Donovan Choy

This is a segment from the 0xResearch newsletter. To read full editions, <a href="https://blockworks.co/newsletter/0xresearch" target="_blank" rel="noreferrer noopener">subscribe</a>.



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The following is the third and final part of a multi-part series on the state of crypto liquid markets, based on several conversations with liquid funds. You can find part <a href="https://blockworks.co/news/crypto-liquid-funds-bitcoin-target-this-cycle">one</a> and <a href="https://blockworks.co/news/crypto-liquid-funds-fundamentals">two</a> here.



Which crypto sectors are the most reviled by the average person in the industry? Anecdotally, gaming and crypto x AI projects seem to make the easiest punching bags. If I had a dollar for every time I heard “crypto games aren’t fun…”



The liquid funds I spoke to, however, had much more lukewarm and varied feedback. Though some were uninterested in gaming, others expressed optimism.



“The Web3 gaming space is very challenged at the moment and is most overlooked or under-owned,” Spartan co-founder Kelvin Koh told me.&nbsp;



“We need a big hit game for people to pay attention to Web3 gaming again. Off the Grid, Maplestory Universe and FIFA Rivals are three games we are watching closely.”



Off the Grid in particular has continued to average about <a href="https://flipsidecrypto.xyz/yasmin/gunzilla-network-metrics-explorer-kbgQ38">552k</a> daily players after its <a href="https://blockworks.co/news/off-the-grid-blockchain-gaming-experience">big bang launch</a>. Its active player base has cemented the GUNZ chain as a top 10 chain based on active addresses and transaction count, according to <a href="https://x.com/pierskicks/status/1906626745794519419">Delphi Ventures</a>, an investor in the game.



1kx was another fund that <a href="https://x.com/pet3rpan_/status/1887140527310864481">expressed</a> greater optimism for Web3 gaming.



Traditional free-to-play mobile games have an incredibly high entry barrier and require millions to breakeven. But a Web3 game that leverages the power of token incentives can greatly reduce that barrier of user acquisition, 1kx partner Peter Pan told me.



“A game like Pixels raised $4 million in their first year and was able to go to market within 18 months. They spent $70 million in token incentives on user acquisition and made about $25 million back — that’s roughly a 30% return on spend that would never be possible for a Web2 startup managing the same budget.”



Despite the early days of crypto x AI, a few funds also expressed hopefulness for the sector. At the very least, most acknowledged that in the long run, blockchain would enable AI in some specific use cases.



For instance, one crucial way that blockchain tech can support AI is in the area of “identity,” Pantera’s Cosmo Jiang said.



&#8220;Infinite agents and bots will exist thanks to AI. So there will always be a demand to know what is truly human. What better way to create a global, permissionless, censorship-resistant identity solution than using a blockchain? World [formerly known as Worldcoin] is doing something critical here.”



When it came to more mature token sectors within DeFi (DEX, lending liquid staking), there was general agreement among the funds I spoke to that these were markets with proven PMF and ways to perform valuations.



This however also crucially means that token valuations in DeFi were increasingly tethered to financial reality and less susceptible to speculative valuations than, say, memecoins, as one investor told me.



This is in stark contrast to L1/L2 tokens, which saw more disagreement on how they should be valued.



The valuations of most existing L1 tokens (on a P/E ratio basis) were far beyond what a fundamental analysis would explain, and poised for a harsh correction to the downside, one investor told me.



Another believed that L1 tokens were still erroneously being valued as a comps to bitcoin, which has become more of a store of value.



Here’s what Blockworks head of research Ryan Connor had to say on L1 valuations:



“The reason, all else equal, for the higher valuations for L1 and L1-like things is because they are platforms, and platforms can be money-making machines. So all else equal, theoretically, you&#8217;re pricing in higher growth. Solana, for example, can 5x its revenue in the next 12 months to above 10b. That&#8217;s incredible earning power. You can&#8217;t say the same for AAVE.”



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<li><a href="https://blockworks.co/newsletter/forwardguidance">Forward Guidance</a>: The intersection of crypto, macro and policy.</li>



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<li><a href="https://blockworks.co/newsletter/lightspeed">Lightspeed</a>: All things Solana.</li>



<li><a href="https://blockworks.co/newsletter/thedrop">The Drop</a>: Apps, games, memes and more.</li>



<li><a href="https://blockworks.co/newsletter/supplyshock">Supply Shock</a>: Bitcoin, bitcoin, bitcoin.</li>
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Liquid funds remain optimistic about Web3 gaming and blockchain uses for AI

The following is part two of a multi-part series on the state of crypto liquid markets based on several conversations with liquid funds.



