Welcome To Disillusionment

Believe In Something, Trust In Nothing

This isn’t bearposting. Early feedback on this essay’s draft called it pessimistic, and CT seems to peg me as bearish. I’m not. Sober realism isn’t gloom—it’s a lens. Most critiques below look backwards. I urge you to see them as springboards for opportunity. How do you build your optimistic version of the future from here on?

The Pre-Growth Stage

I once thought crypto hadn’t faced its Dotcom bubble, but 2017-2025 proved it was exactly that.

The fact that the Dotcom era was about investing in the future and investing in technology and crypto is no longer seen as “future” nor valued as “tech” takes away its power to engage the masses. Crypto cemented its grift reputation among normies.

It is more likely we’re entering disillusionment in broader crypto markets. Bitcoin is on its own separate adoption cycle to the rest of crypto, which makes it harder to recognize it, but a quick long and short-term look at “alts” tell a clear story. (Important to note that everything is on the same macro cycle.)

Finally, tokens will go to zero, or at least, will be infinitely approaching zero. While we hope our tokens dodge the fall, we should embrace market maturation. And that is not a painless process.

Practically, this means isolated pockets of performance. Alts don’t exist as a category anymore (and cycles in traditional crypto sense either), dispersion of returns will continue and deepen. Narrative plays will get even shorter, on the other hand “value plays” will emerge. This will be a multi-year process.

VC is not dead. The best will stay and refine their skills and improve their understanding and foresight. Hopefully, they’ll be able to fund innovation and its subsequent deployment at scale.

The best opportunities today could perhaps be found in the public market. An investment opportunity in the future of technology is not a window of weeks or months. Capturing the value of some of the existing biggest tech companies was a multi-year or decade-long opportunity.

Everybody Does The Same Thing

As an early-stage crypto investor, hindsight shows that, on average, not investing from 2016-2020 left you poorer, while avoiding action from 2022-2025 left you richer. Paper gains do not count — much of the crypto venture gains from the earlier era were monetizable.

The crypto investment game has changed. Merely participating does not guarantee success. Some extrapolate this and claim “VC is dead”. But what they mean is that the playbook of private-to-public market arbitrage that produced high returns in the past has shrunk if not fully disappeared.

When everyone does the same thing it stops working. Such a playbook only works when few can do it. When everyone is a VC how can everyone make money? When retail joins low-barrier “VC-as-a-service” platforms, who’s left to buy?

It turns out that higher barriers of entry are what made money in the past. Now, in the “even-level” playing field one cannot merely rely on a standardized playbook. Access alone is not “alpha” anymore. When access is productized alpha is drowned in the oversupply of mediocre products.

Too Much Capital

Such oversupply leads to an illusion of actual capital demand. This is how everyone in crypto was incentivized to exaggerate, or to believe in the exaggerated version of the future, to soak up more capital (a similar thing happening in AI right now) while the prices surged into a closing gap of regulatory arbitrage.

The more exaggerated the future the less specific the vision. In absolute terms, crypto is a small market that is still mostly in search of its PMF beyond 24/7 online gambling, stablecoins and “digital gold”.

The innovation alone does not cost much. Capital is better leveraged in the actual deployment of innovation, not in the “0 to 1” stage but in the “1 to n” paradigm. Innovation is more about deploying experimental ideas while the latter stage is about leveraging resources to distribute the solution to a wider customer base.

Crypto would largely benefit from funding smaller scale product-oriented experiments but to accommodate big demand of multi-hundred million “early-stage” funds, the industry ended up funding low-hanging fruit of rather generic infrastructure. The optionality of technobabble seems safer than specific high-risk products.

The mathematics of VC returns is simple. If you run a 500M fund for your “seed stage” ticket to have a meaningful impact on performance should be in the 2.5M to 5M range. This means an implied valuation of 25 to 50M for a seed stage.

Funding a new L1 with an uncapped upside (achnoring to capitalization of successful predecessors) was a more comfortable investment strategy. Similarly, L2s and other infrastructure (e.g. data-availability) were just a convenient generalization of the same playbook.

Stagnation

Today it is clear that it takes more than a destruction of a stablecoin experiment, wiping out bad credit and exchange failure to fully resolve a bubble of bad incentives. Thus, it’s better to see 2020-2025 as one continuous cycle. The brief intermezzo of catastrophic 2022 did not have a lasting effect due to above mentioned excess capital relative to talent/ideas/products.

