Bull markets are as fierce as tigers, bear markets are bitterly hard to endure! Coinbase Co-founder discusses coping with market cycles
The cycle is neither good nor bad; they are natural. The joy of reaching the peak offers the world the opportunity to dream of a future; while the despair of hitting rock bottom forces people to become practical.
(This article is authorized to be reprinted from BlockBeats, titled "Paradigm: How to Improve Adaptability and Smoothly Navigate the 'Bull and Bear' Cycles?" Original article here)
In the first two months of 2021, the prices of many cryptocurrencies have doubled and continue to hit historic highs. The market cap of Bitcoin has surpassed $1 trillion. Pixelated crypto artworks, such as "Note 1," typically sell for millions of dollars. Even senators have changed their profile pictures to laser eyes "Note 2." Exciting things abound.
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Note 1: CryptoPunk in NFT.
Note 2: "Why have many celebrities, including Musk and SEC senators, changed to 'laser eyes' profile pictures?"
As a co-founder of Coinbase, having experienced the previous three market cycles (2011, 2013, and 2017), I have experienced these exciting highs and, correspondingly, the subsequent despair and disillusionment.
Here are some observations and learnings I have gained from these past crypto cycles. I share them with you in hopes that they can help you, your team, and your community prepare for everything in the future, so you can avoid potential pitfalls and maximize your chances of success.
While we cannot predict the future, past cycles give us some insights into what to prepare for. They can help us imagine the potential consequences of this recent wave of joy. They remind us that given the scale of opportunities in crypto tech, uncertainty and volatility are to be expected: This technology can not only change currency but also revolutionize the financial system and the internet.
Table of Contents
Observations on Past Crypto Cycles
Warning: Future cycles will almost certainly be different from past cycles. We may not even be in another cycle! But markets do tend to go through cycles, with key factors often repeating. To prepare for the future, it is worth understanding these elements of past cycles:
Highly Emotional
Founders, employees, and customers quickly gain or lose significant amounts of capital, making it difficult to handle any issue entirely rationally. What's more complicated is that the "hype" phase historically is short-lived, while the "normal/downtrend" phase is much longer. At Coinbase, we surged from 2013 until a chilling 3-year downturn in 2017. Many employees became demoralized, and over a third of the company shut down. As a founder, I felt incredible challenges and solitude.
Attracts Significant Public Attention
The media constantly interviews you; family members ask you to explain what's going on; friends urge you for investment advice; some companies or projects hyped "to da moon" one day have their obituaries written the next.
Strengthens the Ecosystem
Cryptocurrency technology always ends up stronger after each cycle. This holds true for all key indicators: entrepreneurial and developer activity, academic research, infrastructure maturity, enterprise adoption, public awareness, or even just the price. Broadly speaking, a cycle can be redefined as a fluctuation cycle around a relatively consistent curve. Despite emotional ups and downs, at Coinbase, our state in each cycle has been better than the end of the previous cycle, in terms of every indicator and by many multiples.
Wipes Out Weaker Companies
In the upward cycle, the rising tide lifts all boats, while in the downward cycle, poor fundamentals and flawed strategies are mercilessly exposed. Many companies do not survive. Those that do have a significant advantage as they stay focused on building and growing while others perish, often flourishing in the next upturn.
Attracts Regulatory Attention
With public attention comes regulatory scrutiny. At Coinbase, we proactively formulated our regulatory strategy long before regulators came knocking.
Pushes Infrastructure to the Limits
Companies, native crypto apps, and the blockchain itself are no exception. Trading platforms crash. Transaction fees surge 10-100 times. At Coinbase, we depleted operational funds to support the massive influx of customers in 2013, forcing us to pause customer buying capabilities, in what was the largest customer influx we had seen - not the best experience!
Building Resilience to Cycles
Predicting the specifics of cycles is challenging, so the wise approach is to adapt to them. In times of elation or despair, the most important thing you can do is think for yourself. Sometimes, the experiences of others can help in this process. With this in mind, here are effective ways I found to create resilience in cycles:
Lead by Example
Cycles attract short-term attention. Focusing on the mission gives your team and community the opportunity to do the same.
Stay Focused (Keep the main thing the main thing)
Feeling like you can do anything during the boom period leads to wanting to do everything. Therefore, maintain strict requirements for changing or expanding your scope of work.
The same holds true in the downturn. The graveyard of the crypto industry is littered with the corpses of companies that veered off their core mission during the downturn, only to watch their ideals start to take effect in the next upturn. In 2015, a Coinbase board member suggested we start building private blockchains for banks as it offered a short-term cash opportunity. We are glad we avoided this deviation and short-termism.
Stress Test
Imagine your product usage expanding 10 to 100 times on a normal basis. Where will issues arise? Every team leader should consider this. At Coinbase, we attempted to estimate in advance the workload for customer support, cash burn rate, and server loads, but we still underestimated the peak loads by over 10 times during cycles.
Consider Fundraising
Ask yourself: "If cryptocurrencies experience a prolonged downturn, do I have enough cash to survive?" Cash may be easy to come by today, but not necessarily tomorrow. At Coinbase, we found ourselves running low on cash shortly after 2013-14. Fortunately, we decided to raise funds before the crypto winter set in. Without doing so, we might not have made it to spring 2017. When we completed a large fundraising round, we put half of it into a separate bank account to avoid dipping into our emergency fund, the "Rainy Day" Fund. If your personal bank account balance is close to zero, consider taking some money off the table from the market. It can help you sleep better at night and focus on the most promising tasks.
Note 3: "Rainy Day" Fund: Also known as an emergency fund, it is the money held in case of the worst situations, such as job loss, a child or spouse falling ill, or any other major emergency that could lead to job loss or unemployment. Most financial experts advocate that a rainy day fund should contain enough money to sustain a family for three months in case of layoff or similar circumstances. Some now raise the threshold for the rainy day fund, believing that even without income, this money is enough to sustain life for 5 months.
Forewarn Newcomers
Remind new employees that if they join your company, they should be prepared for a long downturn. Coinbase saw numerous employees join at the peak of the bull market in 2013-14, thinking cryptocurrencies were on a "straight line to the moon," only to leave disappointed when the crypto market "collapsed" before rallying again in 2017. Prepare your customers and community just as you prepare your team. When the downturn begins, you may quickly go from being a visionary leader to a scapegoat.
Reiterate Your Message Through Multiple Channels, People, and Times
In noisy, stressful times, information is harder to hear.
Prepare for a Marathon, Not a Sprint
Many founders "burn out." Stay healthy and give yourself some time to clear your head. The more challenging situations you experience, the easier they become to handle. Give yourself a chance to accumulate experience.
Press Onward
The breakthroughs in foundational technology offer tremendous opportunities but also huge uncertainties, which are two key factors in cycles. As cryptocurrency technology begins to redefine multiple large global markets - currencies, financial services, and the internet - it will become an even more extreme example, which is not surprising.
Cycles are neither good nor bad; they are natural. The peak's elation offers the world a chance for a dreamy future; the valley's despair forces people to become practical and clear. Things are never as good as they seem when they're good, and they're never as bad as they seem when they're bad. I don't know how the current cycle will unfold, or if it even is a cycle.
I do know that every past cycle has made cryptocurrency technology stronger than when it started. When things are going well, it's time to build resilience; be prepared for your success no matter what the future holds. I hope you seize this opportunity.
We will continue to support you.
Fred Ehrsam and the Paradigm Team.