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How risky are Formula 1’s Web3 sponsorship deals?

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Cryptocurrency’s relationship to the trappings of glamour has often been a close one. Whether it is through celebrity endorsements, or NFT-based membership clubs, promises of wealth and luxury have played a key part in crypto marketing. Buying into crypto has often been framed as a way to create generational wealth, even from small retail investments. It should be of no surprise then that when a sport such as Formula 1 can boast high-profile events in Monaco, Miami, Monza, Abu Dhabi, and Dubai on its calendar, sponsors from the crypto space would inevitably begin to follow.

This proximity to centres of international wealth is inherently desirable to luxury advertisers in general. Premium brands including Girard Perregeaux, Bombardier, Taittinger, Richard Mille and Zeiss are all partnered with Formula 1 teams. Furthermore, as a sport driven by technical innovation, fans are more likely to be younger and more technically minded than its competitors. This is ideal for Web3 companies who have been quick to buy up space. Fantom, Velas, FTX, Crypto.com, Binance (who we have previously investigated at DisruptionBanking), Tezos, Bybit and Floki have all signed substantial deals with teams and tracks. Some of these deals have a value of over $100 million.

Crypto Crash Fails to Show Up on the Track

Yet the current crypto climate isn’t exactly a favourable one. 2022 has seen a well-published decline in the value of crypto assets. Fantom, a decentralised network and cryptocurrency, has seen its value (as of June 2022) slashed to a tenth of what it was when it signed the sponsorship agreement in January. To add to these woes, this trend does not seem set to reverse soon. According to Du Jun, co-founder of Huobi, a bull market will not return until at least 2024. Thus the question remains, are these multi-year deals going to last? Given that many of these deals were signed in 2022, what is their purpose and who loses if they fold?

Although some have speculated as to whether Formula 1 would be able to survive the loss of its crypto sponsors, in the short-term this is unlikely. Given the vast amount of publicity crypto sponsors have received from getting involved in the sport, alongside a new golden era on the track, it is arguable that these partnerships have raised their value even further. Similarly, Formula 1 has survived sponsorship cycles before, such as when the tobacco industry withdrew $750 million in annual support due to a ban in 2006.

Whilst the biggest losers in the long run might end up being the fans themselves, there is an inherent risk in companies spending large amount of capital that would be better allocated elsewhere. Where for some such as Fantom, this agreement may have been signed long before the crash began, that is not the case for all. Centralised exchange OKX’s multi-year deal was officially announced in May 2022. Though negotiations may have been ongoing for some time before this, it is reasonable to suspect that given the crash began in late 2021, they could have pulled out. Given that their trading volume plunged by over $100 billion in February 2022 alone, they had fair warning. The question therefore remains as to what made them proceed.

Formula 1: Powered by Optimism

Is it blind optimism that fuels these sponsorships? A recent survey by the Bank of America revealed that in spite of the recent crypto-winter, around 90% of current or prospective crypto investors plan to buy more over the next 6 months. Whilst fears of a looming recession may put pay to these plans over the coming months, this offers some insight into the evergreen optimism that is endemic to the crypto space.

If it is optimism alone fuelling these deals, there may be some major casualties. There is precedent from the dot com bubble in the early 2000s. Companies such as Worldcom, Bee-Trade.com, Lucent, Nortel Networks, PC Suria, fkg.com and icnsportsweb.com are just some of those that folded or disappeared into obscurity after sponsoring a Formula 1 team in the early 2000s. Yet many of these pioneering web-based F1 sponsors have also gone on to survive, including Chello, Temenos, and Catia Solutions. Today the legacy of this is there for all to see: Formula 1 cars are littered with web 2.0 sponsorship, from TikTok and Yahoo, to Zahara, data.ai and NetApp.

Yet OKX’s optimism seems to stem, to some degree, from a place of achievement. In the same month as their sponsorship was announced, OKX received a wave of positive publicity, becoming the only exchange that managed to protect its customers from the Luna/UST crash. This was all thanks to its centralised risk detection schemes which enabled its users to sell earlier than other platforms. Unfortunately, this success was not shared with its competitors.

The Denigration of Luxury

Whilst it seems that Formula 1 are unlikely to lose in the short-term, if its crypto sponsors are to fail and lose its fans large amounts of money, there could be a longer-term reputational damage.

The reputational performance of many crypto organisations hasn’t exactly been stellar of late. Binance, sponsors of Alpine, is rumoured to be under investigation by the US Securities and Exchange Commission. Crypto.com had its security breached earlier this year and lost $35 million of investors money. Floki, Velas, and Fantom have seen values plunge to fractions of their initial worth. The Ontario Securities Commission is taking action against ByBit. Tezos has had a scandal ridden journey over the last few years. Are these companies leveraging Formula 1’s reputation against their own? In accepting sponsorship deals, is Formula 1 implicitly endorsing these controversial companies?

Where glamour has been a force that has attracted people to F1, it could also be what turns people away from it. An association with glamour can quickly transform into what is viewed as an uncomfortable obsession with wealth and a lack of care for fans. Younger sports fans are more likely to notice advertising and engage with it than older audiences. Though this can be profitable, when things go wrong, this can also amplify issues. Over the past few weeks, Formula 1 has been engulfed by scandal from porpoising cars endangering drivers, to racism scandals which have not been adequately condemned.

It is the compounding of scandals that can cause other sponsors to drop-out, due to fear of association. Whether it is hosting events in countries with poor human rights records, poor decision making on race-days, environmental issues exacerbated by crypto endorsements, or bad sponsorship performance, whilst no one of these things can sink the sport, together they may do major harm in the long-run.

Author: Alex Joseph

#Formula1 #DigitalAssets #Web3.0 #Crypto

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