Reflections and Confusions of a Crypto VC

Author: Catrina

Compiled by: Jiahua, ChainCatcher

Cryptocurrency venture capital is at a watershed moment. In the past three cycles, token exits have been the main driver of excess returns, but now it is undergoing a significant reset. The definition of token value is being rewritten in real-time, yet an industry-standard evaluation framework has yet to emerge.

What exactly is happening?

This time, the structure of the crypto market is being simultaneously impacted by multiple unprecedented forces, fundamentally disrupting it:

1. The emergence of HYPE has awakened the token market, proving that token prices can have real income support, with over 97% of its nine to ten-digit income generated on-chain.

This has demystified the market for governance tokens that rely on narratives and have hollow fundamentals—think of those L1 and "governance tokens" that existed primarily to avoid the ambiguity of securities laws (which made direct income distribution unfeasible). HYPE reset market expectations almost overnight: now, income is under stricter scrutiny and has become a fundamental bargaining chip for entry.

2. The backlash against other token projects

Before 2025, if you had on-chain income, you would be considered a security; after HYPE, if you ask most hedge funds, they will tell you that if you do not have on-chain income, you will go to zero. This has put most projects, especially non-DeFi ones, in a dilemma, forcing them to adapt hastily.

3. PUMP has brought an astonishing supply shock to the system.

The supply explosion brought about by meme coin mania has fundamentally disrupted market structure through distraction and liquidity. On Solana alone, the number of newly generated tokens surged from about 2,000-4,000 per year to a peak of 40,000-50,000. This has effectively divided a liquidity cake that was already not growing much into about one-twentieth. In the quest for excess returns, the attention and funds of the same buyer group have shifted to speculating on meme coins rather than holding altcoins.

4. Retail speculative funds are accelerating diversion.

Prediction markets, perpetual stocks (perps), and leveraged ETF trading are now directly competing for the same pool of funds that would originally flow into altcoins. Meanwhile, the maturation of tokenization technology has made leveraged trading of blue-chip stocks possible, which do not carry the same zero-risk as most altcoins and are subject to much stricter regulation, being more transparent and having lower information disadvantage risks.

The result is a significant compression of the token lifecycle: the time from peak to trough has sharply shortened, and retail investors' willingness to "hold" tokens has plummeted, replaced by faster capital rotation.

Every VC is asking themselves and their peers some big questions

1. Are we underwriting equity, tokens, or a combination of both?

The biggest challenge here is that we do not have a new best practice manual for value accumulation in token projects— even the most successful projects like Aave still face controversy between DAO and equity.

2. What are the best practices for on-chain value accumulation?

The most common is token buybacks, but that does not mean it is the right approach. We have long opposed the prevailing trend of token buybacks: it is toxic and puts founders with real income in a dilemma.

This motivation is completely wrong: stock buybacks occur after a company has completed its investments in growth, while cryptocurrency buybacks are increasingly being demanded to be executed immediately under the influence of retail/public perception (which is completely fickle and irrational).

You might burn through $10 million that could have been used for reinvestment, only for that value to evaporate the next day due to some random market maker being liquidated.

Public companies buy back stock when it is undervalued. Token buybacks are often executed at local peaks because they are rushed at various stages.

Especially if you are a B2B business generating off-chain income, this is akin to doing useless work. In my view, when your income is less than $20 million, there is absolutely no reason to conduct buybacks just to please retail investors instead of reinvesting the funds for growth.

I really like this report from fourpillars, which shows that buybacks of up to ten digits are almost useless in helping projects set long-term price floors.

Moreover, to satisfy retail and hedge funds, you must continuously and transparently conduct buybacks like HYPE. Any behavior that fails to do this will be punished, just like PUMP's price-to-earnings ratio (based on fully diluted valuation) is only 6 times because the public "does not trust" them—despite the fact that they have burned through $1.4 billion in revenue that could have gone into the treasury.

Here is further reading material on "on-chain value accumulation mechanisms that work without burning money."

3. Will the "crypto premium" completely disappear?

This means that in the future, all projects will be valued based on multiples similar to public stocks (around 2 to 30 times revenue). Take a moment to think about what this means—if true, we will see the prices of most L1 public chains drop over 95% from now, with only exceptions like TRON, HYPE, and other income-generating DeFi projects. This is even without considering token attribution.

Personally, I do not think this will be the case—HYPE has set an extremely exceptional expectation, making many investors impatient about "first-day revenue/user traction" for early-stage startups. For ongoing innovations like payment and DeFi companies, yes, this is a reasonable expectation.

But disruptive innovation takes time to build, launch, grow, and then to see exponential revenue growth.

In the past two cycles, we have had too much patience and blind optimism for so-called "disruptive technologies"—new L1 public chains, Flashbots/MEV esoteric concepts have gone through rounds 8-9, and now it has swung too far, only willing to support DeFi projects.

The pendulum will swing back. While evaluating DeFi projects based on "quantitative" fundamentals is indeed a net positive for the maturity of the industry, for non-DeFi categories, "qualitative" fundamentals also need to be considered: culture, technological innovation, disruptive concepts, security, decentralization, brand equity, and industry connectivity. These qualities will not simply reflect in TVL and on-chain buybacks.

What to do now?

The return expectations for token projects have been significantly compressed, while equity businesses have not experienced a similar degree of decline. This divergence is particularly evident in early and growth-stage projects.

Early investors have become much more price-sensitive when underwriting projects that may exit through tokens. Meanwhile, appetite for equity businesses has increased, especially in a favorable M&A environment. This is completely different from the situation in 2022-2024, when token exits were the preferred liquidity path, based on the underlying assumption that token valuation premiums would continue to exist.

Late-stage investors, those with the strongest brand equity and added value in the crypto-native context, are increasingly moving away from purely "crypto-native" trades. Instead, they are supporting more "Web2.5" companies, whose underwriting is anchored by revenue traction.

This has led them into unfamiliar territory, directly competing with institutions like Ribbit and Founders Fund—who have deeper backgrounds in traditional fintech, stronger portfolio synergies, and better visibility into early trades outside of crypto.

The crypto VC space is entering a period of value validation. The right to survive depends on VCs finding their own PMF (product-market fit) among founders, where the "product" is a combination of capital, brand recognition, and added value.

For the highest quality deals, VCs need to sell themselves to founders to earn the right to enter the capitalization structure table, especially in recent years where some of the most successful cases have required almost no institutional capital (like Axiom) or none at all (like HYPE). If capital is the only thing VCs can provide, they will almost certainly be eliminated.

Those VCs qualified to stay in this game need to be very clear about what they can offer in terms of brand recognition (which is the motivation that makes the best founders willing to engage from the start) and added value (which ultimately determines their right to win deals).