Crisis? What Crisis?
Some thoughts on the current bear market
Welcome to Bear Territory
The crypto market experienced a dark year in 2018. : prices and market capitalization have declined from an all-time high in December 2017. Between December 19th, 2017 and December 18th, 2018, the price of Bitcoin has gone from 16,000 USD to 3,000 USD.
This has resulted in a number of consequences for the overall cryptocurrency industry:
After a sharp drop in the price of Ethereum, ICO projects funded when ETH was at 1,000 USD suddenly see themselves with only a few months to survive.
The viability of some ICO companies has been affected, which means that they either had to scale down or suspend operations indefinitely. ICO projects that invested heavily in their headcount, investments and legal procedures without having hedged themselves from a decline in the overall market needed to make some very tough decisions: scale down and survive, or continue to burn cash and die.
Cryptocurrency funds have taken a significant loss on their performance.
Whereas anyone who is long on Bitcoin could only boast a 1,900% YOY return in December 2017 — a number that starkly contrasts with the poor returns of traditional markets this year — the same strategy in 2018 would have yielded an approximate -80% return. Adverse market conditions have had an extremely negative impact on global cryptocurrency hedge fund performance during the past year.
More problematic, however, certain funds that specialized in ICO investments, which were set up and raised funds based on the promise of instantly liquid VC investments, have begun to see the flip side of the coin. The overall ICO market has been in a dire strait this past year, and investments, even when made at juicy pre-sale discounts, had to be marked down. What’s more, the promise of liquidity on these investments has not held up: looking at current liquidity in secondary markets, a fund could not divest its ICO tokens without taking on a significant slippage cost.
For instance, on Dec 18, 2019, selling 210,000$ worth of EOS on Kraken (i.e about 0.005% of the total amount raised during the ICO) would incur a 7% slippage in the price for the initial ICO buyer.
More layoffs, less capital
As a result, cryptocurrency companies have started letting people go in order to lower their recurring costs. Consensys, one of the most visible company in the industry, recently had to lay off 13% of their staff.
Lavishness is not on the agendas of cryptocurrency companies anymore. Less venture capital money is flowing into the overall ecosystem, leading to fewer projects being funded, as well as a slowdown of the blockchain and cryptocurrency industry development on a global scale.
Potential for a healthy cleansing of the ecosystem?
Our opinion is that this crisis is giving the cryptocurrency ecosystem a much needed and highly anticipated cleanse: no more irrational exuberance, lavishness, Lamborghinis and scam ICOs.
Instead, this crisis forces companies to create value and generate revenue — otherwise, they will not survive the current downturn. This means a focus on hard work, innovating and building new products, delivering value, and developing great teams.
Despite the difficult context, we view this process as necessary and one that will ultimately be positive for the long-term growth of the ecosystem and the widespread adoption of digital assets and blockchain.
A few positive aspects of this bear market:
A rationalization of financing
Projects with a well-built plan to create value will capture a bigger chunk of the overall financing of the ecosystem, and less “projects with no plan but good PR” will be funded.
A prioritization on building products which create value (and generate revenue in the short to medium term).
Companies which had described themselves during the bull market as an all-encompassing product to revolutionize the world now need to wind down and focus on the aspects of their projects that create the most value — and that’s perfectly fine.
Deploying efforts and focusing on one thing at a time, while knowing when to pivot if the original assumption is wrong has been the recipe to success for a large majority of startups. There’s no reason why cryptocurrency companies should be any different.
Focus on building performant companies.
While letting employees go is never a good experience — both from the employee and the employer standpoint — many companies in this space will have to do it. These companies will also have to cut costs and unnecessary expenses — and again that’s fine. No need for a 3,000,000$ boat cruise to entertain your friends and clients.
Projects will have to re-focus and spend money where it matters, such as on the salaries of the teams working hard to develop performant products and sell them. This could accelerate the growth of crypto and blockchain adoption, led by the vital need of companies to generate value and the revenue associated with it.
To conclude, and despite the current price of BTC, we’ve never seen that many serious projects in the space — as anyone attending the last Consensus:Invest could tell. Despite the one year slump in market caps, institutional interest is rising —Fidelity announced their involvement in October 2018 — and a few governments have regulated ICOs and cryptocurrency exchanges (such as Switzerland and France for instance).
Such is the evolution of the cryptocurrency ecosystem: being a good marketer or an early adopter of cryptocurrencies is not enough anymore. Hard work, skills, and grit have all become necessary to build a successful project in this space.
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