The "Yearn Finance" Effect: Cryptocurrency Funds Experience the Calm Before the Dawn

Original Article Title: "The Undercurrent of the 'Vintage' Effect: Crypto Funds Face the Calm Before the Dawn"

Original Article Author: Zen, PANews

Originally, "Vintage" referred to the "vintage" of wine, where a good vintage is a natural gift to humanity, while a bad vintage is constrained by weather and soil, unable to hide its flaws. In funds, the "establishment year" is usually referred to as Vintage, just as the vintage of wine is a reflection of the "terroir," the fund's vintage is more of an economic cycle snapshot, directly impacting returns.

For crypto funds established during the era of monetary easing amid the pandemic, they are currently experiencing the painful backlash from a "bad vintage."

Born in a Bubble, Dies in a Bubble

Recently, investors of crypto funds have been lamenting on social media. The cause was when the Web3 fund ABCDE announced that this $400 million fund would no longer be investing in new projects and would not be raising funds for a second phase. The founder of the fund, Du Jun, stated that over the past three years, ABCDE has invested in over 30 projects with funds exceeding $40 million, and despite the current unfavorable market conditions, its internal rate of return (IRR) remains at a globally leading level.

ABCDE hitting the pause button on investments reflects the current dilemma faced by crypto VCs: institutional fundraising sizes and project investment enthusiasm are both declining, token listing lockup models are frequently being questioned, flexible investors are even hedging their portfolios through secondary markets and hedging operations. Amidst high macro interest rates, regulatory uncertainties, and internal industry challenges, crypto VCs are going through their most severe adjustment period to date. Especially for crypto funds established around 2021, the current environment has intensified the difficulty of their exit strategy.

Bill Qian, co-founder of Cypher Capital, disclosed the performance of the funds they invested in, stating, "We invested in 10+ VC funds in this cycle, all GPs are excellent, all capturing top projects. But for our investment in the entire VC fund (as LPs), we have already done a 60% accounting write-down, hoping to eventually recover 40% of the principal; sometimes, you haven't done anything wrong, you just lost to time and vintage." However, he is optimistic about the next cycle of crypto VCs because extremes must reverse. It's like the web2 VCs of 2000 experiencing a total collapse in Silicon Valley, but the following vintages turned out to be good years for nurturing and investing in innovation.

The "Capital Frenzy" from 2021 to 2022, in addition to the industry's continuous creativity, was driven by the prosperity of DeFi, NFTs, and blockchain games, boosting market sentiment. It was also related to the special backdrop of the times—affected by the COVID-19 pandemic, many central banks around the world implemented large-scale quantitative easing and zero interest rates during this period, leading to global liquidity flooding. "Hot money" sought high-yield assets, and this environment, referred to by academia and industry as the "Everything Bubble," led to the rise of the cryptocurrency industry as one of the important beneficiaries.

Facing such a trend, cryptocurrency venture capital firms that easily accessed funds began to play a game of "carrying the sedan chair," making large-scale bets on conceptual racetracks with less rational analysis of the projects' intrinsic value. Similar to the technology stock bubble, this frenzy of investment detached from fundamentals and short-term uptrends is essentially "expectation pricing" under ultra-low funding costs. Cryptocurrency VCs poured a large amount of funds into overvalued projects, thus planting hidden risks.

Drawing from traditional equity incentive mechanisms, token locking mechanisms aim to prevent project teams and early investors from selling off their tokens in the short term by gradually releasing tokens over the long term, thereby protecting ecosystem stability and retail investor interests. Common design mechanisms include "1-year cliff period + 3-year linear release" or even longer 5–10-year lock-ups to prevent the team and VCs from cashing out before the project matures. This design itself is not a big issue, especially for the cryptocurrency industry that has experienced years of rapid growth. To dispel concerns about wrongdoing by project teams and VCs, restraint through token locking is considered an effective method to boost investor confidence.

However, when the Federal Reserve began tapering and raising interest rates in 2022, liquidity quickly tightened, and the cryptocurrency industry's bubble burst. As these overvalued valuations rapidly fell back, the market entered a "value regression" painful stage. The cryptocurrency VCs who reaped what they sowed also gradually fell into their "darkest hours"—many institutions not only suffered heavy losses in early investments but also faced questions from retail investors who mistakenly believed they had made substantial returns.

