Original title: The Cure
Author: Arthur Hayes, BitMEX CEO; Compiled by: 0xjs@Golden Finance
Grasping and sticks can sometimes infect men and women and lead to irrational behavior. Unfortunately, many Maelstrom portfolio companies have contracted the CEX contagion. These founders believe they must heed everything some prominent CEX says, or their path to sky-high returns will be blocked. CEX says: boost this metric, hire this person, give me this token allocation, list your token on this date... etc., it doesn't matter... we'll tell you when to list. These struggling degenerates have almost forgotten their users and the reason for cryptocurrency's existence. Come to my clinic; I can cure you. The remedy is ICO. Let me explain...
I have my own three-part theory on why cryptocurrency is one of the fastest-growing networks in human history.
Government control - large corporations, big tech, big pharma, big military, and big [your fill in the blank] use their wealth and power to control most large governments and economic groups. While the growth in living standards and life expectancy has been rapid and steady since the end of World War II, for 90% of the population, their financial assets are minimal, and they have nearly no political power, with their growth slowing down. Decentralization is the antidote to the dystopia of wealth and power centralization.
Magical technology - the Bitcoin blockchain and the many blockchains that followed are magical new technologies. Starting from harmless beginnings, Bitcoin has at least proven to be one of the most resilient monetary systems. Bitcoin offers a bounty of nearly $2 trillion, and anyone who can hack the network can double spend it.
Greed - the rising fiat and energy value of cryptocurrencies that power blockchains or tokens created through those blockchains has made users wealthy. The wealth of the cryptocurrency community was showcased during the upcoming US elections in November this year. Like most other nation-states, the US has a pay-to-play political system. Cryptocurrency tycoons are among the biggest donors to political candidates in all industries, leading to the victory of candidates who support cryptocurrencies. Cryptocurrency voters can afford to be generous in political campaigns because Bitcoin is the fastest-growing asset in human history.
Most cryptocurrency people inherently understand why this movement has been successful; however, there is occasionally a bit of forgetfulness. This is reflected in the way cryptocurrency capital formation has changed over time. At certain points, those seeking cryptocurrency capital catered to the greed of the community and achieved tremendous success. At other times, cash-strapped founders forgot why users flocked to cryptocurrency. Yes, they might believe in a government made up of the people, for the people, and yes, they might create super cool technology, but without making users rich, the adoption of any crypto-centric product or service will progress too slowly.
Since the ICO frenzy stopped in 2017, capital formation has become less pure, deviating from the purpose of igniting community greed. Instead, we have high fully diluted values (FDV), low circulating supplies, or VC-backed tokens. So far, VC tokens have performed poorly in this bull market cycle (2023 to date). In my article 'PvP', I noted that on average, older coins are underperforming major tokens (Bitcoin, Ethereum, and/or Sol) by about 50% in 2024. Retail investors can eventually buy these projects through major centralized exchanges (CEX), but they are unwilling to pay such high prices. Thus, the internal market-making teams of exchanges, airdrop recipients, and third-party market makers dump tokens into poorly liquid markets, resulting in dismal performance. Why have we, as an industry, forgotten the third pillar of the cryptocurrency value proposition... making retail investors wealthy?
The antidote to Memecoins
The new issuance market for cryptocurrencies has turned into what it was supposed to replace. This system resembles the IPO scams of TradFi. Retail investors are the ultimate bag holders for VC tokens, but there are always alternatives in the cryptocurrency space. Meme coins are tokens with no use other than the ability to spread Meme content virally on the internet. If a Meme becomes popular, you buy it, hoping others will follow in your footsteps. The capital formation of meme coins is egalitarian. The team releases the full supply at launch, with an opening FDV in the millions. Starting from decentralized exchanges (DEX), speculators make extremely risky bets on which Meme will enter the collective consciousness of the industry, thereby creating buying pressure for the token.
From the perspective of the average gambler, the best part of memecoins is that if you get in early, you can move up one or two deciles on the wealth ladder. But every participant realizes that the memecoins they purchase have no productivity and will never generate any cash flow, so they are essentially worthless. Therefore, they fully accept the possibility of losing all their money in pursuit of their financial dreams. Most importantly, there are no gatekeepers telling them what memecoin they can or cannot buy, and their secret pools of funds are not waiting to dump their recently unlocked supplies when the price rises high enough.
I want to create a simple taxonomy to understand different types of tokens and their values. Let's start with memecoins.
The intrinsic value of Memecoins = Viral spread of Memetic content
Intuitively, this is easy to understand. You just need to be a socially active person in any community (online or offline) to understand memes.
