Author: Ryan Watkins
Compiled by: Ken, Chaincatcher
Key points
In 2021, this asset class over-excited market expectations; since then, valuations have been returning to rationality, and the pricing of high-quality assets has now become reasonable.
With the relaxation of the US regulatory environment, the issues of interest alignment and value capture for tokens have finally reached a turning point, making them more valuable investments.
The growth of the crypto economy is shifting from a cyclical to a long-term structural trend, and a number of practical applications beyond Bitcoin have emerged in the industry.
The winning blockchain is gradually establishing itself as the standard for startups and large enterprises, and becoming a cradle for the world's fastest-growing companies.
After a four-year Altcoin bear market, market sentiment has plummeted. The long-term opportunities of top projects are mispriced (undervalued), and few analysts are predicting exponential growth in their models.
While top-tier projects may thrive in the new era of the crypto economy, rising delivery expectations and intensified competition from traditional companies will weed out weaker players.
Few forces can rival a well-timed idea, and the crypto economy has never seemed so unstoppable.
The crypto economy is undergoing the biggest transformation I've seen in my eight years in the industry. Institutions are hoarding tokens, while early cypherpunk pioneers are diversifying their wealth; businesses are positioning themselves for S-curve growth, while disillusioned crypto natives are feeling weary; governments are guiding the global financial system toward blockchain, while day traders are still worrying about candlestick chart fluctuations; emerging markets are celebrating financial democratization, while American cynics lament that it's all just a casino game.
Recent articles have explored which historical period the current crypto economy most resembles. Optimists compare it to the post-dots bubble era, arguing that the speculative age is over and long-term winners like Google and Amazon will emerge, climbing an S-shaped curve. Pessimists, on the other hand, compare it to emerging markets like China in the 2010s, believing that weak investor protection and impatient "long" capital could lead to poor asset price performance, even as the industry itself thrives.
Both perspectives have merit. After all, history is the best guide for investors, aside from firsthand experience. However, analogies are ultimately limited. We need to understand the crypto economy within the context of macroeconomics and technology. The market is not monolithic, but rather composed of numerous interconnected yet independent entities and stories.
Here is my best assessment of where we were in the past and where we are headed in the future.
The Red Queen's Cycle
“You see, here, you have to run like crazy just to stay in the same place. If you want to go somewhere else, you have to run at least twice as fast!” — Lewis Carroll
In financial markets, "expectations" often mean everything. Prices rise when expectations are exceeded, and fall when they are below expectations. Over time, expectations swing like a pendulum, and long-term returns are often negatively correlated with current expectations.
In 2021, the crypto economy overextended expectations to a far greater extent than most people realized. Some aspects were obvious, such as the price-to-sales ratios of DeFi blue-chip projects reaching 500x, or the valuations of eight smart contract platforms exceeding $100 billion, not to mention the absurd bubbles in the metaverse and NFTs. But the most sobering chart was undoubtedly the "Bitcoin/Gold" ratio.
Despite significant progress, the price of Bitcoin against gold has not reached new highs since 2021; in fact, it has declined. Who would have thought that in what Trump calls the "crypto capital of the world," after the launch of the most successful ETF in history, and against the backdrop of a systemic devaluation of the US dollar, Bitcoin, as digital gold, would perform worse than it did four years ago?
For other assets, the situation is far worse. Most projects entered this cycle with numerous structural problems, exacerbating the challenge of meeting extremely high expectations.
The revenue of most projects is cyclical and highly dependent on rising asset prices.
Regulatory uncertainty has hampered the participation of institutions and businesses.
Dual ownership structures lead to a misalignment of incentives between equity insiders and public token investors.
Poor information disclosure led to a serious information asymmetry between the project team and the community.
The lack of a unified valuation framework leads to excessive market volatility and a lack of fundamental price support.
These problems combined caused most token prices to plummet, with only a very few managing to barely reach their 2021 highs. This had a huge impact on market psychology, because nothing in life is more frustrating than "constant effort going unrewarded."
This disappointment was particularly acute for speculators and opportunists who saw cryptocurrency as a shortcut to wealth. Over time, this struggle led to widespread burnout across the industry.
This is certainly a healthy process of survival of the fittest. Mediocre efforts should no longer yield as amazing returns as they have in the past, and the era before 2022, when one could make a fortune with "air coins," is clearly unsustainable.
However, a glimmer of hope lies in the fact that the aforementioned issues are now widely understood, and prices have already reacted to them. Today, aside from Bitcoin, few crypto natives are willing to discuss the long-term fundamentals of other assets. After four years of growing pains, this asset class now possesses the necessary conditions to deliver another upward surprise.
The Awakening of the Crypto Economy
As mentioned earlier, the crypto economy entered this cycle with many structural problems. The good news is that this is now widely recognized, and many of these problems are becoming a thing of the past.
First, besides digital gold, many other use cases are demonstrating compound growth, and even more are undergoing transformation. The crypto economy has spawned:
Peer-to-peer internet platforms enable users to transact and execute contractual relationships without the need for government or corporate intermediaries.
Digital dollar: Can be stored and transferred anywhere on Earth with internet access, providing a cheap and reliable currency for billions of people.
Licenseless Exchanges: Enable anyone, anywhere, to trade the world’s top assets 24/7 on a single, transparent platform.
New derivative instruments, such as event contracts (prediction markets) and perpetual contracts, provide valuable predictive information and a more efficient price discovery mechanism, respectively.
Global Collateral Markets: Enables users to access credit without permission through transparent, automated infrastructure, significantly reducing counterparty risk.
A democratized asset issuance platform: enabling anyone (individual or institution) to issue publicly tradable assets at extremely low cost.