To read full editions of the the 0xResearch newsletter, <a href="https://blockworks.co/newsletter/0xresearch" target="_blank" rel="noreferrer noopener">subscribe</a>.



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Yesterday’s <a href="https://blockworks.co/news/crypto-liquid-funds-bitcoin-target-this-cycle">0xResearch coverage</a> looked at how the institutionalization of bitcoin and an altcoin supply glut has made it harder to invest in any crypto asset that isn’t bitcoin.



What are liquid funds doing about it? How are they adapting?



Of the eight liquid funds I spoke to, seven mentioned the importance of “fundamentals.”



“Crypto can only grow if it attracts institutional capital, and institutions care most about fundamentals. This is still limited in pockets but is improving within crypto in meaningful ways,” Pantera general partner Cosmo Jiang told me.



Fundamental investing is a lot like painting a mosaic — what is sometimes called &#8220;mosaic investing&#8221; in traditional equities, he said.&nbsp;



“Fundamental investors are building a mosaic of all the data points that exist today — both qualitative and quantitative — to predict the earnings power of this business in the future. What matters is not today&#8217;s metrics, but the cashflow potential of a business three to five years from now.”



What these metrics are, and how much they matter, depends largely on the context of the token’s business.



For instance, ParaFi Capital founder Ben Forman thinks valuable metrics for L1/L2 blockchains are “the total stablecoin and real-world asset supply issued on the chain” and “the velocity that those tokens are circulating.”



&#8220;Vanity metrics like TVL, which are often showcased by L1s but often involve wrapping of their native token, will be meaningfully less significant in the future,&#8221; Forman said.



While professional investors and data wizards still can’t agree on which metrics matter most, there is at least a common belief that narratives are no longer all that matters.



“In 2021, the majority of capital being deployed was not being done so through a fundamental lens,” Theia Fund’s Noah Goldberg argued in a previous <a href="https://x.com/Blockworks_/status/1897077974870245779">X space</a> with 0xResearch. “There was a lot of momentum trading, and retail capital that isn’t price-sensitive…Whereas today, I would say that a lot of capital in liquid markets is concentrated in the hands of funds,” he said.



One investor I spoke to pointed to how tokens with strong fundamental metrics tend to suffer less of a drawdown in a market crash.



The focus on fundamental investing also forces crypto to confront the industry’s most sacred narrative: the Bitcoin halving and four-year cycle.



Some, like Defiance’s Arthur Cheong, believe the four-year cycle of crypto has “officially ended.”



“As the marginal impact to supply of each successive halving event decreases, it will have less impact on the price going forward,” Cheong wrote in an investor letter.



Other funds dismissed the halving as irrelevant, since their mandate involved holding liquid tokens over time horizons longer than four years.



Another fund called the four-year cycle a “meme,” pointing to interest rate cycles as the real risk-on and -off toggle.



Pantera’s Cosmo Jiang <a href="https://panteracapital.com/blockchain-letter/looking-past-tariff-volatility/">saw</a> bitcoin’s historical bull rallies as simply having coincided with global liquidity cycles, like the Eurozone debt crisis in 2012, Brexit in 2016 and Covid in 2020.



In the third and final part of this series, we’ll finally dive into some of the crypto sectors that liquid funds are looking at.



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<li><a href="https://blockworks.co/newsletter/empire">Empire</a>: Crypto news and analysis to start your day.</li>



<li><a href="https://blockworks.co/newsletter/forwardguidance">Forward Guidance</a>: The intersection of crypto, macro and policy.</li>



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<li><a href="https://blockworks.co/newsletter/lightspeed">Lightspeed</a>: All things Solana.</li>



<li><a href="https://blockworks.co/newsletter/thedrop">The Drop</a>: Apps, games, memes and more.</li>



<li><a href="https://blockworks.co/newsletter/supplyshock">Supply Shock</a>: Bitcoin, bitcoin, bitcoin.</li>
</ul>

Crypto liquid funds are turning to fundamentals to navigate a sea of altcoins

This is a segment from the 0xResearch newsletter. To read full editions, <a href="https://blockworks.co/newsletter/0xresearch" target="_blank" rel="noreferrer noopener">subscribe</a>.



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The following is part one of a multi-part series on the state of crypto liquid markets, based on several conversations with liquid funds.



It’s an open secret that most crypto liquid funds are underperforming.



Liquid funds work similarly to traditional hedge funds: Pick a market direction, deploy capital and outperform a benchmark.



