Instl. Crypto Custody
Jul 25, 2022

Crypto Winter: How Projects Can Use Treasuries To Thrive

Crypto projects are in build mode looking for ways to survive the market downturn. Yet they are sat on inactive treasuries missing out on potential yield.

While some may bristle at the term ‘Crypto Winter’, it's undeniable that the market is experiencing a significant downturn no matter how you dress it. Many crypto companies and projects are downsizing, restructuring, or scaling back in some form. This isn't unusual. We have seen this cycle play out before and the industry came back stronger in the end.

Founders and CFOs are finding they now need to rely on their treasuries while they focus on building and surviving until the market recovers. Surviving might be enough, but for many crypto projects, there is the potential to not just survive but to thrive in this environment. 

In this blog post, we consulted with Evgeny Gokhberg, the managing partner of Re7 Capital, to understand what founders/CFOs can do to turn their treasuries into yield generating portfolios even during this bear market.

The end of 2021 gave founders an opportunity to raise capital and to increase their corporate treasuries. As of Q2 2022, there has been a 31% decline in VC investments and valuations are dropping significantly. Many CFOs and Founders are now looking at those treasuries and trying to figure out just how much runway they actually have. What they haven't realised just yet is that they are sitting on potential yield and are doing very little with the capital they have. 

 

Building a portfolio can make the difference

Despite the headlines of doom and gloom, there are market neutral funds out there who are making use of true DeFi protocols to generate yield even now. If crypto companies were to use their treasuries to build an effective trading portfolio, they could stand to extend their runways by months, giving them the freedom to wait out the bear market, increase their valuations or build extra features.

Deploying treasuries to build a portfolio raises some challenges, which is why most founders have avoided this approach so far, but with the market the way it is, this could be a lifeline worth exploring. To build a profitable portfolio requires weeks, even months of extensive research into the assets and protocols available.

As a founder or CFO, you need to consider how your treasury looks in terms of asset breakdown. What percentage is in stablecoins, governance tokens or volatile assets? Analysing and tracking the risk and how to rebalance your portfolio will be of the highest importance.

The layers you use can introduce additional risks and depend on how far you are willing to stray from ethereum in pursuit of yield, so you will need to contemplate that in your strategy. Things to watch out for are smart contract risks, make sure the protocols you use are audited and be sure to research them thoroughly before committing funds. You may have to assemble a team to study these, looking into the products, documentation, audits and their smart contracts. A useful exercise that the most successful fund managers use is to build direct relationships with the developers at those protocols. Having someone to call or message directly in a pinch can be very useful. 

One or two people can manage a small portfolio, but if it grows, you will need to hire a full-time team of up to 10 people with experience. This can mean that you will have better returns, though it increases your operational costs and you will need to keep in mind that performance fees are standard in the industry, which introduces incentive but at a substantial additional cost. Finding the right balance between portfolio and team size will be key at the start.

Crypto Winter can be solved by using treasuries effectively

One challenge for a lot of new funds is being able to scale quickly, so having the right infrastructure from the beginning is essential. As part of that infrastructure you should look into operational requirements, whether you require an external administrator, how you will custody your assets and how they will be governed. 

While there is a lot that goes into this process, it could make the difference between failure and survival and if executed well, your crypto company could actually thrive even during a crypto winter. 

In addition, to effectively manage your treasury portfolio, you will need extensive expertise running market neutral crypto funds. This includes the research, risk analysis and rebalancing of your portfolio, all within a trusted custodian solution that has the ability for you to set threshold rules, whitelist contract addresses and implement multisig for as many signers as you require.

If you have decided you want to enhance your cash flow and ensure your company's runway but don't have the time or expertise to set up and manage an effective portfolio with your company's treasury, get in touch with us to learn more.

 

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