Yesterday, Crypto startup ShapesShift’s founder and CEO Erik Voorhees announced the layoff of a portion of its workforce. In a heartfelt article posted on Medium, Mr. Voorhees addressed its former employees, and cited reasons for the decision to downsize. However compelling the causes, the palpable question is how did it come to this. How is that a number of companies with good ideas and position are failing so drastically. The answers are not easy, not is there only one.
In more than one occasion, analysts blame Ether as the main culprit. The dependence on Ether as the preferred medium of value during ICO fundraising cannot be ignored. Ether is the token from the Ethereum network – an established and by all accounts secured enterprise in the crypto space. On January 10, 2018, Ethereum’s price grew 1,300% reaching $1,417 per token. Companies stockpiled the currency and use it to finance operations and project development. However, when the price of Ethereum began to fall, the value of ether fell in unison causing cash reserves to dwindle and eventually disappear. Ether has lost approximately 90% of its value from its all time highs. This cause a de facto collapse of any project relying on its value for monetary support.
Another cause exemplified in ShapesShift’s downturn is the rapid diversification of product lines. For ShapeShift in particular, the division of resources for development of Coincap, a live crypto data index, and the acquisition of hardware wallet company KeepKey over extended the company’s reach. In addition, other software-based projects like plugins and APIs also deprived the company of money. This is a shared cause in many other struggling enterprises in the crypto industry.
Another primary cause of companies failing is the lack of marketing. It is surprising how often crypto startups overlook this very critical component. Companies like Universa (UTNP) with arguably superior blockchain performance than Ripple (XRP) are victims of this problem. The complete lack of a marketing campaign makes otherwise potentially successful projects invisible to the market. On the other hand, Tron, a project with little innovation but excellent marketing strategies maintains a top ten spot in the marketcap standings.
Regulation, or the fear of it, is partially responsible for the downfall of Shapeshift and a number of other ventures. According to Mr. Voorhees, the changing regulatory framework in the crypto space led the company to second guess the legal standing of their project. The uncomfortable regulatory footing diverted resources to mitigate risk and reassess compliance. The end result was large legal bills that raised costs. The team behind the promising Stablecoin project ‘Basis’ abandoned development when the project could not be modified to meet regulatory compliance.
ShapesShift is a leader in the crypto to crypto exchange industry. Nevertheless, increased competition from less risk-averse exchanges like Changelly, Flyp.me, the Kyber network, and Changenow is closing in on their market share. Bitmain is facing the same issue with Canaan, Ebang, Samsung, AMD, and others who are aggressively taking advantage of the company’s losses. Increased competition in a bear market is becoming a major factor in the demise of Crypto companies.
As in any other industry, success in the crypto market can’t be guaranteed. A sound business model, a balanced budget, and proper marketing are key in advancing under any market conditions. However, the unpredictability, volatility, and lack of regulatory clarity of the crypto market present additional challenges on new crypto companies. The sharp price decline combined with an extended bear market proves too difficult for young companies to overcome. As prices continue to fall, additional firms will likely join those that failed under the immense pressure of a changing crypto climate.