Traditional angel investors and venture
capital funds usually work together with the projects to create value by
connecting resources, providing consultancy, etc. The reason behind this is to
make sure the project can properly grow in value, allowing funds to exit in
later equity rounds throughout the months or years to come. In this long-term, cooperating process, the seed
round investors don’t fully exit in pre-A or A rounds, but wait for a couple of
rounds to conclude before they can fully exit, in order to maximize the amount
of value captured. The key lesson here is that it’s a
unidirectional and long-term process.
One of the reasons for the sudden growth of crypto projects is due to their
“global” funding nature: a hyper crowdfunding mechanism allowing for global
investments and liquidity. Fast-moving token funds saw the opportunity at hand
and took their chances and did earn a good piece of the pie.
The Crypto Investment Pyramid
Step 1: Teams/projects with a great idea look
for first-tier funds to invest as the early investor with better prices and
Step 2: With first-tier fund names backing
the project, the teams are now in a comfortable zone to find further investment
from second- or third-tier funds.
Step 3: The team continues to do global roadshows, public
relations and marketing campaigns to create a belief among global retail
investors about the project’s value proposition and its future growth, premised
on real user adoption and usage need. Projects typically limit the amount of
tokens available for private sale so as to induce FOMO (fear of missing out)
from retail investors upon listing, providing the necessary liquidity for
presale investors to safely exit.
Step 4: The last part of the pyramid is the
supposed product users that will join the ecosystem by using the product that
best displays token’s true value.
the pyramid described above, the following investors are buying the bills of
the previous ones and, as long as there are more retail crypto investors coming
in, then the hype generator has worked and the mechanism can continue to propel
itself. Since investors are seeking for a “fast in” and “fast out” for the
highest possible return, the teams are usually busy with fundraising and
marketing instead of the project itself, also known as air token projects
without real users and real projects.
It is not
surprising that the pyramid collapsed soon after, since there are no users at the
bottom and retail crypto investors don’t want to be the base of the pyramid that
needs to pay the bills of previous funds. After being repeatedly dumped on by
funds and losing a certain amount of funds, these retail investors learned
their lessons and have since become investment-passive.
bottom base consists of the second- and third-tier funds, as they don’t get the
same price offers as the first one. These funds can’t afford to pay for the
bills, and they learned their lesson as well soon after, and have since become
The New Paradigm
this stage, there are only two players left: the projects and first-tier
funds. The projects are aware that after releasing the promised tokens to the
investors, the first-tier funds with the lowest discounts will most likely dump
in the market, hoping to sustain its high return, where the projects will then
need to buy out at a higher cost to stabilize market prices. Hence, the
projects try all excuses they can find to not release the tokens.
fundamental process of investors supporting projects back in traditional
investing was unsustainable in most cases in crypto. Instead, the projects and
funds spent much more energy fighting over price and quota and as a result
became enemies of one another. The wheels for such a game have stopped
and the pyramid has collapsed.
an evolution cycle for the bubble to burst so as to allow all participants to
rethink and come back to the core value of existence. The core value is indeed the
need of the product for the users, and that’s where it shall all restart.
that, first-tier funds ought to be more patient and should provide more
valuable resources and consulting as in traditional investments; the projects
shall refocus on delivering their promises first and target the very bottom of
pyramid: the users.
growth of the user base, the pyramid would reconstruct from the base again,
and retail crypto investors will have the opportunity to buy from the
secondary market for its investments, whereas second- and third-tier funds can
buy a larger piece of the total token pool from projects at more reasonably
negotiated prices and lock up terms.
lesson learned is to create a product with accurate consumer needs and to design
correct token economics to leverage its growth, which will be expanded upon in
the next article of the series.