterly earnings call that “unprecedented store expansion” by rivals and a price war hurt profits and caused “significant disruptions” to the operating environment.
Executive anxiety extends beyond consumer companies. Elevator maker Otis Worldwide saw new-equipment orders in China fall by double digits in the second quarter, forcing it to cut its outlook for growth out of Asia. CEO Judy Marks told analysts on a quarterly earnings call that prices in China were down roughly 10% year over year, and she doesn’t see the pricing pressure abating. The company is turning to productivity improvements and cost cutting to blunt the hit.
Add in the uncertainty created by deteriorating U.S.-China relations, and many investors are steering clear. The iShares MSCI China exchange-traded fund has lost half its value since March 2021. Recovery attempts have been short-lived. undefined undefined And now some of those concerns are creeping into the U.S. market. “A decade ago China exposure [for a global company] was a way to add revenue growth to our portfolio,” says Margaret Vitrano, co-manager of large-cap growth strategies at ClearBridge Investments in New York. Today, she notes, “we now want to manage the risk of the China exposure.”
Vitrano expects improvement in 2025, but cautions it will be slow. Uncertainty over who will win the U.S. presidential election and the prospect of higher tariffs pose additional risks for global companies.
For now, China is inching along at roughly 5% economic growth—down from a peak of 14% in 2007 and an average of about 8% in the 10 years before the pandemic. Chinese consumers hit by job losses and continued declines in property values are rethinking spending habits. Businesses worried about policy uncertainty are reluctant to invest and hire.
The trouble goes beyond frugal consumers. Xi is changing the economy’s growth model, relying less on the infrastructure and real estate market that fueled earlier growth. That means investing aggressively in manufacturing and exports as China looks to become more self-reliant and guard against geopolitical tensions.
The shift is hurting western multinationals, with deflationary forces amid burgeoning production capacity. “We have seen the investment community mark down expectations for these companies because they will have to change tack with lower-cost products and services,” says Joseph Quinlan, head of market strategy for the chief investment office at Merrill and Bank of America Private Bank.
Another challenge for multinationals outside of China is stiffened competition as Chinese companies innovate and expand—often with the backing of the government. Local rivals are upping the ante across sectors by building on their knowledge of local consumer preferences and the ability to produce higher-quality products.
Some global multinationals are having a hard time keeping up with homegrown innovation. Auto makers including General Motors have seen sales tumble and struggled to turn profitable as Chinese car shoppers increasingly opt for electric vehicles from BYD or NIO that are similar in price to internal-combustion-engine cars from foreign auto makers.
“China’s electric-vehicle makers have by leaps and bounds surpassed the capabilities of foreign brands who have a tie to the profit pool of internal combustible engines that they don’t want to disrupt,” says Christine Phillpotts, a fund manager for Ariel Investments’ emerging markets strategies.
Chinese companies are often faster than global rivals to market with new products or tweaks. “The cycle can be half of what it is for a global multinational with subsidiaries that need to check with headquarters, do an analysis, and then refresh,” Phillpotts says.
For many companies and investors, next year remains a question mark. Ashland CEO Guillermo Novo said in an August call with analysts that the chemical company was seeing a “big change” in China, with activity slowing and competition on pricing becoming more aggressive. The company, he said, was still trying to grasp the repercussions as it has created uncertainty in its 2025 outlook.
Few companies are giving up. Executives at big global consumer and retail companies show no signs of reducing investment, with most still describing China as a long-term growth market, says Dana Telsey, CEO of Telsey Advisory Group.
Starbucks executives described the long-term opportunity as “significant,” with higher growth and margin opportunities in the future as China’s population continues to move from rural to suburban areas. But they also noted that their approach is evolving and they are in the early stages of exploring strategic partnerships.
Walmart sold its stake in August in Chinese e-commerce giant JD.com for $3.6 billion after an eight-year noncompete agreement expired. Analysts expect it to pump the money into its own Sam’s Club and Walmart China operation, which have benefited from the trend toward trading down in China.
“The story isn’t over for the global companies,” Phillpotts says. “It just means the effort and investment will be greater to compete.”
Corrections & Amplifications
Joseph Quinlan is head of market strategy for the chief investment office at Merrill and Bank of America Private Bank. An earlier version of this article incorrectly used his old title.