If memecoins are like this, then what are VC coins?
TradFi followers do not possess real skills. When I reflect on what skills were required for my previous work at an investment bank, I know this to be true. In short, it doesn't take much skill. The reason so many people want to work in TradFi is that you can make a lot of money without needing to understand anything substantial. Give me an ambitious young person, as long as they have a grasp of high school algebra and a good work ethic, I can train them to do any front-office financial service job. But this is not the case for professions such as doctors, lawyers, plumbers, electricians, mechanical engineers, etc. Entering these professions takes time and skill, but on average, they earn less than assistant investment bankers, salespeople, or traders. The amount of intelligence wasted in financial services is frustrating, but I and others are just responding to societal incentives.
Since TradFi is a low-skill but high-income profession, entry into this rare club will be restricted based on other social factors. Who your parents are and where you went to college or boarding school matter more than your intelligence. Adhering to stereotypes based on race and social class is more significant in TradFi than in other professions. If you are allowed into this exclusive club, you will perpetuate these norms, bestowing value on the traits you have won and those you have not. For example, if you worked hard and accrued massive debt to get into a top university, you will hire others from your university because you believe it is the best. If you do not, you are admitting to yourself that all the time and effort you spent obtaining that degree was not worth it. In human psychology, this is called the effort justification bias.
Let's apply this framework to understand how VC puppets raise and allocate funds.
To accumulate enough capital to invest in enough companies to find winners (e.g., Facebook, Google, Tencent, ByteDance, etc.), top venture capital firms require a large amount of capital. This capital comes from endowment funds, pension funds, insurance companies, sovereign wealth funds, and family offices. All these pools of funds are managed by people from TradFi. Managers must fulfill their fiduciary responsibility to clients by investing only in 'appropriate' venture capital funds. This means that overall, they must invest in venture capital firms managed by 'qualified' and 'experienced' professionals. These subjective requirements mean that the heads all graduated from the same small set of global elite universities (Harvard, Oxford, Peking University, etc.) and began their careers at large top investment banks (JPMorgan, Goldman Sachs), asset management firms (BlackRock, Fidelity), or large tech companies (Microsoft, Google, Facebook, Tencent, etc.). TradFi employment gatekeepers indicate that if you do not have such a background, you lack the necessary experience and background to invest wisely on behalf of others. They are a homogeneous group of people who look the same, speak the same, dress the same, and live in the same global elite enclave.
The dilemma faced by VC fund allocators is that if they take the risk of investing in a fund managed by individuals with non-standard backgrounds, and that fund fails, the allocator might lose their job. However, if they play it safe and invest in funds managed by 'appropriate' individuals, and that fund fails, they can attribute it to bad luck and continue their asset management business. If you fail alone, you lose your job. If you fail with others, you can keep your job. Since the main goal of TradFi fools is to retain high-paying, low-skill jobs, they minimize career risk by playing it safe and allocating to funds managed by individuals with 'appropriate' backgrounds.
If the basis for selecting a venture capital fund is whether the managing partner fits an established stereotype, then that same manager will only invest in companies or projects where the founders fit the 'founder' stereotype. The resumes of founder-focused entrepreneurs must include experience at large consulting firms or investment banks, and they are expected to attend one of the specific global elite universities. Technical founders must have experience working at very successful large tech companies and hold advanced degrees from well-known universities that cultivate excellent engineers. Finally, because we are social beings, we are more inclined to invest in people near us. Silicon Valley venture capital firms only invest in companies located in the Bay Area of California. Chinese venture capital firms prefer their portfolio companies to be headquartered in Beijing or Shenzhen.
The end result is the formation of a monotonous echo chamber. Everyone looks, speaks, feels, believes, and lives the same way. Therefore, everyone succeeds or fails together. This is a perfect environment for TradFi VC puppets, who aim to minimize career risk.
When the ICO bubble burst, crypto project founders begged venture capitalists to fund their nearly worthless projects, making deals with the devil. To raise funds from venture capital firms primarily located in San Francisco, New York, London, and Beijing, crypto project founders had to make changes.
The intrinsic value of VC coins = Founders' universities, work experience, family background, and location
VC allocators first believe in the team and then the product. If the founders fit this stereotype, then capital flows freely. Because they inherently possess the 'right' traits, a small portion of teams will find product-market fit after investing hundreds of millions, and the next Ethereum will be born. Since most teams fail, the decision matrix for VC allocators is unquestionable because they only support the types of founders that everyone considers likely to succeed.
