Crypto & Sports: What Happens To The Multi-Billion-Dollar Sponsorship Agreements?!
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Crypto & Sports: What Happens To The Multi-Billion-Dollar Sponsorship Agreements?!
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Hey Friends,
Crypto assets have been on a freefall over the last several months. Bitcoin is down more than 65% from its all-time high. Ethereum is down nearly 75% from its all-time high, and the total value of all crypto assets has dropped 70% in the last six months.
Many people will argue about why this is the case: Some might believe it was always a scam, while others will say it’s performing like a risk asset under pressure from the Federal Reserve, which is hiking interest rates to combat high inflation in the US.
But I think this is particularly interesting given the trend that we saw last year in sports. For example, by my count, there were more than $1.5 billion in sponsorship agreements signed by crypto companies, including exchanges, tokens, and more.
That includes the $700 million that Crypto.com paid to rename the iconic Staples Center in Los Angeles. And it includes the $500 million-plus that FTX has spent on deals with the Miami Heat, esports franchise TSM, Major League Baseball, and more.
So what happens to these deals? Are these companies able to pay? Is the emergence of crypto within professional sports over for good? Well, let’s talk about it.
I think there are several different ways to look at this. And just like everything else, there is a distribution of outcomes. Take Crypto.com and FTX, for example. These appear to be solid businesses that are growing fast and bringing in billions of dollars in annual revenue. My guess is that they will be able to pay their deals regardless.
FTX Revenue
2020: $85 million
2021: $1 billion-plus
Why? Because not only did FTX Founder & CEO Sam Bankman-Fried previously say he could pay for his deals with the cash on his balance sheet right now, but I’ve heard from several top crypto CMOs that they were required to show financial statements, growth projections, and more, to complete the large 9-figure deals that we are seeing.
So my concern sits much more with the teams that went further out on the risk curve.
For example, look at the Washington Nationals. They signed a 5-year, $40 million deal with Terra before the start of the MLB season. It included advertising and signage around the stadium and a video series explaining crypto to be published by the team.
"We are excited to partner with Terra to name our most exclusive club and explore bringing powerful new fan experiences to Nationals Park, including the use of UST cryptocurrency to make purchases,” said Nationals managing principal owner Mark D. Lerner at the time of the deal’s announcement.
But just a few months later, the algorithmic stablecoin UST dropped from its $1 peg to less than a cent, and more than $40 billion in value was destroyed overnight.
Still, the Washington Nationals posted a “crypto 101” video on its social media account, fulfilling its contractual obligation at the expense of being tone-deaf.
The obvious answer with hindsight bias is that Terra was never in the same category as Bitcoin. And while many people will argue that there is value in other projects outside Bitcoin—and that may be the case—there are currently nearly 20,000 cryptocurrencies in existence, and 99% of them will probably end up being worth $0.
Remember, this is something the Bitcoiners warned others about early on.
Still, that doesn’t mean all of these deals are bad. My larger point revolves around the thesis that individuals, teams, and organizations will always venture further out on the risk curve during bull markets. That’s true in regards to retail traders picking investments, as well as professional sports teams choosing marketing partners.
But the sports organizations that were able to manage risk properly and resist financial temptation are in a much better position today than their counterparts.
I hope everyone has a great day. I’ll talk to you tomorrow.
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