Venture Capital in Crypto: A Double-Edged Sword
In A Nutshell
The influx of venture capital into the cryptocurrency market is a double-edged sword, especially when it comes to the launch and long-term viability of new tokens. While these investments bring necessary liquidity, they also introduce significant selling pressure, potentially harming the token’s price stability over time. This issue is compounded by the high fully diluted valuations and large unlock schedules for early investors, leading to a potential decrease in the price of many newly launched tokens.
The Impact of Venture Capital on Token Launches
Profit-seeking venture capitalists (VCs) have been identified as a detrimental force for the sustainability and price action of newly launched cryptocurrencies. According to crypto analyst Route 2 FI, the practice of permissionless token listing, combined with the involvement of “money-hungry VCs”, poses a long-term risk to individual tokens. The analyst highlights the trend of high fully diluted valuation (FDV) tokens, which often promise substantial airdrop allocations to early adopters but are plagued by large unlocking schedules that favor early VC investors. This imbalance can result in a sharp price decrease for most new tokens, undermining their long-term viability.
Market Trends and VC Unlocks
As of the beginning of 2024, the total market capitalization of altcoins, excluding Bitcoin, experienced a 38% increase year-to-date. However, this growth does not necessarily indicate a healthy market for all tokens. The lack of sufficient demand to absorb the increase in circulating supply caused by large VC unlocks creates selling pressure, leading to potential market downturns. This situation may trap early buyers, fostering bearish sentiment, reducing total value locked (TVL) in the affected protocols, and causing developers and team members to depart.
Is an Altcoin Season in Sight?
Historically, altcoins have enjoyed periods of significant growth following Bitcoin’s ascents to new highs. However, with the current landscape featuring over “300 decent projects”, the liquidity needed for all top altcoins to thrive simultaneously is lacking. This scarcity of funds could signal the end of the altcoin season trend, as there simply isn’t enough capital to support the multitude of tokens vying for investment. The analyst Route 2 FI suggests that unless there is a substantial influx of institutional or retail investment, the market could devolve into a perpetual player-vs-player battle.
Our Take
The concerns raised about the impact of venture capital on the long-term health of new cryptocurrency tokens are valid and warrant serious consideration. The practice of prioritizing short-term gains over the sustainable development of these tokens may erode trust and stability within the crypto market. It highlights the need for a more balanced approach to token launches, one that considers the long-term implications of funding strategies and unlock schedules. As the market continues to evolve, the role of VCs and the structure of token launches must adapt to ensure the longevity and stability of the crypto ecosystem.
Sources:
– TradingView
– Substack post by Route 2 FI
