The Crypto World Goes Round
The first hard truth: the technologies to build scalable consumer and B2B apps in crypto like low latency, cheap blockchains, stablecoins etc, have all existed since ~2018. I was there, built with those things, and drank the coolaid. If the mass market apps and use cases were coming - they would have already emerged. L2s, Solana, and embedded wallets don’t fix this. Everyone is still building infrastructure.
Right now there are essentially two use cases that have PMF in crypto:
Some stablecoin payments in emerging countries (slow and steady growth)
Gambling and Speculation (roughly 100x + the size of the stablecoin use case )
The second hard truth: the halvening is 180 days priced in. ETFs have driven a ton of liquitity, but BTC is actually down from it’s highs. Liquidity begets price for speculative assets like crypto. In this world where the price hasn’t really moved but a ton of liquidity has been injected, we’re in unprecedented territory. This has never happened before post halvening.
The Funding Environment
VC drives a lot of the activity in crypto because in a lot of ways the builders are beholden to them. There really haven’t been many successful bootstrapped crypto projects (the original bitcoin being the main outlier). If you want to understand the funding environment, it all starts with this graph, where in 2021 VCs took home a whopping 88b!! in distributions
On the back of this monster year, some HUGE funds were raised on the promise that this asset class can drive massive returns. Between A16Z, Paradigm, Haun etc, there’s probably 25b in venture money still being deployed into the market. With funds of this size, there’s only one way they produce returns: primarily layer 1 token plays that appreciate dramatically in bull markets. They’ve been slowly deploying over the past three years, but the question on everyone’s mind is, will we get the bull market and knotch another 10x+ in bitcoin price? This will bring the token exits rolling in and those funds can dump on those investors. This is why you keep seeing these rounds happen.
The last thing I’ll say about VCs - in these cycles it’s actually quite HARD to beat the large-cap coins. If a VC does this they’re in the top 5-10% . My guess is that none of the mega funds will do that this cycle. They’re really just making their money off of management fees. LPs are better off investing in a basket of BTC, ETH, and SOL - if they can.
Cycles and Liquidity
The first thing I’ll say is anything can happen. If there’s going to be another cycle at this point the most likely base case is that the fed cuts rates, and then that injects a ton of risk capital into the system, that + ETFs and a new investor base drives a lot of liquidity. Then the liquidity drives price. Coinbase does super well as the ETF supplier. Retail comes back in droves. Altcoins go nuts. BTC bags huge gains. Many intial token offerings. VCs from the last cycle make out and the ETF investors who ape in end up holding the bag. Cool. It’s a liquidity thing though, don’t trick yourself into thinking it’s any more.
The base case? I think there is a pretty decent chance that this cycle is toast. The fed doesn’t cut rates enough to really impact crypto liquidity. BTC won’t see north of 100k for at least another 3 years (if ever). None of my crypto friends will like this take, but it’s likely the most pragmatic one.
The second-order effects of a best-case flat cycle are not good. The VCs that raised those huge funds in 2022 are now left holding the bag, and LPs won’t re-up. Venture funding dries up, and those VC funds have mediocre returns. As a builder myself, I know I’ve gotten disillusioned and moved on to new things. The best builders won’t be interested in building in crypto (I think this is already happening). Who’s left are essentially the grifters and get-rich-quick seekers (you can see some of this playing out already). If you’re building in this environment it’s essentially a hail marry wait it out for another cycle and hope you can launch a token - which is probably the toughest place to be mentally.
Conclusion
Sovereign money like bitcoin is something that needs to exist in the world, and it’s great that it does. This along with a world computer. This doesn’t mean price will go up forever though. I think we need to answer the question: what do we do when the music stops? If this cycle is done, how do we move forward? How does the capital structure of this industry keep working and funding builders? How do we increase the graduation rates from seed (which are quite bad)?
There are some great builders in crypto. Particularly the folks working on projects like base etc, with absolutely the best intentions. How do we convert that energy into something positive for the world? I’d like to see them succeed. But the first step is probably taking a look in the mirror and asking ourselves: what are we doing here?