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Moving from TradFi to DeFi? How to spot the dangers

Moving into crypto might not be the promised land that it was even just a few years ago, but that doesn’t mean it isn’t a desirable space to be in.

For one, it’s cool to be in the avant-garde. Crypto might have been on the stage for a few years now, with market leader Bitcoin soon turning 15 years old, but that’s still younger than traditional finance; Goldman Sachs is 155 years old next year. It also pays pretty damn well, in spite of everything. Significant failures in the last year were also spectacular, with FTX the most notable, although BlockFi and Gemini also suffered in the aftershocks.

A lot of people, serious people, want to work in the space. But trading in your traditional finance (TradFi) badge for a Decentralized Finance (DeFi) one comes with certain risks – there’s a reason Goldman Sachs is celebrating 155 years, Barclays 333, and Berenberg 433, whilst Binance has just turned six. TradFi has been doing its thing for a long time, and it knows what it’s doing.

Luckily, if you’re looking to move from TradFi yourself, you too know what you’re doing – you have all the tools at hand to make the transition yourself.

Gordon Zhang is a VP of Corporate Development and Strategy at Riot Platforms (Riot), one of the largest publicly listed Bitcoin miners in the world. He joined Riot a year ago from Kerogen Capital, a private equity fund focusing on energy markets, and started his career in investment banking at Nomura. This is his advice.

1. Skepticism. Are the company's claims true?

“As exciting as it is to join a new company and to dive deep into your new role," Zhang says, there's nothing worse than that same company closing shop shortly thereafter joining, and requiring you to look for a new job.” So, what do you have need to have?

To start with, realistic expectations. “All companies in crypto are in a growth stage, at the end of the day,” Zhang points out. "They all have large capex [capital expenditure] requirements, and that’s where learning how credible a company is, through industry contacts, and understanding ‘is the company able to execute its future plans?’ is so important.” That might not be the sexiest thing to be considering in the next stage of your life, but hey, people sign prenups for a reason too.

2. Look at the funding arrangements 

What credibility means, to Zhang, is the “credibility of [its] growth plans, and its funding capability. Those two areas are where I’ve seen a lot of uncertainty in the market. They may have large growth plans, but have not proven their ability to fund them.”

Funding is a big part of where TradFi professionals slot into the DeFi machine generally.

Funding reliance on Bitcoin can also be risky, and for much the same reasons. Large miners typically put-up large volumes of the coin as a collateral for bank loans, and the (relatively) wild fluctuations of something like Bitcoin can put significant pressure on miners to re-negotiate those bank loans – the Loan-To-Value (LTV) needs to return to its original position, and that requires more Bitcoin.

“That became a huge challenge for miners that took on too much debt," Zhang explains, “especially when Bitcoin prices were at $60k at the end of 2021 and collapsed to under $20k in 2022.” The miners still owed dollars to banks, however. The LTV ratio became too high, and that forced those miners to pay down loans with their existing cash and/or sell Bitcoin on their balance sheet.” This, of course, reduced their cash runway (the amount of time a business can last before its cash runs out).

3. Look at the balance sheet. Look at the colleagues

A strong balance sheet was a big part of what attracted Zhang to Riot, as well as the fact that the invitation was being extended from a known entity – a former colleague at Nomura. He also knew that he could improve its position, from both a Bitcoin and hard currency perspective. Has that worked? Yes, Zhang says. “[Riot] has increased both significantly, while at the same time growing operations by developing a second large-scale facility.”

In a nutshell? Use your TradFi skills to judge your (potential) next employer and how you can help them out. You have a lot of scope to make quick change – Zhang’s employer, Riot, indicates on its latest annual report that it only had 79 non-mining roles. Not a lot of your new colleagues, if any, will have your abilities – you can make an impact, and rise up the ranks, pretty quickly.

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AUTHORZeno Toulon

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