Crypto companies looking to weather the bear market should apply general business principles to power this new-age financial services technology.
Inflation, a bear market, recession – the number one question I field is when will the crypto winter be over. We’ve watched the total market cap of crypto assets decline from more than $2 trillion to roughly $1 trillion just over the past year. It’s certainly been a bumpy ride and the future for many players in the crypto ecosystem will be determined by how they navigate the cold months ahead.
I don’t have some radical insight that guides our investing strategy – it’s not an ace card I have up my sleeve. But having weathered the last crypto winter (2018-2020), I have learned a few things about how to lead a company through these periods of market volatility and uncertainty.
Here I share six principles that have helped guide my approach.
Apply basic risk management principles
Basic risk management is at the heart of any financial institution. From cash reserves to lending protocols, platforms built for success actively monitor risk, manage liquidity, and disclose guidelines to ensure users understand their own exposure.
In particular, crypto lending has been hit hard by the market conditions. Whether it is circular lending or insufficient reserves, regulators and users alike should ask questions about how we re-adjust risk management as an industry to prioritize consumers rather than investors.
Manage cash reserves to maintain consumer confidence
Crypto firms across the world have suffered a liquidity crunch. The size of liquid cash reserves needed to support demand during bear markets is understandably higher. Companies need to invest accordingly to ensure they are able to meet demand without collapsing market prices.
Consumers, on the other hand, need to educate themselves about the companies’ policies, should beware of the smoke and mirrors associated with the flashiest yields, and conduct business only with trusted companies with prudent cash reserve policies.
Work hand in glove with policymakers to advance industry regulations
When I started in this industry more than five years ago, I was dedicated to building a platform and a business that was good for our customers, not one that focused on regulatory compliance. Five years later — and the wisdom of our rapid growth under my belt — I now understand the value of compliance more than ever.
While some in the industry might say that working to advance regulation goes against the ethos of cryptocurrency and blockchain, I would argue that a stable regulatory environment can only support innovation and is essential to establishing trust in the industry, leading to long-term growth. I believe the crypto industry has a fundamental responsibility to work with regulators and share their goal of providing greater protections for everyday users.
Prioritize these principles in your talent pool
If we want risk management and regulatory compliance to be the new industry standard, it is imperative that companies invest in a workforce that matches these priorities and set the bar across all financial services, not just crypto. As tech leaders in financial services, we need to stand up to the challenges of illicit finance.
Crypto isn’t accustomed to making headlines for the good news, and the best way to flip this narrative is by driving the industry forward. We need to set benchmarks across financial services for AML, KYC, geolocation, security, privacy and other industry challenges by using the technical knowledge and ingenuity that has contributed to the crypto industry’s rapid growth. The talent pool is wider and deeper than it was a mere two months ago — investment in this talent pool will pay dividends down the road. I’m constantly hiring security, risk management, and compliance professionals and suggest others do so as well.
Invest in strong companies that build brand, add value, and support the industry
I’ve previously written about how not all investments are good investments. I have been clear that I’m not in the business of bailouts — largely due to my belief in maintaining a healthy level of cash reserves as an important responsibility to our users — but there are many opportunities right now to invest in companies that will move the industry forward. Companies weathering crypto winter and primed for the long haul have a unique opportunity to invest in growth verticals in our business — Web3, NFTs, and much more. Wise investments will benefit the industry, consumers, and long-term growth.
Lower the barrier to entry
Finally, something I’m most passionate about is lowering the barrier to entry into crypto for more people globally. Crypto’s value propositions and use cases have led many people from across the world to enter the space. But if we’re serious about building an infrastructure designed to make financial opportunity accessible to everyone — not just the privileged few — we need to understand the existing barriers to entry and work to drive them down through lower fees and consumer education.
These ideas aren’t revolutionary. They are old-school, battle-tested business principles my business professors at McGill taught me. Powered by new technology, we can weather the crypto winter and come out stronger on the other side. While there is likely more volatility to come, I remain bullish on our industry and believe in our ability to accelerate global prosperity.
Changpeng Zhao, more commonly known as CZ, is the founder and CEO of Binance, the world’s leading blockchain ecosystem and cryptocurrency infrastructure provider.