Blockchain
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, outlines their thinking.
- Some areas of concern include the hype around liquid repackaging protocols.
Cryptocurrency founders are already preparing for the next recession.
That’s according to Elliot Chun, partner at Architect Partners, a firm that advises crypto companies on mergers, acquisitions and financing strategies.
“Everyone comes to me saying, ‘I’m preparing for the next dip in 18 months and I want to take advantage of the current move,’” Chun said.
“I’ve never had so many founders and executive teams say we need to build something in 18 to 24 months.”
The fear is justified. The brutal cryptocurrency crisis in 2022 caught many companies by surprise.
Crypto companies like Bitcoin miner Core Scientific and exchange Voyager have had to file for bankruptcy, not to mention spectacular fraud-induced crashes, like FTX.
Even so, savvy startups can use the current bull run to their advantage by capitalizing on Wall Street’s interest in cryptocurrencies and venture capitalists renewed interest in the sector.
To be prepared
Chun said crypto firms are preparing differently, depending on their profiles.
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“Most of the time they’re looking for a strategic partner, a traditional finance firm that has a similar vision,” Chun said. “They may come in as a business partner or possibly acquire the entire cryptocurrency company.”
Of course, companies that raised significant capital in 2020 or 2021 don’t think the same way as those that didn’t, such as recent startups.
The former often try to generate enough revenue for private equity to take them over. One way to do this is to establish a global presence, as the industry is still mostly fragmented on a regional basis.
Companies can also choose to expand their range of products and services.
“Institutional clients don’t want to work with five different groups custody, tokenization, without funding: they need comprehensive and comprehensive services,” Chun said. “There aren’t many who can do all this.”
Recent startups, Chun said, have one or two excellent products and are run by believers in the industry’s long-term potential, but being a founder is grueling work, so they are open to being acquired.
Learning from 2021
Between Wall Street’s entry into space through spot exchange traded funds Bitcoinand greater adoption, the prospects for well-run crypto companies have never been better, Chun said.
It’s a different feeling than the excesses of 2020 and 2021, when VCs’ fear of missing out “led to unrealistic valuations, which in turn led to poor operational discipline,” Chun said.
Companies behaved as if the abundance of capital lasted forever.
“People spent money on ridiculous things, like $150,000 for a party at a conference, for a pre-revenue company,” Chun said.
But companies that survived the crisis had “much higher” operational discipline, Chun said.
Some even generate revenue.
Liquid repackaging
While this bull market is healthier than the previous one, concerns remain.
Chun cited the hype around EigenLayer and others reformulate the protocols – which allow investors to secure the Ethereum blockchain and other protocols, such as oracles and bridges, with the same Ether stack.
“The concept of liquid repackaging these are essentially native cryptocurrencies internal revenues being stacked on top of each other to the point that no one even understands how to disclose these things,” Chun said. “It’s dangerous.”
Coinbase researchers expressed similar concerns in a April relationship.
Eigenlayer did not immediately respond to a request for comment.
These projects are getting tons of capital from VCs because they generate quick and eye-popping 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 that sell their shares immediately after a company goes public .
While companies will take three to seven years to go public, crypto projects can launch their coins in just a few months.
“VCs can go back to their liquidity providers and say we got an 80% return within a year – and they look like geniuses,” Chun said.
Memecoin
Private investment is also warping markets on a larger scale, Chun said.
Original cryptocurrency investors could use their understanding of the technology to gain an advantage in the past, but things have changed.
Everyone has access to the same information and can perform operations on that information at the same speed.
So how can professional investors benefit?
“Their advantage comes only from early access to projects,” Chun said. “Either the seed round or the equity round, with token distributions that normal people don’t have access to.”
This may explain why retail traders are turning to it memecoin who have not billion into tokens ready to be unlocked, leveling the playing field.
“Retailers actually have the ability to demonstrate once again that they can get higher returns from something that doesn’t have a venture fund — or a founder,” Chun said. “I can’t blame them for trying.”
However, Chun said that memecoins that do not seek to advance into space will ultimately be their undoing.
“The market will fix itself.”
Tom Carreras is a markets correspondent at DL News. Do you have advice on VC and cryptocurrencies? Please contact tcarreras@dlnews.com