The crypto buzz of 2020 and 2021 is long gone – part of the ongoing fallout from the sudden demise of FTX, a situation already impacting Triangle companies as investors, reading both the tea leaves and the headlines, are being more cautious about deploying dollars into cryptocurrency firms.
Matt Senter, co-founder of Bitcoin rewards app Lolli, said his firm is being proactive, having recently rolled out a cash option for its users.
“We still have a Bitcoin first mentality, but for people not quite ready … we had to diversify,” he said.
While he says Lolli had a “great weekend” thanks to Black Friday and Cyber Monday, he said a lot of companies in the crypto space aren’t as lucky. And he worries about how the FTX collapse will darken perception – and tighten wallets in the process.
He’s not alone. Triangle Inno checked in with three crypto entrepreneurs – and while all three say they’re long-term bullish on the sector, they also say there will be pain in the short term tied to headlines over the alleged misrepresentations of FTX founder Sam Bankman-Fried and his company.
Booms and busts
Senter said he has an advantage – in that he’s been in the industry for sometime. He’s seen previous busts and lived to tell the tale.
“But if you’re starting from scratch in this environment, it can be pretty rough,” he said.
Ryan Bethencourt, serial entrepreneur, crypto investor and founder of crypto-focused Layer 1 Ventures, said the fallout inevitably impacts Triangle companies.
Interest in crypto – and decentralized internet technologies known as Web3 – has dropped as those dabbling in the space have been turned off by the FTX headlines, he said. A Web3 meetup used to attract about 100 people every other week to American Underground in Durham, he said.
“Now we’re lucky if we get five to 10 people once a month,” he said. “That’s the level of people tapping out.”
While he suspects some company startups tied to FTX could cause firms to shutter, Bethencourt is seeing the biggest impact – at least right now – as a personal one in the Triangle, and not company specific. As far as he is aware, no Layer 1 Ventures portfolio firms have direct exposure to FTX, he said. But that doesn’t mean the perception issue won’t make it harder for companies in the space to secure investment.
Harder to raise capital
“It’s made it harder to raise money,” Bethencourt said. “And even some of the venture funds have been affected.”
While he doesn’t name Chapel Hill-based Morgan Creek Capital, its crypto-offshoot, Morgan Creek Digital, is among those feeling the sting, as it invested millions into BlockFi, which blamed FTX when it filed for bankruptcy Monday.
Bethencourt expects the bear market the situation is creating “will kill a lot of companies.”
Meanwhile, Senter expects due diligence to expand exponentially.
“Investors are going to say, you really are going to have to prove to us that this is a viable business you’re trying to run here,” he said. “I think this will continue to have ripples for awhile.”
Adam Kling, who raised $1 million earlier this year on Raleigh-based FYX, a crypto-tinged startup creating a next-generation esports platform for game developers by introducing new monetization methods, said it’s not the first time an industry has dealt with a bubble. He points to the Dot-Com Bubble and its inevitable crash.
In Crypto's case, it could be a good thing long-term, Kling said. “We’re getting rid of a lot of the bad actors in the space,” he said. “It’s going to cause people to not look at this industry as a get rich quick opportunity. It needs to get serious with serious people who want to use this technology for good and actually build something.”
He said the FTX situation is “obviously going to suppress a lot of prices” and, while he worries about how FTX perception might impact startup investing, he said the bigger issue might be regulation.
Increased regulation needed?
“I’m a little worried about regulators coming in and regulating things they do not understand,” Kling said.
But Bethencourt pointed out that FTX, as an off-shore firm, wouldn’t be subject to U.S. regulations anyway.
Crypto entrepreneurs said they would be in favor of regulation such as audits when it comes to third parties responsible for other people’s money. But they say that, with or without regulations, they’re still betting on the industry long term.
Kling said the “whole point” was decentralization. He called the FTX situation “a contagion that was built on a lot of cheap money and speculation” and said that, if instead of going to third parties, people had stuck to the decentralization premise, the situation may not have happened.
Crypto has long been on a “boom-bust cycle,” Bethencourt said.
“I believe that, long term, Web3 and crypto will be back in another cycle,” he said. “But who are the winners? I think that’s something I can’t call out.”
