Despite the clear trend of capital inflow, the entire process still requires time.

Author: Regan Bozman

Translation: Deep Tide TechFlow

In the past few days, I have communicated with several family offices, donor funds, and capital allocators interested in cryptocurrency.

Market sentiment is very positive! Bitcoin (BTC) is nearing $100,000, while we have been questioned for the past two years.

Here are some of my observations and thoughts on the gradual opening of private markets:

Despite the clear trend of capital inflow, the entire process still requires time.

Assuming that most decision-makers of institutional capital are used to reading The New York Times (NYT) rather than paying attention to Polymarket.

They had set the probability of Trump winning at about 50% and adjusted their portfolios accordingly.

If we assume that investors will prioritize core assets in their portfolios, then they have a lot of work to do, such as adjusting fixed income, energy stocks, and ESG-related allocations.

As for opportunistic assets like cryptocurrency, or a 1-3% exposure to cryptocurrency in existing portfolios, it is currently not a priority for the first quarter.

Therefore, I am optimistic about the long-term trend of the market, but it may experience volatility in the short term, with a potential pullback by the end of the year or the first quarter, possibly accompanied by some tax-related sell-offs.

However, like the train station scene in "Yellowstone," the direction of this train is irreversible.

Before the election, the fundraising environment for most cryptocurrency funds was very challenging. The main reasons include:

• Challenges in the venture capital space (mainly reflected in the lack of dividend returns)

• Bottlenecks in the cryptocurrency industry (lack of compelling narratives, low market interest, and concerns about market structure)

• Diversion to emerging hot areas (such as the rise of generative AI)

Most limited partners (LPs) categorize cryptocurrency investments as venture capital. To fulfill new venture commitments, they need to receive dividends from existing venture investments.

In 2021 and 2022, this was not an issue, as a large number of IPOs brought substantial returns to LPs.

But currently, liquidity issues in the venture capital space are very prominent. The IPO and M&A markets are sluggish, coupled with poor overall returns in venture capital, leading many LPs to begin cutting new venture commitments.

Most LPs started investing in cryptocurrency funds only in 2021, and these funds have yet to generate any cash dividends.

In my view, this is not a fundamental structural issue—current lock-up mechanisms are simply due to the early stage—but nonetheless, many LPs have yet to see returns from cryptocurrency venture capital.

Of course, this situation is not universal—some LPs have not categorized cryptocurrency within their venture capital portfolios.

Some LPs prefer to choose funds with higher liquidity (I believe this is a good thing for industry development).

However, for most capital allocators, these remain obvious structural challenges (although a Bitcoin price reaching $100,000 may help, it is not enough to completely resolve the issue).

In addition, the cryptocurrency space faces some specific resistances:

• Lack of a clear and unified narrative

• Overall market interest is low (very few new LPs have started paying attention to cryptocurrency in the past two years)

• Concerns about the token market structure

These issues are more subjective than fundamental structural problems.

Of course, a Bitcoin price reaching $100,000 would undoubtedly alleviate some concerns about the field.

Imagine if you heard someone bragging about their cryptocurrency portfolio making a fortune on the golf course; you would feel the urge to participate.

But in my experience, most LPs are not currently paying real attention to the cryptocurrency space.

While "fear of missing out" (FOMO) is a real psychological phenomenon, many capital allocators need to go through complex decision-making processes like committees, so it usually takes at least 1-2 quarters from generating FOMO to actually making an investment decision.

As for the reasons for LPs' low interest in cryptocurrency, one important factor is that AI has captured too much attention from capital allocators.

Many still have doubts about the practical use cases of cryptocurrency, while after experiencing ChatGPT firsthand, one realizes the immense potential of AI, which can almost change everything.

I think discussing the practical use cases of cryptocurrency now seems a bit outdated.

AI is clearly in a bubble phase, and this bubble may severely impact many venture funds.

But I can understand—ChatGPT's experience is very intuitive and straightforward, while the concept of cryptocurrency seems more abstract. Additionally, the theoretical total addressable market (TAM) of AI is almost boundless, which naturally generates high expectations.

However, these are just current concerns—things may change faster than we imagine. In the coming weeks, we may witness two significant events: one is the most favorable political environment for the industry ever, and the other is Bitcoin's price breaking $100,000.

This will completely change the game.

For the past decade, regulatory uncertainty has been the most common reason for people to dismiss the cryptocurrency industry, and in the future, this "excuse" will be hard to use.

This shift will bring many positive ripple effects—more optimized token designs, broader institutional participation, and more entrepreneurs joining the field.

Like all technologies, AI will inevitably enter a phase of disillusionment. Engineers working at AI startups valued at $2 billion but not yet profitable may reconsider their choices after the adjustment in the AI venture market.

They will find that the opportunities in the cryptocurrency space are broader, and the industry has a more interesting cultural atmosphere.

In fact, I have already noticed that the financing market for cryptocurrency is gradually warming up.

Capital allocators tend to be inherently conservative; no one gets fired for giving money to a traditional fund like Bridgewater that charges 2/20 (2% management fee and 20% performance fee).

But when your peers are all talking about something, it becomes almost impossible to ignore it. Cryptocurrency has a strong reflexive effect:

Price increases attract more attention;

Price increases allow existing cryptocurrency venture funds to realize more dividends;

Price increases also attract more entrepreneurs to join the field.

Of course, we still have a lot of work to do—a classic counterargument is: "Investing when prices are high means you've already missed the opportunity."

If we do not support those ambitious cryptocurrency companies and tell compelling stories about these technological use cases, this concern may hinder some capital inflow.

As for whether the market's full explosion will come in the second, third, or fourth quarter, I feel that it no longer matters. Because the macro environment is finally in place.

Let's go all out and make it happen!

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