Unlike hedge funds, however, the yardstick to beat is not a composite benchmark like the S&amp;P 500. Crypto liquid funds are in the game to beat bitcoin.



For example, bitcoin appreciated ~110% in 2024. Any liquid fund performing below that benchmark is underperforming, or considered average at best.



Unfortunately, the rise of orange coin means liquid funds have a much harder job.



Bitcoin has generally held steady on a year-to-date basis while the rest of the altcoin market has plunged <a href="https://blockworks.co/news/altcoin-season-over-memecoins-value">into oblivion</a>.



Consider bitcoin dominance (BTC.D), which has steadily climbed over the past year to 63% today against a total crypto market cap of $3.3 trillion.&nbsp;



Contrast that to last cycle’s market cap peak in November 2021 when BTC.D hovered at the 40-45% range.



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VCs such as DBA’s Jon Charbonneau even question BTC as a benchmark. The appropriate benchmark may be a weighted-average basket of alts like ETH, SOL and BNB, <a href="https://youtu.be/dMSHYjk3b8U">Charbonneau said</a> on the 0xResearch podcast.



This likely explains the noticeably bearish vibes in the Crypto Twitter echo chamber despite bitcoin hovering close to its all time-highs. Many higher risk-seeking investors are positioned on the thesis that altcoins would surge harder than bitcoin, and therefore have been “sidelined” from BTC’s rally.



Pantera’s Cosmo Jiang told me: “It’s not great right now. Most directional liquid funds are probably negative against BTC. For the market-neutral liquid funds, industry averages are irrelevant. Yet they too are having a bad year, but that means they’re generally flat on performance, not positive.”



Practically every liquid fund I’ve spoken to agrees that bitcoin has situated itself as an institutional/macro asset, or as “digital gold.”&nbsp;



“We’re at an interesting point in the S-curve of bitcoin’s adoption where you see penetration rising quickly because of ETFs and the US government’s strategic reserve. Bitcoin inflows exceeded Nasdaq’s QQQ inflows last year, which is crazy,” Jiang said. “Most players still don’t appreciate the nuance that BTC performance is vastly different from the rest of the crypto market.”



It’s not just all about orange coin either, which is incidentally up 11% on the week.



The faltering performance of most liquid funds is impacted by a dark, looming cloud hovering over the altcoin market. The glut of L1/L2, DeFi, DePIN, AI and memecoins that already exist and are soon to be unlocked spells a bleak outlook, Defiance Capital’s Arthur Cheong told me.



“The unlock schedule for all alts, excluding ETH, is estimated to be $1 billion every month for the next two years. There simply isn’t that much demand for altcoins. The total capital by all crypto liquid funds comes up to ~$10-15 billion of capital,” Cheong said.



These structural dynamics, too, affect liquid funds specialized in market-neutral strategies.



“Even when projects try to sell their locked tokens over the counter (OTC) at 30-40% discounts, it’s hard to find a buyer. There’s a broad expectation by markets that altcoins will plunge,” Presto research analyst Min Jung said.



$60 billion in buying pressure would be needed to sustain the prices of the top 10 largest tokens (STRK, ENA, JUP, ONDO, etc.) launched in 2024, Presto <a href="https://www.prestolabs.io/research/is-fdv-a-meme">wrote</a> last year.



This mismatch in demand and supply means that liquid funds must work harder to pick the “right” winners.&nbsp;



The “rising tide (BTC) lifts all boats (altcoins)” phenomenon of past cycles is no more.



In the second part of this series, we’ll look at:



<ul class="wp-block-list">
<li>How are liquid funds are grappling onto fundamentals to adapt?</li>



<li>What crypto sectors are liquid funds looking at?</li>



<li>Is the four-year cycle dead? </li>



<li>Is the L1 valuation premium dead? </li>
</ul>



Keep your eyes peeled for Part Two later this week in the 0xResearch newsletter.



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Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/thebreakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/empire">Empire</a>: Crypto news and analysis to start your day.</li>



<li><a href="https://blockworks.co/newsletter/forwardguidance">Forward Guidance</a>: The intersection of crypto, macro and policy.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha directly in your inbox.</li>



<li><a href="https://blockworks.co/newsletter/lightspeed">Lightspeed</a>: All things Solana.</li>



<li><a href="https://blockworks.co/newsletter/thedrop">The Drop</a>: Apps, games, memes and more.</li>



<li><a href="https://blockworks.co/newsletter/supplyshock">Supply Shock</a>: Bitcoin, bitcoin, bitcoin.</li>
</ul>

Liquid markets