How to venture into blockchain during a recession
Published on August 18, 2022
Written by Michael Soerijadji, founder and managing partner at AC Ventures.
Now that we’re clearly in a recession, many investors are closing the door on blockchain plays for time being. The ‘crypto winter’ we now find ourselves in is largely to blame.
However, I urge investors not to paint with ‘too broad a brush’ in dismissing blockchain-based opportunities. Instead, try to recognize the far broader relevance of blockchain to our future, rather than just looking at it as mere architecture for cryptocurrencies.
In May, one of the market’s largest stablecoins, TerraUSD, lost more than 90% of its value in just one week, despite being touted as a coin that’s “pegged to the US dollar.” This triggered a proper crash and losses of more than US$300 billion for investors across the ecosystem.
At the end of June, Coinbase shares plunged 75% before Goldman Sachs downgraded it to a sell rating.
Reports around that time also indicated that Goldman was looking to raise US$2 billion from investors to buy up distressed assets from troubled crypto lender Celsius. Simultaneously, industry stakeholders discussed a possible deal to see crypto exchange FTX buy out crypto lender BlockFi for pennies on the dollar.
Incidents like the TerraUSD crash are not exactly isolated, with the price of Bitcoin dipping sharply over the past few months. Back in June, its price hovered around US$20,000, 32% lower than the month before and far from the all-time high of US$69,000 in November 2021.
But despite the market’s current doom-and-gloom outlook, blockchain as an agent of change remains key to the world’s digital and financial future. Investors should gather their wits and start shopping now, during this market correction.
Embracing decentralized ledgers
In the context of financial services, blockchain offers a variety of disruptive possibilities. The first and most apparent is bolstered transparency. For nearly every financial service company today, all business activity is built on transactions within a traditional corporate database.
Lots of ink is spilled in the press about ‘what blockchain is’ and ‘how it works.’ If you’re not already in the know, let me sum it up concisely: blockchain tech, while among other things, the foundation of crypto, on a much broader scale, does away with consolidated silos of power by replacing them with decentralized ledgers.
Perhaps the more powerful point is that it enables far frictionless and generally less expensive transactions of all sorts.
Decentralized ledgers are automatic records of transactions maintained across many computers (nodes) that are linked in a peer-to-peer network. For anything to be recorded or executed, a consensus is required across all nodes.
This simple concept is the basis of three global financial revolutions, all taking place at the same time. Apart from crypto, the others are decentralized finance (DeFi) and Web3.
DeFi is a term used to describe peer-to-peer financial services on public blockchains, primarily Ethereum. Web3 is an idea for a new iteration of the internet itself, based on blockchain. Like the other two, it incorporates concepts like decentralization and token-based economics. We can save explanations of things like NFTs and DAOs for another time.
Another important component of blockchain is lowering transaction costs. The financial services sector is chock full of intermediaries (such as banks) that enter the equation to create trust between transacting parties. Blockchain is a way to create trust without such middlemen.
For example, if you’re a lender seeking to verify the creditworthiness of a potential borrower, running data through a dispersed network of parties on a blockchain for consensus may be more attractive than putting all your eggs into the basket of one credit reporting agency. In such a case, blockchain cuts out the go-between in favor of the crowd and lowers your cost of doing business at scale.
For investors and entrepreneurs alike, these are just a couple of down-to-earth examples of how blockchain can be used to build a better future for everyone.
A rational entrance
Here in Asia, our firm has already begun making in-roads into the global blockchain game by investing in a company called NOBI, one of Asia’s top asset management platforms for crypto assets. The startup helps casual investors who want to diversify their wealth with crypto but don’t exactly know how.
We believe in this company because it comes with strong fundamentals, addresses a real and long-term demand, and is not dependent on market hype, speculation, or a paper-based valuation.
That said, even with the recent meltdown, at the time of this writing, the total crypto market volume over the last 24 hours was still worth around US$915 billion. Meanwhile, the global crypto market is estimated to surpass US$6.7 trillion by 2025. We believe investors and founders who shy away from it now will lose out in the long run.
If you do have cold feet today, don’t worry. You’re not alone. After all, crypto is volatile. But now is actually an ideal time for investors and founders to venture into the blockchain. Recessions breed rationality.
As a venture capitalist, I look forward to the next few quarters, as blockchain deal prices will be quite reasonable. While formal financial institutions tighten their purse strings, the blockchain ecosystem can leverage opportunities that emerge from this disruption.
Keep in mind that the fluctuating value of crypto is part and parcel of the game itself. Even when prices were at their record highs in 2021, daily price changes across all tokens were not uncommon.
For example, even Bitcoin faced multiple drawdowns before the crash of this year, with six dips of 50% or more from 2012 to 2021. With this in mind, those who can stomach such swings will gain in the long run.
Thesis-driven blockchain in Asia
Ultimately, blockchain is here to stay. We already see clear signs of the crypto market trying to pick itself back up.
For those of us in Southeast Asia, blockchain will continue to transform our financial sector in fundamental ways.
Some countries in the region already recognize the potential of crypto and are willing to welcome it. Singapore, for example, enacted stricter guidelines on cryptocurrency advertisements and passed a bill that provides regulatory frameworks for crypto companies, demonstrating its readiness to adapt to the new financial paradigm.
At the end of the day, smart investors put money on the table shortly after a correction. That time is now. Institutional players should start looking today at Asian venture funds that are thesis-driven on rational blockchain plays.
This story was originally featured on e27.