Too much capital and little incentive to innovate just resumed the exploitation of what was at hand. Additional inflows of top-down liquidity of ETFs and Microstrategy encouraged market participants to be more aggressive. Again, we lean on capital inflows over real cashflows.

However, VCs have to distribute capital back to their LPs who don’t view their investments as a decade-long commitment. In order to raise more capital, funds needed DPI and were chasing it aggressively in the post-election market euphoria. Still not enough to return their funds but enough to get a couple of drops back to their LPs.

This means it is hard to get 2021 or 2017-like mania going since the retail requires higher and higher thresholds to be responsive and participate at scale while funds were chasing DPIs to get the game going (while undermining that very game at the same time).

In the memecoin paradigm the VCs were replaced with “cabals” with capital flowing to fund lifestyles of TikTok influencers recycling memecoin playbooks with new coins until market exhaustion. The TRUMP memecoin launch drove the final nail into retail participation hopes. TRUMP revealed crypto as a grift and memecoin casino as a tool of capital extraction.

The implication is that mainstream view of crypto is as a casino or get-rich-quick scheme rather than actual investment in the future. Coinciding with changes in the macro environment, the final blow to hopes that tokens possess free will has been dealt.

Between The Clownworld And The Realworld

Sometimes it seems like our hope oscillates between being bailed out by tradfi or degens. These are two radically different memes. But both can simply be stripped down to “liquidity”. Neither of these exists as a real adoption user base.

Degens are not a user profile nor an actual user group. Degens is a cryptobuzzword for liquidity that is neither sticky nor does it aid in long-term adoption. On the contrary – it invites compromising on a product with potential to cater to a non-existent group of people at the expense of real users. This is counterproductive in a search for the actual PMF.

People have confused “speculation is a wedge” with “speculation is the edge”. It is not. Alas, a big portion of decks that I see target “degens” without understanding that this is an opportunistic capital, not a sticky adoption.

Tradfi describes different sets of actors that either don’t understand what crypto is or those who understand it all too well and are not here to buy anyone else’s bags. This group excels in making money for themselves and will look for ways to adopt crypto that benefits them, not y/our bags.

Indeed, actual tradfi adoption becomes a great signal for growth but it might not be the growth you expected or are invested in. Giving up our agency to tradfi could mean a capitulation on a specific version of the future that we want to build.

What To Make Of It

Crypto’s 2017-2025 arc mirrors the Dotcom bubble, now entering disillusionment, with maturing markets leading to isolated wins, dying alts, and emerging value plays over the years.

Excessive capital in crypto fueled exaggerated visions and generic infrastructure investments, rather than specific, innovative products, driven by the need to deploy large VC funds at high valuations. The 2020-2025 period is one extended cycle, propped up by excess capital and liquidity from ETFs, but lacking real cash flow or innovation, with VCs chasing DPI in a pre-euphoric market that never fully lands.

Crypto oscillates between relying on memes of tradfi or degen liquidity, neither of which drives real adoption—degens are transient capital, and tradfi may co-opt crypto for its own gain, not broader benefit. The price action masked the disillusionment for a while but a macro cooldown shows the true cards.

A perspective from the inside reveals that our industry looks fragile. The outside perspective sees it as just another macro asset that outperforms every other asset class in favorable conditions. That’s not nothing.

Similarly to no true price discovery happening on the upside, there is not necessarily a “truth” in the washout. The same way herd mentality played itself on the way up, it might already be unfolding on the way down.

Let’s take into the account the positives we can build on:

1. Protocols and apps more robust – DeFi keeps working as intended even under highly volatile conditions

2. Stablecoins proving PMF – Stripe’s acquisition of Bridge hints that stablecoins solve cross border currency settlement and regulatory clarity opens up adoption vectors. The stablecoin activity has decoupled from crypto cycles and trading volumes.

3. There are cashflows and internet finance is slowly percolating itself into relevance

4. Memecoins a primitive commerce use case for crypto (pay-to-get-rugged)

5. Crypto’s capital formation enables idiosyncratic token experiments (DeSci, DePin, robotics etc.)

Perhaps necessity will lend itself better to invention than excess has so far. But genuine curiosity is what we need the most. Curiosity chases vision, not price action. I think this will catalyze much of the growth in the future. Slowly but surely we’ll embrace a new chapter.

Thanks to Matt and Rap for useful feedback.