2018 has been a rough year for the cryptocurrency industry filled with scams, hacks, crackdown, falling prices and much more. But going into 2018, there was huge excitement and many thought that this year would be the year that cryptocurrencies go mainstream. Some say that this is the inevitable price correction that was necessary, while others say that crypto currencies are rallying towards an inevitable zero valuation. Falling prices have affected everyone; miners, investors as well as startups. Startups are especially hit hard as many investors lose hope that they will be able to cash out on their investment, and have stopped or reduced their allocation of funds to crypto space. This has put many startups in a really bad position as they are unable raise funds, forcing many to shut down or scale down their operations.
Unlike normal businesses, startups operate with a different model altogether. Many of them will not even have a finished product, just an idea. This makes them a risky venture, but the potential success of these startups make investors want to be a part of it. Most startups are not profitable in the initial period. This makes them reliant on funds through VC and other forms of investors, hence startups not being able to raise funds is a real concern. The current crises in crypto startups are due to the fact that high volatility in the market is making investors very uneasy. Investors always like things that they can predict. Also, since many of these startups held a portion of their funds as cryptocurrencies; with the fall in the price of these currencies, their funds also shrank, making it difficult for many to even cover their day to day expenses. Most startups don’t bring in money they are reliant on these funds for their operations forcing many of them to shut down.
Venture capitalists are a class of investors that rose during the startup revolution. They specialise in the high growth market making investments with high risk with an intent to make high profits. The cryptocurrency market was a favourite for many of them in past. Crypto was new, growing and had the potential to explode, but has since died out of favour. Investors are skeptical about returns and many have already given up hope that the market will turn bullish anytime soon. This could be a golden opportunity for many long term investors who see this as a simply bump in the road. At current valuation, investment in many of these startups will be a sweet deal many cannot resist.
Most investors and founders of startups cash out during the IPO. They sell their shares, taking the money they get as reward for the hard work and risk they took for years. With crypto startups, they usually don’t do IPOs, instead they do ICOs. But ICOs are becoming harder by the day as regulators are putting more pressure on ICOs, making it almost impossible for them to raise funds through ICOs. Also, at the current state of market, IPOs are out of the question, leaving investors with no choice but to hold onto their shares for a longer period of time than anticipated. Remember, VCs invest in startups to cash out big money and with the prospect of IPOs not happening anytime soon, many are hesitant to get into startups.
What does the future hold?
Even though 2018 was a rough year for crypto, lately, snippets of positive news have been coming out of the space. Despite the fall in price, the number of users have increased twice as compared to the start of this year. And despite the initial crack down, more and more countries like Japan and Thailand are opening up to crypto, greatly improving the investment landscape. Technical issues like scalability are expected to get improvement soon with the inflow of blockchain developers. The dip in investments from VCs can be attributed to change in investments pattern made by them across all industries. They are no longer focused on early stage startups. Banks and big firms are eager to implement crypto in their own domain. All of this enthusiasm might finally push crypto for mainstream adoption in the near future. Most long term investors and enthusiasts are still holding on, optimistic that crypto has a bright future.
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Disclaimer: The authors of this website may have invested in crypto currencies themselves. They are not financial advisors and only express their opinions. Anyone considering investing in crypto currencies should be well informed about these high-risk assets.
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