Viktor Fischer for Forbes.cz: Discipline and data are paramount

All economic trend indicators are signalling problems – inflation, slowing of economic growth, the S&P 500 index has dropped by 20 percent, Europe has just had the worst quarterly results since the start of the pandemic, and Asian markets are under pressure too. Cryptocurrencies didn’t escape this avalanche either: they fell by as much as 70 percent since their record highs of last October, when the entire sector was valued at $ 3 trillion.
CNN’s Fear & Greed Index shows that the mood of the market fell several times over the past few months to extreme fear, and is now oscillating between fear and neutrality.
But despite this, investors haven’t turned their backs on blockchain. This is evidenced both by the record $ 9.2 billion they poured into cryptoassets in the first quarter of this year, and by the May launch of the new Andreessen Horowitz Crypto Fund 4, which is a $ 4.5 billion investment injection into the development of new crypto projects.

In crypto, more than anywhere else, a crisis is always an opportunity. The best investments I’ve made were during the crypto winter of 2018. Everything was cheap, and the founders of startups had little money because revenue from investors had dried up, so they were extremely focused on their product and scale.

What’s more, history shows that during the bad times of a crisis is precisely when new unicorns are born: just look at WhatsApp or Instagram. Nor is it any different in the quickly growing world of Web3; after all, the last crypto-winter gave rise, for example, to Solana, Uniswap, or Compound.

So when the crypto market fell below one trillion dollars from last year’s record highs in total valuation for the first time in a year and a half this June, I wasn’t scared. This time is a great opportunity for us as a blockchain investment fund – unlike last fall, when the cryptocurrency market was at its peak and Bitcoin was at $68,000.

Now that Bitcoin is below a third of that value, you can see how the crypto world has come back to life below the surface. How the founders of blockchain projects are focused again, concentrating on development, on their project – and they’re also calling us again and looking for investors. They, too, feel that due to macroeconomic trends, another crypto winter is just around the corner.
This doesn’t scare us, because as I say: It’s a chance for us to buy quality projects cheaply. At the same time, we’re a fund, we don’t manage just our own money, and yes, I know that not all investors manage to rein in their emotions as well as I’ve been preaching here from the start (and I admit, I borrowed this mantra from Warren Buffet). When Bitcoin was at its maximum and we wanted to raise $100 million, we eventually raised $123 million and I had to humbly turn down other investors, telling them that unfortunately we were full. And yet the right opportunity is only coming along now, not a year ago.
If people allow themselves be controlled by their emotions, they won’t invest in crypto now. I get it, they’re afraid, Bitcoin has plunged and the market looks volatile. But I’ve got a different perspective. The number of transactions on blockchain is currently at record levels. Solana, for example, is now the most used blockchain in terms of number of transactions. But its current price doesn’t reflect that, because it fell along with the whole crypto market as it cooled off and retail investors departed, who allowed themselves to be governed by fear. After last year’s huge boom, retail investors abandoned crypto, which was the only bubble we were afraid of, and it really did burst – while a year ago trading volume was $ 300 billion, now it’s $ 100 billion.

But at the same time I know it’s twice as much as two years ago. And that’s the number that’s important. When you switch off your emotions and only look at the hard data, you see that now’s the right time to jump on the crypto train.

While retail investors only remember what happened in the past half year, we invest over five-year horizon. And when it comes to crypto, I’d recommend this strategy to everyone. Have discipline, don’t allow yourself to be ruled by emotions, and don’t speculate. Put money systematically into crypto too, don’t gamble with investments. Don’t invest in Dogecoin because they wrote about it on Twitter. But people love to gamble, they want to make quick money.

In contrast, we don’t speculate at all. We stick only to the data. Every Monday my Chief Investment Officer, Chief Financial Officer, and I convene the investment committee and make decisions together. Each of us has a veto. When one of us falls in love with a deal, the other two stop him.

Another insurance policy we have in uncertain times is a robust analytic team – it now numbers over thirty, while a year ago it was a third of that. But since then we’ve scaled, we’ve also got a team of engineers who programmed our own risk management system. The Terra-Luna case, which was such an unhappy one for the entire crypto market, showed that this was a wise decision.
A year ago, here in Forbes, I said that the Terra project and its Luna token was one of the most interesting things in our portfolio. And since then Terra has experienced an implosion from a $120 billion valuation to zero. And when it sank, it took part of the crypto market along with it.

We didn’t get burned, as we’d already sold most of our position in Terra before it crashed. I’m not saying this because I want to boast – I’m sorry for Terra’s fall, it’s a major problem that caused lots of people to lose lots of money. The reason we weren’t among them isn’t because we’ve got a crystal ball or miraculous intuition. I don’t mind admitting that nobody expected Terra to sink to zero over four days. Neither did I. But what I thought or didn’t think isn’t important, because those are emotions. We rely on data and we’re careful, which is why we perked up our ears even before something big and visible started to happen on the market. Data analysis showed us that Terra was basically subsidizing its entire business and propping up its valuation artificially. It was overvalued. The Fed began to raise interest rates and everything went down, but the Luna token held up because the Anchor protocol kept giving investors twenty percent. A big exclamation mark. And then the war in Ukraine began, which along with high interest rates we saw as an excessive macroeconomic risk. We’re not the only ones who sold in time, other large crypto funds, the Pantera and Galaxy, made the same evaluation. Just like we do, they have large analytical teams numbering in the dozens, who do precisely this. But retail and smaller investors got burned big time. The fall of Terra triggered a cascade of crashes and people lost lots of money.

Although I have a fundamental belief in the power of crypto, it’s necessary to admit that it’s not headed for easy times. Winter is coming, there’s a crisis around the corner, and hence caution is key. Since World War II the world markets have experienced 14 bear markets, with the downturn lasting from a month to a year and eight months. The average downturn lasted 11 months with a cumulative decline of 32 percent. Nevertheless, we now think that we’re on a longer scale and are preparing for a two-year bear market, especially due to general stagflation and geopolitical instability. The crypto market can easily not start to turn around until sometime in May 2024, when Bitcoin will halve – I believe that this will pull the market back up. By then the macroeconomic situation could perhaps start improving. We’ll see how the inflationary trend will continue.

That’s why we say to all the companies in our portfolio: Either you’ve got cash for another two years, or you have to raise capital and cut costs to survive the next 24 months. From the perspective of company founders, it’s a difficult period one needs to prepare for.

And is there capital on the market in this situation? That takes me back to the start again, to opportunity. The valuation of crypto projects has halved, hence for us as investors everything is half price, a favourable situation. Were investing more now than a half-year ago. And we’re not afraid of making investments, even big ones.