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Kc  · 09/01/22

Lipstick and Candy: What could make the lipstick effect during crypto winter?

06/27/23 · Crypto trading 101 · This is not a financial advice
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The “lipstick effect” is the nickname economists gave to a retail spending pattern that has been observed in most past recessions since the Great Depression of 1930s.

When times are tough, consumers stop spending big. But instead of simply not spending on anything that is not necessary, people choose different products to make themselves feel better. Top selling products are things that are relatively cheap, but provide a psychological boost.

Some economists say that part of the decision process is a search for a status symbol. That explains why women go for luxury lipsticks - hence the name of the effect - as lipsticks are reapplied in public places.

But sometimes the goal is just pure entertainment. That is why cinema tickets and candy also sold well during the Great Depression and quite likely also why bubble gum is a thing.

One more angle that plays into the recession spending patterns is the perceived shot at a better future. In past recessions that popped up in high lottery ticket sales, and let me tell you, there could be far worse ways for this to manifest than gambling.

So, let’s do some wild speculation. What might be the products driving the lipstick effect in crypto during the bear market?

Here are four contenders, starting from the least likely one.

  1. Play2Earn for escapism and entertainment

    GameFi has been hit heavily since April with some NFT games losing around 13% their total active users, according to Footprint Analytics.

    In-game tokens and NFTs were a hot commodity a few months back. So it’s not surprising that people get salty when their value drops, especially since they still have to do the same amount of work in earning them.

    With less active users on the play2earn model it becomes much harder for you sell your NFTs as there are no buyers. This creates yet another negative feedback loop and leads to even less interest in play2earn.

    One way to stop the bearish spiral from spreading would be a game so immersive that people would just really want to play it, no matter what.

    That hasn’t happened yet, though, but there is plenty of game development going on.

  2. Airdrops for the quick buck

    Crypto airdrops and bounties have been taken as a way to get your hands on some cryptocurrency without investing any money. Airdrops and bounties are the most accessible way to earn crypto - everyone has a smartphone and a Twitter account.

    Both airdrops and bounties are marketing tools. They get released to the community as campaigns and people are to receive tokens or NFTs for as little as signing up or retweeting.

    Crypto bounties ask for a longer commitment, participants are to write blog posts or shill a token on Twitter consistently over a few weeks.

    With the crypto winter starting, the volume of crypto bounties thinned down a lot. They are more expensive to run as they require a campaign manager whereas an airdrop can be dealt with via a Gleam contest or a Google form.

    As a result, you will still get tons of crypto airdrops available right now, especially in DeFi and in NFT gaming.

    It’s hard to say what the future holds for DeFi, but one thing is certain: if people stop believing in its potential then there will be a lot less airdrops. Airdrops are done for marketing, with no public confidence there would be little reason to promote DeFi products.

    As of now though, airdrops are gaining in popularity, if anything.

  3. Metaverse as an escape to virtual reality

    Metaverse is still more or less a concept, or as the crypto industry likes to say, a vapourware.

    The idea is to have a decentralized virtual world where you can own your own digital assets and buy or craft your own digital identity. Think of it as a mix of Bitcoin, Ethereum, and Second Life. It’s a Web3 platform that runs its backend on blockchain - it uses NFTs for identities, land and properties or as consumer items.

    Everyone in the crypto industry has been quick to jump on the NFT bandwagon when Metaverse started getting promoted. And that makes sense.

    NFTs just as any blockchain-based asset suffers the limitation of being purely virtual. There have been countless altcoin projects to connect a physical object with its representation on blockchain, mostly with the aim of using that for luxury goods or works of art. It hasn’t really worked out.

    But there’s a simple way around the issue: Create a fully virtual world where you can create a status symbol out of a purely digital product and put a price tag on it.

    The marketing for Metaverse has been busy convincing people that this new virtual world will be the future, but so far the skepticism seems to outweigh any excitement.

    If Metaverse does become a hit though, then that would create an enormous market for NFT art and cryptocurrencies in general.

  4. Memecoins for both entertainment and a shot at profit

    Random outbursts of Elon Musk shilling DOGE and a lot of additional speculations as to what other meme coins he possibly shills in some his more vague tweets have been the mainstay on cryptotwitter for way longer than would seem reasonable. People love to speculate on penny cryptos, especially if they are exploitable for memes.

    Meme coins are the epitome of pure entertainment and a chance to get in early on something that could pop off. Most meme coins have no utility value and they don’t even pretend to promise any.

    It is true that you can now stake Shiba Inu coin on Binance and elsewhere. That is seen as a value proposition - you can yield staking rewards just for holding SHIB. This however does not change the fact that Shiba Inu is a token with enormous supply, no utility and too high fees and volatility to be used as a currency.

    Tldr; meme coins exist just for the lulz.

    Right now, with the crypto industry mostly sobering up from the hype of the DeFi season of 2021, meme coins and their army of followers are surprisingly more relevant than ever.

    Ever since it became known that there’s money to be made in the crypto industry, it has been hard to find good crypto assets to invest in. Projects that have a sound idea do not take off or lag behind, like Bitcoin, but a random half-functional blockchain becomes the hit. As mentioned in a recent technical analysis post, if you look at the charts and nothing else, you’ll see that the strongest assets of the season were Luna and Solana.

    In turn, there’s a lot of people who are more than happy to opt for gambling on meme coins instead, since it’s all just a show anyway.

    Meme coins are a way to check out and at least have some fun while you might possibly make some money as well.

    Then you just wait until the industry behemoths figure out what’s next.

Risk note: Always do your own research, investing in cryptocurrencies is risky.

Scam alert for airdrops: There are scam airdrops out there, especially on Facebook and Twitter. If an airdrop form asks you to send in a small amount of tokens to participate, then you know it’s a scam. All genuine airdrops are 100% free. The only thing you stand to lose in a genuine airdrop is the time you spent retweeting if the campaign doesn’t pay you.

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