As Albert Einstein is crediting with saying, “You do not really understand something unless you can explain it to your grandmother.”
The global crypto gold rush swelled for a couple of months, but it went down even faster than it emerged and has since stagnated to where we are now.
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 conditions.
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.
Within 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.
The new 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 investment-passive.
The New Paradigm
Now at 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.
The 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.
Perhaps it’s 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.
Besides 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.
With the 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.
The final 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.
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