Open financing platforms enable people around the world to raise funds for their businesses, overcoming local economic limitations.
Physical infrastructure network: By crowdfunding and distributing operations to independent operators, a more scalable and resilient infrastructure can be built.
This is not an exhaustive list of all valuable use cases in the industry to date. The key point is that many of these use cases have proven their real value and continue to grow regardless of price fluctuations.
Meanwhile, as regulatory pressure eases and founders realize the costs of this misalignment, the dual "equity-token" model is being corrected. Many existing projects are integrating assets and revenue into a single token, while others are clearly separating on-chain revenue for token holders and off-chain revenue for equity holders. Furthermore, with the maturation of third-party data providers, disclosure practices are improving, reducing information asymmetry and supporting better analytics.
Meanwhile, the market is gradually reaching a consensus, returning to a simple and time-tested principle: 99.9% of assets need to generate cash flow, with only a very few exceptions, such as value stores like BTC and ETH. As more fundamental investors enter the market, these frameworks will be strengthened, and market rationality will increase over time.
In fact, given time, the concept of "autonomous ownership" of on-chain cash flow may be understood as unlocking on an equal scale with "autonomous digital value storage." After all, when in history has a situation been allowed where holding digital bearer assets, and automatically receiving rewards regardless of location on Earth, simply because the program is used, has been permitted?
Against this backdrop, winning blockchains are emerging as the monetary and financial cornerstone of the internet. Ethereum, Solana, and Hyperliquid are experiencing ever-growing network effects, anchored by their expanding ecosystems of assets, applications, businesses, and users. Their permissionless design and global distribution capabilities have made their applications among the fastest-growing businesses globally, boasting unparalleled capital efficiency and revenue turnover. In the long run, these platforms are likely to form the foundation for the potential market size of "financial super apps," a market that almost all leading fintech companies are vying for.
Against this backdrop, Wall Street and Silicon Valley giants are unsurprisingly pushing their blockchain initiatives at full speed. A new wave of products is being released almost weekly, ranging from tokenization to stablecoins and everything in between. Notably, unlike the early stages of the crypto economy, these efforts are no longer experiments but production-ready products, and most are built on public blockchains rather than isolated private systems.
This activity will only accelerate as the lagged effects of regulatory changes continue to permeate the system over the next few quarters. With increased clarity, businesses and institutions can finally shift their focus from "is this legal?" to "how blockchain can expand revenue, reduce costs, and unlock new business models."
Perhaps the most telling sign of the current situation is that very few industry analysts are forecasting exponential growth in their models. In my observation, many of my colleagues (both sell-side and buy-side) are hesitant to even predict annual growth rates exceeding 20%, lest they appear overly optimistic.
After four years of pain and valuation reset, it's time to ask ourselves: What if all of this really could grow exponentially? What if dreaming again really pays off?
Yin Yang Demon Realm
“A lit candle casts a shadow.” — Ursula K. Le Quinn
On a cool autumn day in 2018, before starting another tiring day at investment banking, I stopped by an elderly professor's office to talk about blockchain. As soon as I sat down, he recounted a conversation he'd had with a skeptical stock hedge fund manager. The manager claimed that cryptocurrency was entering a nuclear winter, and that it was simply "looking for nails with a hammer" (finding solutions to problems that don't exist).
After giving me a crash course on unsustainable sovereign debt burdens and the collapse of trust in institutions, he finally told me what he had said to the skeptic: “Ten years from now, the world will thank us for building this parallel system.”
Although it hasn't been 10 years yet, his prediction now seems remarkably prescient, as cryptocurrency is increasingly resembling an idea that is ripe for the future.
In a similar spirit, and which is the central theme of this article, it argues that the world still underestimates what is being built here. Crucially for all of us investors, the multi-year investment opportunities in leading projects are undervalued.
The last point is crucial. The future of cryptocurrencies may be inevitable, meaning your favorite coin could go to zero. Another side of this inevitability is that it's attracting fiercer competition, with unprecedented pressure to deliver results. As I mentioned before, with more institutions and companies entering the industry, they're likely to weed out many weaker players. This doesn't mean they'll win everything and devour everything, but it does mean only a few players will emerge as big winners.
The point here is not to induce anxiety. In all emerging technology sectors, 90% of startups fail. There may be more publicly known failures in the coming years, but that shouldn't distract you from the bigger picture.
Perhaps no technology resonates more with the zeitgeist of our time than cryptocurrency: declining trust in institutions in developed societies, unsustainable government spending in G7 countries, blatant currency devaluation by the world's largest fiat currency issuer, deglobalization and fragmentation of the international order, and a yearning for a new system that is fairer than the old one. As software continues to devour the world and younger generations inherit wealth from the older, the timing for the crypto economy to emerge from its bubble is perfectly timed.
While many analysts interpret the present using classic frameworks such as Gartner's hype cycle and Carlota Perez's post-hype phase, believing that the best returns are over and a dull, practical phase is about to begin, the reality is far more interesting than that.
The crypto economy is not a single, synchronously maturing market, but rather a collection of products and businesses on different adoption curves. More importantly, speculation doesn't disappear as technology enters its growth phase; it only fluctuates with changing sentiment and the pace of innovation. Anyone who tells you "the era of speculation is over" is either disillusioned or ignorant of history.
It's reasonable to remain skeptical, but don't be cynical. We are reshaping how money, finance, and most importantly, the economy are governed. This is both challenging and exciting.
Your next task is to figure out how best to take advantage of this emerging reality, rather than endlessly complaining that it's all doomed to fail.
Because within the fog of disillusionment and uncertainty lies a once-in-a-lifetime opportunity—but this opportunity is reserved only for those willing to bet on the dawn of a new era, rather than mourn the end of the old.
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