It is clear that having cryptocurrency acuity is far from enough when choosing which teams to fund. This is where the divide between VCs providing funding for projects and the ultimate retail investors begins. The fools in VC want to keep their jobs. Retail investors want to stop being worthless civilians by buying a token that can multiply by 10,000 times. Returns of 10,000 times were possible in the past. If you bought Ether at about $0.33 during the pre-sale, at current prices, your return is 9,000 times. However, the current cryptocurrency capital formation process makes generating these types of returns nearly impossible.
Venture capitalists make money by passing the illiquid SAFT (Simple Agreement for Future Tokens) hot potato from one fund to another and raising the valuation at each turn. When a crypto project’s mess enters a CEX for its first listing, its FDV typically exceeds $1 billion. To generate 10,000 times returns, the FDV must grow to a significant number, one that is larger than the total value of all fiat assets... and we are only talking about one project. This is why retail investors prefer to take risks investing in a memecoin with a market cap of $1 million rather than a project with a $1 billion FDV backed by the 'most respected' venture capital groups. Retail behavior aligns with the maximization of expected returns.
If retail investors reject the VC token model, what is the essence of ICO?
The intrinsic value of ICO = Viral spread of Meme content + potential technology
Meme:
If the appearance, feel, and established goals of a team's project align with the current spirit of the crypto age, then that project has Meme value. If the Meme becomes popular and spreads rapidly, then the project will garner attention. The goal of the project is to acquire users as cheaply as possible and then sell products or services to those users. The most watched projects will funnel users into the top of their funnel.
Potential technology:
ICOs occur early in a project's lifecycle. Ethereum raised funds first and then built. There is an implicit trust that as long as the community provides funding, the team building the project will create something valuable. Therefore, there are several ways to evaluate potential technologies:
1. Has the team built something substantive on Web2 or Web3?
2. Is the content proposed by the team technically feasible?
3. Can this potential technology solve globally significant problems and ultimately attract millions or even billions of users?
Technical founders who can achieve the above points are not necessarily the ones that VCs will invest in. The crypto community does not place much value on family connections, previous jobs, or specific educational backgrounds. These things are nice, but if they do not lead to a founding team delivering good code previously, they are irrelevant. The community will always support Andre Cronje over some ex-Google employee with a Stanford degree and Battery membership.
While most ICOs (i.e., 99.99%) tend to approach zero after one cycle, a handful of teams can build technology that derives value from users who join because of a meme. Early investors in these ICOs have the opportunity to gain 1,000 times or even 10,000 times returns. This is the game they want to play. The speculative and volatile nature of ICOs is a feature, not a flaw. If retail investors want safer, boring investments peddled by better people, they can trade on numerous TradFi stock exchanges around the world. In most jurisdictions, IPOs require companies to be profitable. Management must also make various statements to assure the public that they are not cooking the books. For most retail investors, the problem with IPOs is that they do not produce life-changing returns. Venture capitalists have already bled their interests dry in the process.
If ICOs so clearly fund projects with viral Memes and potentially impactful technologies globally, how can we make them great again?
ICO roadmap
The purest form of ICO is that any team with an internet connection can pitch to the crypto community and obtain funding. The team will launch a website detailing who they are, what they will develop, why they are qualified, and why the market needs their product or service. Then investors... well, speculators can send cryptocurrency to an on-chain address, and after some time, tokens will be issued to the investors. Each aspect of an ICO, including timing, amount raised, token price, type of technology to be developed, team composition, and investor location, is not determined by any gatekeeper (venture capital funds or CEX) but is decided solely by the team conducting the ICO. This is why ICOs are despised by centralized intermediaries... they are unnecessary. However, the community loves ICOs because they offer many projects proposed by people from diverse backgrounds, ultimately allowing those willing to take the highest risks to achieve the highest returns.
ICOs are making a comeback because the industry has gone through a full cycle. We experienced freedom, but also lost our wings. Then, we felt the iron heel of VC authoritarianism and CEX control, and grew disgusted by the overvalued garbage they imposed on us. Fueled by the money printing in the US, China, Japan, and the EU, we have a new emerging bull market behind us, a group of fallen individuals captivated by useless memecoin speculative trading, and the community is once again ready to dive headfirst into high-risk ICO trading. Now is the time for cryptocurrency speculators to throw their funds in all directions, hoping to find the next Ethereum.
The next question is, what will be different this time?
Timing:
Now, with frameworks like Pump.fun, listing a token takes just minutes, and we have more liquid DEXs where teams will raise funds through ICOs and deliver tokens within days. This is different from previous ICO cycles, where there would be months or years between token subscription and delivery. Now you can immediately trade newly issued tokens on platforms like Uniswap and Raydium.
