After experiencing three bull and bear markets, former Coinbase co-founder shares insights on navigating cycles
Although the cryptocurrency market does go through one cycle after another, some key elements tend to recur.This article is sourced from PANews, authored by Jordan.
Cryptocurrency investment firm Paradigm and Coinbase co-founder Fred Ehrsam recently wrote a letter to the founders of projects in their investment portfolio. Fred Ehrsam summarized his experiences from founding Coinbase and going through three market cycles to help crypto startups prepare for future scenarios. PANews translates the letter as follows:
Dear Founders,
In the first two months of 2021, cryptocurrency prices have doubled, repeatedly setting new historical highs. Now, Bitcoin's market capitalization has surpassed $1 trillion, digital crypto art has sold for millions of dollars, and even U.S. senators have changed their Twitter avatars to "laser eyes."
As one of the co-founders of Coinbase, I have experienced price peaks during the previous three cryptocurrency market cycles (2011, 2013, and 2017), but I have also gone through the ensuing despair and disillusionment.
Here are some lessons I've learned from past crypto cycles, which I hope can provide some help to crypto project founders, teams, and the crypto community, and prepare for the future to avoid pitfalls and maximize success.
While we cannot predict the future, studying past cryptocurrency market cycles allows us to imagine potential outcomes after market booms. By learning from history, we can expect uncertainty and volatility to return due to the large scale of the cryptocurrency market. This technology has the potential to change not only "money" but even the financial system and the internet itself.
Observing and Analyzing Past Crypto Cycles
First, a (big) warning: future crypto cycles will almost certainly differ from past cycles, and we may even be in a cycle right now! However, while the crypto market will indeed go through cycle after cycle, some key elements tend to repeat.
To prepare for future market changes, it is necessary to learn and understand past cycles. Generally speaking, people exhibit the following characteristics during crypto cycles:
- Founders, employees, and customers of crypto projects can become emotionally charged, as they can quickly make a lot of money and also lose a lot very fast. When money comes in, they often find it difficult to handle large sums rationally. Since the market "hype" cycles are often short, emotional fluctuations can be exacerbated, and it takes longer for the market to return to "normal/calm."
Coinbase performed well in 2013, but then went through a long and arduous three-year period where many employees felt frustrated, and more than a third of the staff left. As a co-founder, I also faced incredible challenges and loneliness, which lasted until 2017.
- Crypto projects can easily attract public attention. During a bull market, the media rushes in, relatives and friends want to know more, and friends seek investment advice from you.
But remember, your company and project can be elevated to great heights in one day, only to be harshly brought down the next.
- The cryptocurrency ecosystem will be further enhanced. Compared to when entering each cryptocurrency cycle, the entire ecosystem will be further strengthened after exiting the cycle. We can see this change from many key indicators, such as:
- Entrepreneurial and developer activity
- Academic research
- Infrastructure maturity
- Adoption of enterprise-level applications
- Public art
- Simplified pricing structures, etc.
If we narrow the scope, we can redefine the "cryptocurrency cycle" referred to in this article as a volatility cycle that aligns with the "adoption curve," resulting in a more pronounced trend change. Taking Coinbase as an example, at the end of each cycle, we found that many indicators had increased several times compared to the end of the previous cycle.
Weaker companies will be eliminated. When the market is "rising," you will find that all "boats" can sail smoothly on the surface. At this time, if you cannot adjust your business fundamentals or continue to implement the wrong strategy, then when the market enters a "down cycle," many issues will be ruthlessly exposed. Weaker companies will be eliminated by the market, while those with real advantages will typically thrive when the next market cycle arrives.
Regulatory attention will continue to increase. As public attention rises, regulatory scrutiny follows. At Coinbase, we have made every effort to develop regulatory strategies and actively communicate with regulators.
Infrastructure will be pushed to its limits, including enterprises, crypto-native applications, and the blockchain itself. Some exchanges may fail, and trading fees could skyrocket by 10 to 100 times.
For example, in 2013, to support the massive customer demand, we spent all our operating capital and ultimately had to suspend customer purchases of cryptocurrencies—at that time, we saw a large influx of users into the exchange but did not provide them with the best trading experience.
