The crypto capital crunch


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The bear market is causing a painful capital crunch for crypto companies.

During the bull run of 2017, most entrepreneurs couldn’t walk down the street without falling into money. Everyone wanted to invest in the next project or company that was going to 10x. Everything seemed to be going up and to the right. And when there is easy money floating around, everyone thinks they can build companies.

The reality is that building a company is really hard. There will be highs and lows. Good days and bad. But the real entrepreneurs persist, regardless of the market conditions. Unfortunately, we are seeing this narrative tested in real time.

February 2nd will officially mark the current bear market as the longest in crypto’s short history. The 400+ day downward trend has forced many companies to feel excruciating pain from loss of profitability, contracting margins, less access to capital, and decreasing interest from new users or customers. During this time, we have seen major layoffs, product launch delays, and complete company shutdowns.

The worst part may not be behind us either.

Many people, including myself, are calling for lower lows in the coming months, along with a bear market that could persist until Q3 or Q4 of this year. Each passing day without relief only compounds the problems for companies. This creates a situation where founders will be forced to change business models, reduce costs, or make hard decisions to shut down.

While the outlook is bleak, there may be some help on the way:

  • Mike Novogratz and Galaxy Digital are reportedly raising a $250 million credit fund that will lend capital to crypto companies. The decision to pursue this was supposedly driven by inbound interest from companies that are feeling the negative effects of the bear market. If successful, the publicly traded merchant bank could provide some much needed, efficient access to capital for entrepreneurs.

  • Bithumb, the largest South Korean crypto exchange, is reportedly working on a reverse takeover scenario with Blockchain Industries, the publicly listed US company. This would allow the exchange to immediately gain access to the public capital markets in a way that not many other companies have been able to. If successful, it would be natural for many private crypto companies to quickly follow suit.

  • The founder of OKCoin has purchased a controlling stake in LEAP Holdings, the Hong Kong Stock Exchange listed company. Reports are surfacing that this is the first step in a reverse takeover plan to get OKCoin, and other crypto-related ventures owned by the founder, into the Asian public markets. Again, if successful, others will quickly follow the blueprint.

Bear markets aren’t fun for anyone. Entrepreneurs are tested and investors lose money. However, one positive effect is that the tourists are driven away, companies are forced to pursue sustainable models, and the true builders can focus on building.

I’m watching this capital crunch closely because there will be a small handful of people who figure out how to find relief — either through innovation or financings. These are the folks who will be well positioned to get aggressive when the market turns and the next bull market starts.

I’ll leave you with some well seasoned advice from Warren Buffett on bear markets:

“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.”

Time will tell who seized the opportunity.

-Pomp


The “Off The Chain” podcast has been downloaded 400,000+ times in 160 countries. You can listen to the latest episode with Wall Street legend Roy Niederhoffer here: Click here for Off The Chain podcast


THE RUNDOWN:

Blockchain Startup Symbiont Raises $20 Million to Take Aim at a Cause of the Financial Crisis: Symbiont announced $20 million in Series B funding led by Nasdaq Ventures. Investors including Galaxy Digital, Citi, and Raptor Group also participated in the round. With that influx of cash, Symbiont plans to take its technology from the research and development phase into the deployment stage. The firm has focused on creating a permissioned blockchain network for financial purposes. So unlike, say, Bitcoin’s blockchain network, which anyone can see, Symbiont’s network requires the permission of its users for a new party to enter. Read more.

Chicago Exchange Withdraws Proposal to List Van Eck Bitcoin ETF. Van Eck Blames the Government Shutdown: The Chicago Board of Exchange has withdrawn a proposed rule change that would have allowed the listing and trading of a Bitcoin-backed exchange traded fund. The BZX Exchange, an equities exchange operated by the CBOE, proposed last June a rule change to list a new Bitcoin ETF offered by Van Eck Securities and SolidX Management. On Wednesday, BZX filed a notice with the Securities and Exchange Commission that it had withdrawn the proposal on Tuesday, without offering an explanation for the action. Read more.

JP Morgan Alums Launch 'Blockchain as a Service' on AWS: A startup called Kadena is releasing a new version of blockchain—a tamper proof ledger system run across multiple computers—for free on Amazon Web Services on Wednesday. The founders of Kadena, who helped lead JP Morgan’s once-buzzy blockchain group before striking out on their own in 2016, say their version of a blockchain, ScalableBFT, is superior to the alternatives offered by IBM and others. Co-founder Stuart Popejoy said existing versions of private blockchains are inadequate because they slow down when more than 20 users try to participate. This alleged flaw is significant because a primary purpose of a blockchain is to allow multiple people to see and maintain a shared ledger in near real-time. Read more.


A16z-backed Startup Anchor Labs Launches Crypto Custodial Service: A crypto startup has launched a custodial service for institutions that it claims is more secure than cold storage yet offers easier access to assets. Anchor Labs, which previously raised $17 million in a series A round backed by Andreessen Horowitz, Max Levchin, Khosla Ventures, Blackrock’s Mark McCombe, Elad Gil and AngelList co-founder Naval Ravikant, announced the launch of Anchorage, a digital asset custodian, on Wednesday. Read more.


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Nothing in this email is intended to serve as financial advice. Do your own research.