Editor's Note: This article points out that the current market speculation atmosphere may seem illusory, but the market is moving towards being driven by fundamentals, with real projects starting to trade at reasonable valuations. Venture capital returns may shrink, and capital will flow to the public market, supporting the emerging winners. It will take time for the market changes to manifest, and investors should go with the tide and seize the opportunities presented by the underlying digital platforms.
The following is the original content (edited for easier reading):
"In their absorbed contemplation, the sounds of hidden things gradually approach, and they listen devoutly, while the people outside the streets know nothing at all." - C. P. Cavafy
The crypto economy has proven time and again that it is the fastest horse when the monetary environment is loose. Syncracy believes this time will be no different, with the added stimulus of institutionalization and regulatory transparency. However, the key difference between today and past cycles is that returns are less likely to be driven by thematic trends and more likely to be dispersed.
Unlike past cycles, there is no innovative trigger factor driving the market rebound this time. Instead, the rise in this asset class is driven by the promise of BTC ETFs and institutionalization, and the speculative capital that follows lacks a clear focus. Unlike 2021, there is no birth of DeFi or Non-Fungible Tokens to excite - just a general sense of improvement and early signs of infrastructure maturation.
At the same time, the number of assets in the crypto economy has grown by 1-2 orders of magnitude, making it more difficult for the entire industry, or even the entire asset class, to rise in unison. As a result, speculative capital lacks a clear direction, and many have a cynical view that the only guiding logic is financial nihilism - perhaps the only noteworthy technological breakthrough in this cycle is the more efficient infrastructure for launching and trading tokens.
Currently, the challenge facing this asset class is that the valuations of many "real" projects are not cheap. The average application climbing the "Slope of Enlightenment" has a price-to-forward-revenue ratio of 44x, despite only showing early signs of overcoming cyclical forces and transitioning to compounding long-term growth.
While some distinctive projects trade at relatively reasonable valuations compared to traditional stocks, these projects still need to grow to match their valuations. Although there are compelling reasons to believe these applications are undervalued in the long run, especially compared to the ~200x higher multiples at which blockchain infrastructure trades, it is unclear whether there is any urgency to build long positions on an absolute basis.
Meanwhile, more and more venture-backed projects are going public at high valuations but with little fundamental basis, leaving the market fatigued. As secular winners emerge on the crypto economy's foundation, the industry is clearly oversaturated, and over-financed venture investors continue to invest in this infrastructure, which may ultimately pay the price for misallocating capital. Retail investors are well aware of this and now refuse to blindly bid up new tokens, as the upside has already been fully priced in (if not overpriced) behind the scenes.
Against this backdrop, investors are increasingly flocking to "MEME" assets, and as speculative interest rises, rational investment opportunities remain limited. These assets lack a clear valuation framework, making them highly reactive and prone to bubbles.
For example, L1 assets are still traded based on their relative valuation to BTC and ETH, which themselves are priced as non-sovereign currencies that cannot be intrinsically valued. Meanwhile, AI tokens are also traded on the basis of relative valuations, even though AI, as an emerging field, has immense potential but is difficult to quantify. At the same time, MEME coins completely abandon any pretense of value and are priced solely based on attention.
The appeal of MEME assets is amplified by the increasing short-termism in the crypto market, a phenomenon that can be called the "speed trap". In an investment world increasingly influenced by social media and gamified trading, group psychology and instant gratification have distorted investors' mindsets, with retail speculators chasing quick gains at an accelerating pace. This is not surprising, as it reflects a broader shift in the global economy towards on-demand goods and services. Just as consumers expect fast food delivery, retail investors now expect instant returns through mobile trading apps like Robinhood.
There is growing evidence that these trends are reducing stock market efficiency. Syncracy has observed that these trends are also distorting the crypto market - few market participants can see beyond two weeks, let alone two months or two years. For many, trading has quietly become a facade for gambling. So, as a fundamentally-driven investor, how does one navigate this?
The synthesis of these observations is that the projects with solid fundamentals and MEME appeal are the ones to focus on.
Pure fundamental assets may have a valuation floor, but they also have a ceiling, reducing their appeal to retail investors, except for small-cap stocks. On the other hand, pure MEME assets benefit from reactivity, but are now oversupplied, highly gamified, and extremely volatile, limiting their appeal to institutional investors.
Assets like SOL, which combine these two characteristics, offer the best of both worlds - their fundamentals are grounded in reality, with thriving on-chain activity, but they can also attract speculative capital from both retail and institutional investors who price them relative to ETH and BTC. Smaller-cap assets like TAO also fit this profile, with the promise of decentralized AI accelerating economic growth and speculative fervor - TAO is dubbed the "AI currency".
In summary, Syncracy believes the asset class is starting to bifurcate between BTC and stablecoins, which are on a productivity plateau, and other assets that are at best on the Slope of Enlightenment. Looking at various adoption metrics, the crypto economy resembles the late 1990s internet - the revolutionary potential of the internet was evident, but valuations had reached astronomical levels, and there was no fundamental framework for evaluating internet companies.
As mentioned earlier, BTC may have passed this uncertainty phase and is progressing towards global adoption, becoming digital gold. However, other asset classes are once again seeing the stirrings of speculative frenzy similar to the late 1990s.
"We always overestimate what we can do in two years and underestimate what we can do in ten years." - Bill Gates
While many may view this speculation as nihilism, we are seeing signs of progress. Encouragingly, real projects are starting to trade more on fundamentals, similar to stocks, and are being forced to channel value flows back to token holders. This is a positive development, as public market investors become more discerning, driving new projects to launch at more reasonable valuations.
The return on venture capital may contract as a result, which will drive capital into public markets, thereby better allocating it to the emerging secular winners. The crypto economy must digest these changes in order to achieve the next leap in asset classes.
At the same time, it is clear that we must go with the flow rather than swim against the current. The large-scale structural changes we are witnessing - from the decline of venture capital to the rise of the influence of institutional allocators - will take time to fully manifest.
The beauty of this speculative chaos is that the market provides incredible opportunities for those with fundamental digital platforms, which as commodity monies have enormous asymmetric return potential and institutional-scale liquidity. This trade will not last forever, but in the meantime, the game is capital, Meme, and speculation.
Important Legal Disclaimer
The above content reflects the views of Syncracy Fund Management ("Syncracy"), but should not be construed as financial or investment advice.
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