Thanks to Maelstrom's investment in the Oyl wallet, we have an early preview of some potentially game-changing smart contract technologies being built on the Bitcoin blockchain. Alkanes is a new meta-protocol designed to bring smart contracts to Bitcoin using the UTXO model. I can't claim to understand how it works, but I hope those smarter and more skilled than I will take a look at their GitHub repository and decide for themselves whether to build on it. I hope Alkanes can drive a surge in Bitcoin ICO issuance.
Alkanes wiki, repo, and specifications.
Liquidity:
Because retail cryptocurrency enthusiasts have fallen in love with memecoins, they are eager to trade super speculative assets on DEXs. This means that there is enough liquidity to immediately trade unproven projects' ICOs after tokens are delivered to investors, allowing for true price discovery.
Although I hate Solana, I must acknowledge that pump.fun has brought net benefits to the industry because the protocol allows non-technical normies to issue their own memecoins and start trading them in minutes. Following this theme of democratizing finance and cryptocurrency trading, Maelstrom invested in what it believes will become the go-to spot for spot trading of memecoins, all cryptocurrencies, and eventually newly issued ICOs.
Spot.dog is building a memecoin trading platform to attract web2 norms. Their secret is not in technology, but in distribution. Currently, memecoin trading platforms are designed for cryptocurrency traders. For example, Pump.fun requires a fair understanding of Solana wallets, exchanges, slippage, etc. Bettors who follow Barstool Sports, follow r/wsb, trade stocks on Robinhood, and bet on their favorite teams using DraftKings will switch to trading on Spot.dog. Spot.dog has already signed some great partnerships. The 'cryptocurrency buy button' on the social trading platform Stocktwits, which has 1.2 million unique visitors per month, is powered by Spot.dog. Iggy Azalea's $MOTHER Telegram trading bot's sole partner is... you guessed it, Spot.dog. I bet you degenerates want to know what the token is? Don't worry, if you want, I'll tell you when to incorporate YOLO into Spot.dog's governance token.
User interface/user experience:
The crypto community is very familiar with using non-custodial browser wallets like Metamask and Phantom. Crypto investors can easily load their crypto browser wallets, connect to dApps, and purchase assets. This will make it easier for ICOs to obtain funding.
Blockchain speed:
In 2017, it was not uncommon for popular ICOs to cause the Ethereum network to become unusable. Gas fees would skyrocket, and no one could afford to use the network. By 2025, the cost of block space on Ethereum, Solana, Aptos, and other Layer 1s will be very cheap. Current order throughput is several magnitudes higher than in 2017. If a team can garner widespread support from enthusiastic speculators, their ability to raise funds will not be hindered by slow and expensive blockchains.
Given that the cost of every transaction using Aptos is extremely low, they have the opportunity to become the preferred chain for ICO launches.
Average transaction fee (USD):
● Aptos: $0.0016
● Solana: $0.05
● Ethereum: $5.22
Firmly reject
I presented a method for curing CEXually transmitted diseases in the form of an ICO. Now, project founders must do the right thing. But just in case they haven't received the message, retail cryptocurrency investors need to 'say no.'
A firm 'no' to the following:
- VC-backed high FDV, low circulating supply projects
- Overvalued token listings on centralized exchanges
- People who promote what they believe to be 'irresponsible' trading behavior.
The ICOs of 2017 were clearly garbage. I think the most value-destructive ICO was EOS. Block.one raised $4.1 billion in cryptocurrency to build EOS. After EOS launched, there was no further news. Actually, that is incorrect; surprisingly, EOS still maintains a market cap of $1.2 billion. This indicates that even something as thoroughly garbage as EOS had an ICO that marked the peak of the bubble, and its value is still far above zero. By the way, as someone who loves financial markets, I find the structure and execution of EOS's ICO to be a wonderful thing. The founders paid attention to and studied how Block.one raised the most funds through ICOs or token sales.
I'm saying this to point out that on a risk-adjusted basis, if you correctly adjust your bets, even things that should go to zero will retain some value after an ICO. Early investment in ICOs is the only way to gain 10,000 times returns, but there is no heaven without hell. To achieve 10,000 times, you must accept that most of your investment will approach zero after the ICO. But this is better than the current VC coin setup, where 10,000 times is not only mathematically almost impossible, but you might still lose 75% a month after launching on CEX.
Retail speculators unconsciously recognize the poor risk-return profile of VC coins and avoid them in favor of memecoins.
Let's create fervent support among users for new crypto projects again, giving them the chance to gain immense wealth, and make ICOs great again!