According to STIX founder Taran Sabharwal's recent data, among the projects tracked, nearly all projects experienced a significant drop in valuation, with SCR and BLAST even showing year-on-year drops of 85% and 88%, respectively. Multiple data indicates that many cryptocurrency VCs committed to lock-up positions may have missed better exit opportunities in the secondary market last year. This forced them to seek alternative paths—Bloomberg reported that several VCs and market makers collaborated in secret to hedge the lock-up risk through derivatives and short positions, profiting in a declining market.

In a weak market, fundraising for new crypto funds is equally challenging. A report from Galaxy Digital shows that despite an increase in the number of new funds throughout 2024, it was the softest year for crypto venture capital funding since 2020 on an annualized basis, with 79 new funds raising $5.1 billion in total, far below the frenzy levels seen during the bull market from 2021 to 2022.

According to a research article previously published by PANews, incomplete statistics suggest that in the first half of 2022, there were 107 Web3-related investment funds launched, with a total amount reaching as high as $39.9 billion.

Meme and Bitcoin ETF Fund Flows

Against the backdrop of the industry lacking a clear product narrative and tangible use cases, the community is beginning to rely on Memes to generate topics and traffic. Meme tokens, with the allure of the "get rich quick" myth, have repeatedly triggered trading frenzies, siphoning off a large amount of short-term speculative capital.

These Meme projects often experience rapid hype cycles but lack sustained support. As the on-chain "casino-ization" narrative continues to spread, Meme tokens are starting to dominate market liquidity, capturing user attention and capital allocation focus. This has led to some truly promising Web3 projects being squeezed and overshadowed, with both their visibility and access to resources limited.

Meanwhile, some hedge funds have also begun to seek entry into the Memecoin market to capture excess returns brought by high volatility. This includes the venture capital firm Stratos supported by a16z co-founder Marc Andreessen. The hedge fund launched a liquid fund holding the Solana-based meme coin WIF, delivering a substantial 137% return in the first quarter of 2024.

Aside from memes, another significant event in the crypto industry—the launch of a Bitcoin spot ETF—may also be a potential reason for the altcoin market slump and VC struggles.

Since the approval of the first batch of Bitcoin spot ETFs in January 2024, institutions and retail investors have been able to directly invest in Bitcoin through regulated channels, with traditional Wall Street asset management giants joining in. In the three days following the ETF launch, nearly $2 billion in funds flowed in, significantly enhancing Bitcoin's market position and liquidity. This further strengthens Bitcoin's attributes as "digital gold," attracting a broader range of traditional financial participants.

However, with the emergence of a Bitcoin ETF, a more convenient and cost-effective compliant investment path has been provided, and the industry's original fund circulation logic has begun to change. A large amount of funds that might have originally flowed into early-stage venture capital funds or altcoins chose to stay in ETF products, transitioning to passive holding. This not only disrupted the past fund rotation rhythm of altcoins catching up after Bitcoin's rise, but also increasingly decoupled Bitcoin from other tokens in terms of price trends and market narrative.

Under the continued effect of the siphon effect, Bitcoin's dominant position in the entire crypto market continues to rise. According to TradingView data, as of April 22, Bitcoin's market dominance (BTC.D) has risen to 64.61%, hitting a new high since February 2021. This indicates that Bitcoin's position as the "institutional main entrance" is becoming more consolidated.

The impact of this trend is multi-faceted: traditional capital is increasingly focused on Bitcoin, making it difficult for Web3 entrepreneurial projects to receive sufficient funding attention; and for early VCs, the exit channel for project tokens is limited, secondary market liquidity is weak, leading to extended return cycles, difficulties in realizing gains, and the need to contract investment pace or even pause investments.

Furthermore, the external environment is equally challenging: high interest rates and increasingly tight liquidity make LPs hesitate to allocate to high-risk assets, while regulatory policies are evolving but still need improvement.

As Rui from Hashkey Capital wrote on Twitter: Will there be a counterattack as epic as in 2020? Many friends have a pessimistic attitude, so they are leaving one after another. Their logic is very simple and effective. On the one hand, all the users who should enter have entered, everyone is used to the casino's gameplay, used to the concept of pumping and dumping to define project quality, just like being used to shorting ETH. Users' attributes have been shaped. On the other hand, it is difficult for us to see the emergence of large-scale applications at the chain level. Various fields such as Social, Gaming, and ID have all been "restructured" by Crypto, but in the end, everyone finds it a mess, making it difficult to find new Infra opportunities and new limitless imagination.

Under multiple pressures, the "dark moment" of crypto VCs is likely to continue for quite some time.

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