Let me share some thoughts on this topic of what makes a coin die or survive a bear market.
23 Jun 2022, 10:32
Let me share some thoughts on this topic of what makes a coin die or survive a bear market. Most of what I will be writing below is the result of careful observation of the crypto space over the past years. It is also why I am part of this project, because I personally feel comfortable and safe, knowing that this team knows how to avoid the below mistakes.
Hope this perspective helps some of you 😊
1) Mismanagement of Funds
In the bull-market, everything looks rosy and confidence is high. The human nature works in a way that we always extrapolate the current situation into the future. It everything goes up, humans tend to think that this will just go on forever. If everything goes down, they equally think we are going to 0. History has repeatedly shown that nothing goes up forever and nothing goes down forever. We all know this, but due to our nature of feeling most intuitively when extrapolating current trends, we tend to think "this time is different".
This is just a human nature and it takes a lot of effort and active brain work to overwrite these feelings with rationality. Especially when for months and months everything turns green. As a result of this, not only investors, but also teams rely on this comfortable new standard and they sacrifice downside protection for upside potential.
For investors, this can be in the form of going all-in, keeping no cash-reserves for daily expenses, or taking leverage.
For team members and managers, this can be spending too much on marketing, not keeping cash-reserves, scaling the team too fast relative to the cash buffer (high burn-rate) and generally being wasteful. And of course teams and projects can also take leverage in various forms.
Another costly mistake teams may do is to spend useful cash and resources to try and catch/support the price at certain levels. This can quickly deplete the reserves of a project (which it will need in the bear market) and turn into exit-liquidity.
In our case we have sufficient reserves for at least 5-6 years without having to touch any crypto. The last part is important. The team expenses are already factored into this calculation, which means that we can keep developing products and the ecosystem without having to scale down.
2) Bull-Dependent Economy
Another reason for dying projects is that many of them are fully optimized for bull-markets and are essentially "designed to die" when things turn bad. The best example is LUNA, which relied on ever more capital flowing in, just for the system to not implode.
Such projects can also be ones that heavily rely on a third-party project's success. For example infrastructure projects for an external economy, which then implodes. Other projects rely on capital from outside to keep operating, or need a strong cash-flow from within the crypto space. These can weaken up during bear times and result in the business/project to become insolvent.
In our case we are not dependent on any other projects or income generated from crypto. We were also never driven by hype or unrealistic targets. Anyone who reads through the Hydra 2.0 whitepaper will quickly notice this 👌
3) Bad Team Management
In bear markets, investors lose confidence in the market. They become overly pessimistic about everything (which can be a good or bad thing) and it leads to irrational decisions. For example many are selling things they are firmly believing in, just because of a momentarily emotional reaction.
The same can happen for team-members as well. When markets go down, certain team members may start to question the survival chances of the company they work for, and start looking for alternatives (out of the fear of ending up job-less). This is a natural reaction, because many projects indeed die.
If a project loses valuable team members during such a difficult cycle, it can hurt the ability to keep developing and risk a domino-effect, where other members get even more worried and jump the ship. We have seen for example Fantom recently losing key team members. I am sure there are many others.