Our Thoughts On The Recent Market Activity


 

We wanted to share our thoughts on the turbulence we have seen at the macro level in markets and in particular how this has impacted the blockchain/digital asset industry.


The pandemic forced governments to provide a massive stimulus by infusing trillions of dollars of money. 80% of all US dollars in existence were printed in the last 22 months (from $4 trillion in January 2020 to $20 trillion in October 2021). At the same time, supply-driven inflation is a completely new beast. We expect markets to remain turbulent for at least most of this year. The short to medium term impact on the market remains unclear.


Our industry is far from immune to the macro environment – and similar to many blue-chip tech stocks, digital assets have taken a 50%+ price hit. Where we differ to perhaps most traditional asset classes is that our industry is more accustomed to such events given that this is the fifth time since 2013 that Bitcoin has fallen by more than 50%. It will come as no surprise to learn that we see this as a tremendous opportunity and an event which was expected to occur at least once (but likely more times) during an investment cycle.


The collapse of Terra (covered in our May newsletter) resulted in $60 billion being wiped off the market in a few days, this has had a knock-on effect on many businesses who were directly impacted. In addition, the macro picture and the recent rate hike in the US has had negative consequences for risk assets in general. These recent events have exposed many companies who were mismanaging their risks – most being over leveraged or having an asset/liability liquidity mismatch leaving them insolvent (more information here).


You may be asking “how can any of this be good for us?”.


A healthier market will emerge. Just like the early days of the internet, there is a lot of innovation in the space, with many new and experimental business models being invented. In the early stages of a new industry, market cycles are much more rapid and these stress periods are a healthy way to flush out flawed and unsustainable business models – allowing future value to flow to sustainable and more robust businesses. In addition, failures and mistakes of the past become lessons for future founders as well as areas to be navigated for regulators and industry groups.


A more investor friendly landscape. As you may expect, company valuations have already begun to reflect market conditions. As an investor, this results in a much better entry point. Many investors have been directly impacted by the Terra collapse and are therefore quite distracted, others are generally more selective. During bull markets there are much more opportunistic founders who are attracted to the significant amount of money flowing into the space. Quality projects are easier to discover with less noise. Given our long-term strategy, focus on sustainability – we couldn’t ask for a better environment to be investing! The next 12-18 months will certainly be an exciting time from a deployment perspective. It is important to note that the price of digital assets or the valuations of private companies does not change anything about the fundamental value proposition that a Web 3.0 built on blockchain offers.


The differences of this cycle. Last year saw an explosion in blockchain related VC investment, with $31.6bn poured into projects in 2021, more than the 10 previous years combined, according to PitchBook data. The momentum shows no sign of stopping in 2022, with many new $1bn+ funds launching so far this year and new participants continuing to join the market. In addition, the talent pool of entrepreneurs and engineers migrating from Web 2.0 to Web 3.0 is of a much higher quality than previous cycles. Whilst the recent deleveraging of markets shows that we are still early enough to the party for it to be exciting, the combination of financial and human capital demonstrates that we have de-risked compared to previous cycles.


Final Thoughts


We will see more companies die in the short to medium term. There will be lay-offs and down rounds. Opportunistic founders will struggle, with more value diverted towards sustainable, high-quality businesses in the industry. This is a healthy process from which a stronger industry will emerge. Disciplined founders who survive through the stress period and continue to build will find success in the long run. The space has more talent, more capital, better infrastructure and more robust regulation than ever before – we couldn’t be more optimistic.

 

Disclaimer: this newsletter was put together for informational purposes only based on our review and analysis. This should not be construed as a solicitation, offer, or recommendation to acquire or dispose of any investment or engage in any transaction.




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