- 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 restaking protocols.
Crypto founders are already preparing for the next downturn.
Thatâs according to Elliot Chun, partner at Architect Partners, a firm that advises crypto companies on mergers, acquisitions, and financing strategies.
âAll of them are coming to me saying, âIâm getting ready for the next drop in 18 months, and I want to capitalise on the current move,ââ Chun said.
âI have never had so many founders and executive teams saying we have to make something happen within 18 to 24 months.â
The fear is justified. The brutal crypto downturn in 2022 caught many companies unaware.
Crypto companies like Bitcoin miner Core Scientific and exchange Voyager had to declare bankruptcy, not to mention the spectacular blowups caused by fraud, like FTX.
Even so, savvy startups can leverage the current bull run to their advantage by tapping into Wall Streetâs interest in crypto as well as venture capitalistsâ renewed interest in the sector.
Be prepared
Chun said crypto firms were preparing differently, depending on their profiles.
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âMost times theyâre looking for a strategic partner â a company from traditional finance that has a similar vision,â Chun said. âThey can be there as a commercial partner, or eventually acquire the crypto firm altogether.â
Naturally, the companies that raised significant capital in 2020 or 2021 donât think the same way as those that didnât â like recent startups.
The former often seek to generate enough revenue for private equity to buy them out. One way to do that is to establish a global presence, since the industry is still mostly fragmented on a regional basis.
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Firms can also elect to expand their suites of products and services.
âInstitutional customers donât want to work with five different groups for custody, tokenisation, offramping funds â they need all-encompassing comprehensive services,â Chun said. âThere arenât that many that can do all of that.â
The recent startups, Chun said, have one or two excellent products and are run by believers in the long-term potential of the industry â but being a founder is gruelling work, so theyâre open to being acquired.
Learning from 2021
Between Wall Streetâs entry into the space through spot Bitcoin exchange-traded funds, and increased adoption, the prospects of well-run crypto companies have never looked better, Chun said.
Itâs a different feeling from the excesses of 2020 and 2021 when VCsâ fear of missing out âled to unrealistic valuations, which in turn led to poor operating discipline,â Chun said
Companies acted like the abundance of capital would last forever.
âPeople were spending money on ridiculous things â like $150,000 on a party at a conference, for a pre-revenue company,â Chun said.
But firms that survived the downturn had âmuch higherâ operating discipline, Chun said.
Some are even generating revenue.
Liquid restaking
Even if this bull market is healthier than the last one, concerns still remain.
Chun cited the hype around EigenLayer and other restaking protocols â which allow investors to secure the Ethereum blockchain and other protocols, like oracles and bridges, with the same stack of Ether.
âThe concept of liquid restaking is essentially internal crypto native revenues being put on top of another to the point where nobody even understands how to unravel this stuff,â Chun said. âThatâs dangerous.â
Coinbase researchers voiced similar concerns in an April report.
Eigenlayer did not immediately respond to a request for comment.
These projects are getting tons of capital from VCs because they generate quick, eye-popping returns, Chun said.
Investors who allocate capital to projects will tend to jump ship immediately after their token allocation is unlocked, Chun said â similar to venture funds selling their shares immediately after a company goes public.
While companies will take three to seven years to go public, crypto projects can airdrop their coins within months.
âVCs can go back to their liquidity providers and say we got 80% returns on this within a year â and they look like geniuses,â Chun said.
Memecoins
Private investment is also warping markets on a larger scale, Chun said.
Original crypto investors could leverage their understanding of the technology to get an edge in the past, but thatâs changed.
Everyone has access to the same information, and can execute on that information at the same speed.
So how do professional investors get an advantage?
âTheir edge is only from getting early access to projects,â Chun said. âEither the seed or equity rounds, with token distributions that normal people donât have access to.â
That could explain why retail traders turn to memecoins that donât have billions in tokens ready to unlock, levelling the playing field.
âRetailers actually have the ability to prove again that they can get more returns from something that doesnât have a venture fund â or a founder,â Chun said. âI canât blame them for trying.â
Still, Chun said memecoins not looking to advance the space will ultimately be their downfall.
âThe market will play itself out.â
Tom Carreras is a markets correspondent at DL News. Got a tip about VCs and crypto? Reach out at tcarreras@dlnews.com