Crypto founders are already preparing for the next downturn.

That’s according to Elliot Chun, partner at Architect Partners, a firm that advises crypto companies on mergers, acquisitions, and financing strategies.

“All of them are coming to me saying, ‘I’m getting ready for the next drop in 18 months, and I want to capitalise on the current move,’” Chun said.

“I have never had so many founders and executive teams saying we have to make something happen within 18 to 24 months.”

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 Street’s interest in crypto as well as venture capitalists’ renewed interest in the sector.

Be prepared

Chun said crypto firms were preparing differently, depending on their profiles.

“Most times they’re looking for a strategic partner — a company from traditional finance that has a similar vision,” Chun said. “They can be there as a commercial partner, or eventually acquire the crypto firm altogether.”

Naturally, the companies that raised significant capital in 2020 or 2021 don’t think the same way as those that didn’t — 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.

Firms can also elect to expand their suites of products and services.

“Institutional customers don’t want to work with five different groups for custody, tokenisation, offramping funds — they need all-encompassing comprehensive services,” Chun said. “There aren’t that many that can do all of that.”

The recent startups, Chun said, have one or two excellent products and are run by believers in the long-term potential of the industry — but being a founder is gruelling work, so they’re open to being acquired.

Learning from 2021

Between Wall Street’s 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.

It’s a different feeling from the excesses of 2020 and 2021 when VCs’ fear of missing out “led to unrealistic valuations, which in turn led to poor operating discipline,” Chun said

Companies acted like the abundance of capital would last forever.

“People were spending money on ridiculous things — like $150,000 on a party at a conference, for a pre-revenue company,” Chun said.

But firms that survived the downturn had “much higher” 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 — which allow investors to secure the Ethereum blockchain and other protocols, like oracles and bridges, with the same stack of Ether.

“The 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,” Chun said. “That’s dangerous.”

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 — 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.

“VCs can go back to their liquidity providers and say we got 80% returns on this within a year — and they look like geniuses,” 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 that’s 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?

“Their edge is only from getting early access to projects,” Chun said. “Either the seed or equity rounds, with token distributions that normal people don’t have access to.”

That could explain why retail traders turn to memecoins that don’t have billions in tokens ready to unlock, levelling the playing field.

“Retailers actually have the ability to prove again that they can get more returns from something that doesn’t have a venture fund — or a founder,” Chun said. “I can’t blame them for trying.”

Still, Chun said memecoins not looking to advance the space will ultimately be their downfall.

“The market will play itself out.”

Tom Carreras is a markets correspondent at DL News. Got a tip about VCs and crypto? Reach out at tcarreras@dlnews.com