Crypto recession strategy is becoming a challenge for most startups during the COVID-19 induced recession in the global economy. The stock market collapsed and the cryptocurrency market especially the Bitcoin price movement followed it almost identically.
Lex Sokolin, co-head at a New York-based blockchain software company, ConsenSys in his newsletter Future of Finance discussed the recession strategy that crypto startups need to know.
The crypto recession strategy for startups
There are two types of venture capitalists:(1) those who possess network, skillset, timing and have luck on their side in terms of generating real returns; (2)those who do not possess attributes to be close to the conservative benchmark. About 10 percent of venture capitalist fall in (1) category, while 90 belong to (2) category. However, only after years, the category of the venture capitalist could be identified, as they began to realize and mark to the market their market bets. This is the basic layout for any business let alone the crypto recession strategy.
Market prices and proxies are well-known practices in the game. So, in case a company raises a follow-on-round (e.g. Series A), the valuation of paper trickles from that round down into the valuation models, it then trickles into the performance reporting, and then is made accessible to limited partners. As the whole value chain has some information problem, not exactly knowing the real worth, hence everything can be of a lot of worth.
However, on paper in writing, the return seems correct. This investment strategy can have plenty of bets that could generate a huge return, so a Binance among the other 30 exchanges would just do fine. Moreover, it is recommended to leave half of the funds in the portfolio for the follow-on investment, just in case the company began to de-risk and start showing signs of success, more cash could be added.
As the mark-to-market moment follows once the funds have been invested, it is believed that the funds have god performance underlying, it is just not visible. So, many new investment vehicles would be raised as the market allows stacking the management fee and personal reward.
In case a shock is applied, like that of Coronavirus, the entire portfolio would be in distress. The venture capitalist would have a hell of time both by witnessing the collapse of the price and the money being pulled out. So, it is pertinent for a venture investor to maintain their sanity and check for their portfolio; which projects could bear the burn of the crisis and which projects are worth supporting.
All said and done, all the venture investments that the portfolio manager made earlier would rise once again.
It is interesting to note that though the new might be alluring, they are less interesting than those preserving the valuation of the very promising firms already held. If a venture capitalist is compelled to mark-to-market on those venture portfolios. In such a case the majority would lose 20-50 percent immediately, and this would not be in the self-interest of the venture capitalist, who will be interested to raise a follow-on fund and increasing the management fees.