In 2000, the dot-com bubble burst. This was the end of an overheated market where adding dot-com to a business name could add seven to eight figures to your valuation. Protractors of the internet celebrated what they thought was the impending death of the internet and these "tech scammers."
Losses exceeded $1.7 trillion in the dot-com bubble. Amazon alone is worth approximately $1.12 trillion at the time of writing. Priceline, Ebay, Broadcom and Google changed the way the world does business, even though some of these stocks declined in value by up to 80% during the popping of the dot-com bubble and even up to two years after.
However, the capitulation turned out to be a great catalyst to drive use-centric businesses to thrive post-bubble burst. It also encouraged VCs to back those who have a product-market fit. I think we're at a very similar point for crypto. This can wash out a lot of garbage. Looking back on this last bull cycle, a lot of us were waiting on the signs of a blow-off top. It never came.
In retrospect, we were still overheated. We watched NFTs of rocks selling for as much as $1.8 million. Valuations of public equities with blockchain in their names skyrocketed. As the old saying goes: As the tides go out, we can see who's been skinny-dipping.
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Skinny-dipping seems to be rampant as all markets have seen record amounts of leverage over the past two years. When prices go down with high-leveraged markets, margin calls multiply the downward movement of asset pricing as those who over-leveraged have to sell what they need to avoid being liquidated. This helps push asset prices down as they sell, imposing more sell pressure on themselves.
A variety of projects had either systemic flaws or hefty overleverage. These are practices that are hopefully washed out with the tide. Builders and cofounders during bullish momentum used shortcuts, tradeoffs, greed and bad decisions to ignore downside risk — much like the dot-com era.
These founders/builders promised to build out the digital asset infrastructure, however, they've potentially built out something just as valuable: risk mitigation practices. Much like Enron and Worldcom of 2001 drove other businesses to look internally, this could do the same for crypto.
I hope these companies can find a way out of this mess, but either way, this serves as an example for future builders in this space. If you're building a project, consider avoiding using third parties for treasury management with a utopian view of an 8% yield. If you're a hodler, it's undoubtedly safer to have your funds in cold storage and not be tempted by the short-term interest. And if you do participate in the short-term objectives, make sure you fully understand what's happening to your assets and the downside risk.
How can projects and companies better mitigate the risk of exposure to such events?
For starters, don't be tempted to lengthen runway and operating capital by lending out part of your treasury. Falling back on the old line of "not your keys, not your crypto" is a must in risk mitigation for treasury management. Some treasuries were caught up in multiple capitulations of centralized lending protocols lately.
With treasury management, assume you're wrong in every bucket of asset allocation and mitigate against it.
If you're a project or entity in our space, don't get love drunk only when things are going parabolic. Always have a risk assumption based on the trends adversely reversing because, inevitably, all hype cycles will. Using leverage is a prime example of a practice to consider steering clear of. We're in an industry where 10x multiples can be seen as "small." In my opinion, after seeing recent capitulation, there's no need to get greedy and use leverage from a business perspective.
If your protocol needs to be engaged in yield, decentralized options have performed exactly as they've been designed to perform vs the downfall of centralized lending and borrowing platforms.
Either way, this was needed to wash out some of the nonsense in our space. The capitulation fire has been burning hot, but when it's done, a new ecosystem can emerge with better practice and insight.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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