The pervasive influence of venture capitalists (VCs) on newly-launched cryptocurrencies is considered detrimental to their long-term sustainability and market performance, despite the initial liquidity they bring.
According to a popular crypto analyst known as Route 2 FI, in an April 22 Substack post, he criticized the role of VCs and the process of permissionless token listing:
“Permissionless token listing and money-hungry VCs are bad for the individual token long term. Every year 100 new tokens launch.
“Diluting existing ones. It’s now April 2024, and inflows into altcoins seem way more selective and not enough to offset big unlocks.”
He further highlighted the problem with high fully diluted valuations (FDV) in token launches, which are appealing for early adopters due to potential large airdrops but are marred by the substantial unlocking schedules for early VC investors.
These schedules often lead to significant price drops as the market cannot sustain the inflated initial valuations. Route 2 FI expressed skepticism about the viability of such investments:
“I think most new VC scam coins (high FDV coins) eventually will dump hard AF. And that you can use this to your advantage in pair trading or in situations where you want to hedge.”
The total market cap of altcoins, excluding Bitcoin, had risen significantly by 38% year-to-date to $1.05 trillion, as per TradingView data.
Nonetheless, this growth is overshadowed by the potential risks associated with large VC unlocks.
The lack of sufficient demand to absorb the increased circulating supply results in downward pressure on prices.
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This scenario is exacerbated by the potential exit of early buyers and developers, diminishing community trust and reducing total value locked (TVL) in the protocols, as Route 2 FI elaborated:
“At some point, the supply will outnumber the demand and we will start spiraling downwards due to massive inflation.
“Early buyers will get trapped, which leads to bearish sentiment among the community, reduced TVL in the protocol, devs (if any) leaving for greener fields, and team members quitting.”
In the broader context, the notion of an “altseason,” where altcoins surge following Bitcoin’s peaks, might be changing.
Despite over 300 noteworthy projects, the lack of enough liquidity could signal the end of this recurrent trend. Route 2 FI reflected on the new market dynamics:
“We hear a lot about altseason, but this time around I think things will be different… But ask yourself who is going to buy all these tokens.
“Unless institutions or retail are coming in masses, it will just be a forever PvP fight.”
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