Defending Crypto Fundamentals Investing

Article author: TheiaResearch Article translation: Block unicorn

I am optimistic about the future of our industry, but I am not expecting another bubble like the one four years ago. I expect excellent assets - and there are indeed many excellent assets - to perform well in the next few years, and bet all my capital on this expectation. However, there is a strange idea in the structure of the industry that even worthless assets should trade at astronomical valuations every four years. This phenomenon has happened twice - once in 2017 and again in 2021 - so it is logical to think that it should happen again in 2025. I think this idea is wrong and hinders the development of our industry.

Divide the world into two paradigms - the fundamentals paradigm and the cyclical mania paradigm.The fundamentals paradigm means that you believe in the long-term vision of the industry, but do not expect the token to trade at a price higher than its intrinsic value. Under the fundamentals paradigm, investors are incentivized to work with great teams to build profitable businesses in large markets, while builders are incentivized to focus on the product, customers, and the basic economics of the business. The cyclical mania paradigm, on the other hand, means that investors believe that there will be a bubble every four years, and none of that matters. The natural incentive is to time the market and try to invest in tokens with narrative value when the mania begins. There is no need to think about fundamentals, or whether the team is building for the long term — none of these issues matter when the price of each asset is far above its intrinsic value.

I think it’s surprising that many investors who operate under the cyclical mania paradigm will be disappointed in the next few years because fundamental strategies perform well and narrative tokens do not. There are too many sellers and too few buyers, and there will not be a repeat of 2020-2021.

We experienced a bubble in 2021 because multiple inelastic buyer groups met in a market with almost no supply. We are seeing local VC funds raise over $20 billion in 2021 and aggressively deploy that capital into the market as quickly as possible. Crossover funds raised $630 billion between 2020 and 2021, building on over 10 years of good performance during the 2010-2020 tech bull run and aggressively deploying it into the crypto market. Retail investors have ~$815 billion in stimulus checks in their hands and are confident in the industry. Super-cap investors also have $1.5 trillion in new capital thanks to the rapid price increases of BTC, ETH, and SOL (and a few other Tier 1 tokens trying to replicate those gains). People in these groups believe that the industry will deliver on its promise in the short term; they believe that on-chain finance will disrupt Goldman Sachs in the next few years and that everything will be built on the blockchain ecosystem by the middle of this century. There are no sellers to meet this demand, and the only ones entering this period are founders and a few early VC investors holding large amounts of tokens. They can’t sell — partly because of the lockup period, partly because they believe in the story and have new capital to invest. Remember the logic of market cap: if 90% of tokens are locked up and only 10% of tokens are trading at double the price, the total market cap will double as well. Thus, the growth in market cap during the last bubble was mostly due to too many buyers buying a small amount of tokens from a small number of sellers.

Today the market is structured completely differently, and it’s much harder for local funds to raise new capital. Fundraising in 2023 is down 85%, and has barely recovered in 2024 (e.g. Paradigm raised $800M in 2024 vs. $2.5B in 2021). Crossover funds will be slow to return, and retail investors have largely disappeared as consumer savings fell from over $2 trillion in 2021 to negative numbers in 2024. The remaining retail participants would rather invest in meme coins (or shit) than in the complex infrastructure narrative embedded in venture capital unlocking. The big players are showing a shift in preference for returns on core assets like BTC, ETH, and SOL, rather than narrative tokens. While there is a group of directional liquidity willing to buy tokens, they are small compared to the overall market, and we don't want to buy low-quality assets at high valuations. There is a slight forced selling dynamic in the market. There are two core return metrics in venture capital (VC) - total value to paid capital ("TVPI") and paid distributions to paid capital ("DPI"). TVPI includes realized gains on assets you have sold and unrealized gains on assets you have not sold but have marked, while DPI only includes cash that has been returned, reflecting how much money has been returned for each dollar invested. VC funds raised before 2019 have performed quite well in both TVPI and DPI, but most of the returns are still on paper. These large funds are reaching the statutory end of their lifecycles, meaning they need to sell their remaining positions to return capital to fund investors. VC funds raised after 2019 still have plenty of fund life left, but with modest DPI returns (<0.10x) in most cases, and fund investors demanding to see DPI returns before allocating to the next fund, the largest holders in this sector are likely to be net sellers in the coming years.

In late 2023 and early 2024, many investors tried to get in before another frenzy, causing narrative token prices to rise.The problem is that most people are buying assets they don’t really believe in, hoping someone will buy them off them at a higher price. This wave of foolish money did not show up, and the market rejected a true bull run attempt for narrative tokens. These buyers will not show up, and narrative tokens will continue to underperform in the coming years. We are on the eve of a shift to fundamentals, and those who believe in the vision of an internet financial system understand that we are still in the early stages of one of the biggest cash flow opportunities in the history of capitalism. To benefit from it, you just have to work hard and focus on the fundamentals. I hope our industry can develop like Silicon Valley did after 2001. The entire industry flourished over the next few decades, but this was achieved only through hard work, product-market fit, and proper risk assessment. Voodoo valuation techniques like "click-through valuation" and "eyeball valuation" faded away as the market shifted to valuations based on first principles and basic economics. During this period, companies like Amazon, Apple, and Google built the most profitable businesses in the world, and almost everyone who worked hard and focused on fundamentals succeeded.