Bitcoin
How Crypto Founders Are Preparing for the Next Bear Market – DL News
- Crypto founders expect another downturn within 18 months.
- Elliot Chun, partner at Architect Partners, describes his thinking.
- Some areas of concern include the enthusiasm surrounding fluid resumption protocols.
Crypto founders are already preparing for the next crisis.
This is according to Elliot Chun, partner at Architect Partners, a firm that advises crypto companies on mergers, acquisitions and financing strategies.
“They all come to me saying, ‘I’m preparing for the next drop in 18 months and I want to capitalize on the current change,’” Chun said.
“I’ve never had so many founders and executive teams say we need to make something happen within 18 to 24 months.”
The fear is justified. The brutal crypto crisis of 2022 caught many companies off guard.
Crypto companies like Bitcoin mining company Core Scientific and exchange Voyager have had to declare bankruptcy, not to mention spectacular fraud-driven blowups like FTX.
Still, savvy startups can turn the current bull run to their advantage by taking advantage of Wall Street’s interest in crypto as well as venture capitalists’ renewed interest in the sector.
Be ready
Chun said crypto companies are preparing differently depending on their profiles.
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“Most of the time, they look for a strategic partner – a company in the traditional financial sector that has a similar vision,” Chun said. “They could be there as business partners or eventually acquire the crypto company outright.”
Naturally, companies that raised significant capital in 2020 or 2021 don’t think the same way as those that didn’t – like recent startups.
The former often seek to generate enough revenue so that private capital can buy them. One way to do this is to establish a global presence, as the industry is still largely fragmented on a regional basis.
Companies can also choose to expand their suites of products and services.
“Institutional clients don’t want to work with five different groups to custody, tokenization, increasing funding – they need comprehensive, comprehensive services,” Chun said. “There aren’t many who can do all that.”
Recent startups, Chun said, have one or two great products and are run by people who believe in the industry’s long-term potential — but being a founder is hard work, so they’re open to being acquired.
Learning from 2021
Enter Wall Street’s entry into space through Bitcoin spot exchange-traded fundsand increased adoption, the prospects for well-run crypto companies have never looked better, Chun said.
It’s a different feeling from the excesses of 2020 and 2021, when VCs’ fear of missing out “led to unrealistic valuations, which in turn led to poor operating discipline,” Chun said.
Companies acted as if the abundance of capital would last forever.
“People were spending money on ridiculous things — like $150,000 on a party at a conference, for a pre-revenue company,” Chun said.
But companies that survived the crisis had “much greater” operational discipline, Chun said.
Some are even generating revenue.
Reestablishment of liquid
Even though this bull market is healthier than the last, concerns still remain.
Chun cited the hype surrounding EigenLayer and others reestablishment protocols – which allow investors to secure the Ethereum blockchain and other protocols, such as oracles and bridges, with the same stack of Ether.
“The concept of liquid restoration it’s essentially internal crypto-native recipes being layered on top of others, to the point where no one understands how to untangle these things,” Chun said. “This is dangerous.”
Coinbase researchers expressed similar concerns in a April report.
Eigenlayer did not immediately respond to a request for comment.
These projects are receiving a lot of capital from VCs because they generate quick and surprising returns, Chun said.
Investors who allocate capital to projects will tend to jump ship immediately after the token allocation is unlocked, Chun said – similar to venture funds selling their shares immediately after a company goes public.
While companies take three to seven years to go public, crypto projects can launch their coins live within months.
“VCs can go back to their liquidity providers and say we got 80% returns in a year – and they look like geniuses,” Chun said.
Memecoins
Private investment is also warping markets on a larger scale, Chun said.
Original crypto investors could leverage their knowledge of the technology to their advantage in the past, but that has changed.
Everyone has access to the same information and can execute that information at the same speed.
So how do professional investors gain the upper hand?
“Their advantage is just getting early access to projects,” Chun said. “Whether it’s seed rounds or equity rounds, with token distributions that normal people don’t have access to.”
This could explain why retail traders resort to memecoins that doesn’t have billion in tokens ready to be unlocked, leveling the playing field.
“Retailers actually have the ability to prove once again that they can get more returns from something that doesn’t have a venture fund – or a founder,” Chun said. “I can’t blame them for trying.”
Still, Chun said memecoins that don’t seek to advance the space will ultimately be their undoing.
“The market will dry up.”
Tom Carreras is markets correspondent for DL News. Have a tip about VCs and crypto? Get in touch at tcarreras@dlnews.com