The plunge in the cryptocurrency market is weighing on the software-development community that spawned over 1,000 digital coins amid dreams of independence from traditional financial systems and instant wealth.

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ETCDEV, the startup that led development on Ethereum Classic, which is among the top 20 coins with a market capitalisation of about US$400 million (NZ$581 million), announced this week that it's shuttering operations due to a funding crunch. ConsenSys, one of the largest crypto-related software startups based in New York, said it's planning a reorganisation.

Many of the companies are suffering because they kept a portion of their funds in digital assets, whether in tokens they sold through initial coin offerings or in Bitcoin and Ether, which served as the preferred means of exchange in the crypto world. As prices collapsed this year by more than 90 per cent in some cases, and their so-called digital wallets thinned out, many developers found they couldn't raise additional funding.

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"We are definitely a part of this trend," Igor Artamonov, founder of ETCDEV, said in an interview. "There are a few things that happened at the same time. I am sure if that happened a year ago, that wouldn't be a problem at all, a year ago there was a lot of free money in the market. But in a bear market there's a change."

ETCDEV discovered it was in a financial crunch last week, and couldn't raise funds, Artamonov said. Its 12 workers are searching for other jobs and a few have been recruited by a rival company, he said.

They're not alone. In late November, Steemit Inc., which supports a site that pays content contributors for posts, said in a blog posting that it's been forced to lay off nearly 70 per cent of its employees. Adult entertainment site SpankChain has downsized from 12 people to eight workers recently, according to a tweet from CEO Ameen Soleimani. That's down from 20 employees and contractors in March.

Venture capitalists funded about 1,180 crypto startups since 2012, to the tune of more than US$5.6 billion, according to CoinDesk. Hundreds of other companies raised about US$22.5 billion by issuing tokens to the public or so-called accredited investors via ICOs, according to the researcher.

Sirin Labs, for example, raised $158 million last year to create a mobile phone that allows consumers to trade and use crypto. The company, which will ship its first batch of a few thousand phones in December, is now considering abandoning hardware altogether and refocusing on shipping software for other phone makers to use, Chief Executive Moshe Hogeg said in an interview. Sirin now only has enough funds for six to 12 months of operations, he said.

"I'd be comfortable saying that the pricing pressure on digital assets in 2018 is likely to lead to 25-50-per cent shutdowns and layoffs for current projects based on historical comparisons," said Lex Sokolin, global director of fintech strategy at Autonomous Research. "However, the pace of new entrants and capital could counterbalance this contraction and still grow the sector overall."

Many startups had trouble getting to a viable product, Martha Bennett, a principal analyst at Forrester Research, said in an email. And others' business models didn't hold up, such as East Wenatchee, Washington-based Giga Watt, which filed for bankruptcy in November. The provider of hosting services for people wishing to mine cryptocurrencies couldn't cover costs when Bitcoin's price nosedived.

"Sooner or later, this would have led to a contraction anyway," Bennett said. "The crypto crash acted as both catalyst and wake-up call."

- Bloomberg