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Bracing for the Winter Blues

It seems like crypto firms are finally being forced to acknowledge the harsh reality of long winter sets in. With increasingly clear indications that the bear market is here to stay for a while, firms are re-aligning their operations and resorting to mass layoffs.

The latest to join this growing list (which includes Consensys, Bitmain and Status) is Shapeshift, with the decentralized exchange laying off roughly one-third of its staff citing turbulent market conditions. Shapeshift’s predicament might be a direct result of its necessary but unpopular move in the second half of last year to impose KYC/AML norms on its users, due to mounting regulatory pressure. Shapeshift faced a severe backlash from the crypto community with a number of users leaving the platform. The rundown in the overall market and the ensuing steep decline in crypto trading have made matters worse. Shapeshift’s challenges are not unique; budding crypto startups that witness expontential growth in revenues and users in an bull market often end up spending large amounts of capital chasing growth, which can be dangerous when the tide suddenly turns, or when the music stops, as one famous Wall Street CEO put it once.

Having witnessed the yin and yang of commodity cycles during a previous stint as an Oil and Gas research analyst, one can vouch for the fact that prudent capital management is the only thing that can keep companies from going belly up and sustain them through market cycles. As the old adage goes – topline is vanity, bottom line is sanity, and cash flow is reality!

If it is any consolation, Shapeshift’s situation is far better than those of a number of projects that raised capital in the form of cryptocurrencies, mostly in ETH during the recent ICO bull run. Numerous projects, helmed by twenty-somethings with no financial management experience are now struggling, and potentially facing lawsuits. Consider this anecdotal story of an ICO that raised close to $40 m in ETH, and built out swanky offices in SFO, as well as a couple of tier-1 Asian tech hot spots. Right off the bat, 25% of the raise went to the ICO advisors and the PR folks. Smart early Investors took profits as soon as the coin listed on the usual suspects, post which ‘market makers’ fought against the gravity of market logic for a while, until they too threw in the towel. Very few projects converted most of their raise to cash at the right time, and treasury mostly consisted of project tokens (‘shitcoins’) and Ehereum. Both tanking was obviously a double whammy. Last heard, the company had $300k in the bank, 80 employees spread across the globe and no real working product.

While it is understandable that the unpredictability of crypto prices makes it hard for growth-hungry startups in this space to chalk out their business plans, companies should be cognizant of the detrimental effects of a bear market on a company’s operations and should plan accordingly. It is no wonder that VCs, with their patient capital are now becoming the financiers of choice in this market. Silver linings might be on the horizon though, starting Q2. Quite a few market indicators seem to point to a rebound in BTC prices starting April, and regulation is also slowly stabilising, with some sort of light at the end of the tunnel even in famously intransigent places like India.

As we like to say with regulation, you can price risk, but you cannot price uncertainty. 

Meanwhile in Crypto Wonderland….

“Venezuela: Taxes to be Paid in Currency Earned” Venezuelan government has published a new decree that introduces taxation for operations with cryptocurrency and foreign fiat. All citizens who deal with cryptocurrencies or foreign fiat currencies are now obliged to report their income and pay taxes in the same currency they have operated in, and not in the sovereign bolivar, Venezuela’s national currency. The latter has been facing severe hyperinflation for months since its launch in August 2018.

“EBA Asks for Clarity on Crypto Regulation at EU Level” The European Banking Authority (EBA) has urged the European Commission to examine whether unified crypto rules are needed across the region. In a report published Tuesday, the EBA said that crypto asset-related activities do not currently fall under existing EU financial laws and, as these activities are “highly risky” appropriate rules need to be put in place to protect investors. The EBA has, therefore, asked the commission to carry out a “comprehensive” analysis to determine what action may be required at the EU level.

“ESMA Makes Suggestions to EU on Crypto Regulations” The European Securities and Markets Authority (ESMA) published a report on crypto assets and ICOs yesterday. It advises the EU’s Commission, Council and Parliament on the existing rules that could be applied to crypto assets and further sets out any regulatory gaps to consider for policymakers. Notably, it suggests that some crypto assets could fall under the EU’s MiFID financial framework and be classed as financial instruments, although some adjustments may be required.

“NBU Executive: Overregulation Hurting Industry”Mikhail Vidyakin, a director at the Ukrainian central bank NBU, believes that overregulation in Ukraine is reportedly preventing the cryptocurrency industry from evolving in the country. According to him, there are too many institutions in the country that have the authority to regulate cryptocurrencies.There are at least three government organizations in Ukraine that fall under this definition: the NBU, the Ministry of Finance and the National Securities Commission. Clearly, this is an issue that is plaguing crypto in multiple sovereigns including the US.

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