Cultivating Adaptability to "Cycles"
Almost no one can predict the details within cycles, so the wisest approach is simply to adapt to the cycles. Whether feeling elated or despairing, the most important thing you can do is to think of yourself. But sometimes, you can also learn from the experiences of others.
So, here are some "lessons" I offer to help you better adapt to cycles.
Lead by example. Regardless of the stage of the cycle, you should focus on short-term issues. Concentrating on specific tasks can provide your team and community with a "fighting chance."
Do important things first. When we are in a bull market, everything seems to be going smoothly and prosperously, and you might want to take on everything.
However, when you want to adjust or expand your business, you should maintain high standards. This should also be the case during a bear market. In fact, many cryptocurrency companies have failed, and "company remains" are everywhere in the "crypto graveyard." They failed largely because they deviated from their core mission during the bear market, ultimately having to watch their ideas take effect in the next upturn.
In 2015, a member of the Coinbase board suggested we build a private blockchain for banks, as it could bring significant short-term profits to Coinbase. However, we ultimately did not do this, and looking back, that decision was crucial. We have always adhered to Coinbase's core mission, while that board member's suggestion was actually "temporary" and did not align with Coinbase's core mission.
- Create a stress test checklist. If your product's user base experiences a 10-100 times increase and then the service suddenly goes down, how would you handle it? You need to regularly ask various team leaders similar questions.
At Coinbase, we always estimate the maximum load for customer support, cash burn rate, and server load in advance—but even so, during peak bull market times with over 10 times the load, Coinbase still did not perform optimally.
- Always be prepared for financing. You need to regularly ask yourself, "If the next bear market in cryptocurrency lasts longer, do I have enough cash to survive?" It may be easy to raise funds today, but that does not mean it will be easy tomorrow.
At Coinbase, we found ourselves facing a cash shortage shortly after 2013-2014. Fortunately, we had actively raised funds before entering the bear market.
If we hadn't prepared in advance, we might have gone out of business before the spring of 2017. At that time, Coinbase raised a significant amount of funds, and we placed half of it in a separate bank account to deal with various emergencies and crises. If the number in your personal account is close to "0," I suggest you save some money to ensure your living situation is not affected for a while. Having this money can at least help you sleep better at night and allow you to focus on achieving ambitious missions.
- Give new employees a "heads-up" early on. You need to remind new employees early on, giving them a "heads-up" that they may face the risk of long-term downtime after joining the company.
At Coinbase, many employees joined during the 2013-2014 cryptocurrency bull market, but they thought cryptocurrency prices would "moon," only to be harshly hit by reality, leading many to leave in frustration.
The same situation occurred again during the 2017 bull market. Therefore, you need to prepare your team to handle risks and also prepare your customers and community accordingly.
When a vicious cycle begins, people's evaluations of you can turn 180 degrees, from a visionary leader to a fraud nailed to a cross.
If you want to convey a message, ensure it is communicated through multiple channels, by multiple people, and multiple times, because during market excitement, your message is always hard to hear.
You are not participating in a "sprint," but in a "marathon." Many people start with great momentum but end up being eliminated by the market. Therefore, you first need to stay healthy and then take some time to clear your mind. The more experiences you go through, the better you can handle challenges and difficulties. So, give yourself a chance to accumulate experience.
Moving Forward
Cryptocurrency is a foundational technology that, while offering tremendous opportunities, also brings about many uncertainties. In fact, it is the interplay of "opportunity" and "uncertainty" that defines cycles.
Today, crypto technology is beginning to redefine many traditional markets, such as currency, financial services, and even the internet itself. Sometimes, people may find cryptocurrencies to be somewhat extreme, and it is not surprising to feel this way.
As for the cycles themselves, they are neither good nor bad, but a natural state. When the market is in a bull cycle, it gives you a feeling of being at the peak and provides opportunities to change the world and dream of the future;
When the market is in a bear cycle, you may find yourself in a state of despair, but it also allows you to reflect on the practicality and clarity of your project. So you need to understand one thing: when things are good, they never look that good; when things are bad, they never look that bad.
I do not know how the current cycle will develop, nor do I know if we are truly in a cycle. But I do know that after each cycle, the cryptocurrency industry becomes stronger.
No matter what the future holds, you must adapt to the cycles and prepare for success—I hope you seize this opportunity!
Sincerely,
Fred Ehrsam and the Paradigm Team
