Resilience during the crypto winter

1. Resilience, you said resilience?

The objective of management is both to sustain advantage, but also to last. At smooth, bull, times, the later objective is easily fullfilled, but at the risk of being neglected,-- leading to maximal exposure at times of a crisis.

The second objective of a firm can be translated in one term borrowed from physics: resilience. Applied to managerial economics, resilience is the ability of a company to minimize its business against adverse shocks, and rebound quickly to previous state of affairs, ---ideally when the effects of the crisis starts to peak and decelerates.

2. Resilience: learning from covid-19 pandemic

A case in point of a major adverse shock has been the covid-19, which had demonstrated that resilience is typically challenging, especially for firms industry facing large headwinds from the pandemic.  In general, bouncing back to pre-crisis takes time, in the range of 18-24 months, and the success is poor:

a) a long tail of firms, typically 35-50%, struggles to regrow from the bottom reached at the peak of the crisis.  

b) About 15% of companies do not survive the crisis, get liquidated or absorbed.

3. Resilience: new headwinds and impact on crypto

Covid-19 pandemic stabilizing on the healthcare side, the next challenge has been a rise of inflation due to supply chain challenges from the pandemic, and significant energy price boost as result of the Ukrainian war. Economies have had no choice but to raise interest rates, leading to a significant repricing of most of the financial markets. 

One segment with significant headwinds may be the crypto market. For instance, the bitcoin market has seen a 250 days drawdown culminating in a plunge of 70% of bitcoin price lately. 

Such a plunge has led to question the sanity of the bitcoin ecosystem, with well-known voices nearly signaling that it is worthless, and worse, a Ponzi scheme.

The reality is however that the bitcoin ecosystem has been there for years now, had since fall of higher and longer drawdown (like after 2013 and 2017), and rebounded. Today, institutional money has been pouring money as investment in the ecosystem, from known players such as BlackRock, and others. The key question thus here is more about whether the current headwind will shake the market and who will be the winners, -- leading to the question of who is possibly resilient and able to rebound past, --better rebound forward to consolidate its advantage.

Clearly weak hands have been visible in all part of the crypto market ecosystem, —from the collapse of cryptos themselves ( Eg Terra US), to finance players such as credit lender, Celsius, or the asset management player, Canadian Purpose ETF who saw a sudden shrinkage of half of its assets in a matter of a few days. But like any ecosystem, the external shock starts to percolate inside the full system, and to make all other players exposed, in particular, bitcoin miners. 

Regarding the later, their business is closely linked to bitcoin price, and energy price—the drawdown of more than 80% seen on the publicly quoted miners, mirrors such a correlation, a fortiori because most of those players own a large stock of bitcoin, as a way to secure best on -the -spot- liquidity on top of possibly capture a major upside in the market, should the blockchain market morphs back into some bull fashion. 

The system dynamics for resilience is key here, as liquidity trapped miners may be forced to sell, making the bitcoin price under pressure for the full ecosystem—in such interdependence, those players the less exposed are thus those with low debt leverage, accurate investment commitment in new mining machines, and energy efficient infrastructure. In this respect, it is notable that the current cash flow margins of players such as Argo, Riot ot Marathon, are largely above 50%, and still under a scenario of large drawdown. The question is more of a liquidity issue for resilience, and a learning from such volatility to adapt strategy to come even stronger after the market rebound. 

4. Preliminary conclusions

We might thus conclude that bitcoin market may be at risk, but every market may also have an opportunity to reinvent itself, )-and not fully collapse, during a crisis.

For those investing in the market, it is therefore essential to understand how the return to brighter skies will also be associated with a redistribution of value in the total cryptocurrency ecosystem. Do your home work.