Four things the crypto sector needs to fix to have long-term success and growth
At Engelworks, we remain excited about the future of blockchain technology and digital assets. However, we believe that two things need to be fixed to be successful in the long term.
Firstly, conditions for a healthy retail investor segment must be created. Recently, the financial ‘win-lose’ seesaw has dangerously tilted away from retail investors to whales, including crypto natives and TradFi.
Secondly, more projects must cross the chasm into a broader ‘early majority’ adoption to drive real value within the crypto ecosystem. For that, sustainable business models and better customer experience are required.
We would argue that the primary motive for most current participants in the crypto industry is the expectation of making outsized returns. It’s perfectly understandable, as the traditional financial system is broken, central banks are struggling to control inflation, and retail investors are being pushed into the darkest corners of financial markets in search of any decent return.
In our view, these are the things that need to change for the crypto industry to have a sustainable future:
As more institutional liquidity flows into the market and more experienced TradFi traders come in, more altcoins and protocols will be tested. Where tokenomics design weaknesses are significant, these will be run to the ground. This is probably not such a bad thing for the long-term quality of digital assets, but many more retail investors will lose money in the process. One of the ways to fix this is to require more rigour from exchanges in assessing the quality of tokens they list.
In trading more liquid assets, in particular, BTC and ETH, it has become increasingly difficult for retail investors not to lose money. The main reason is market manipulation by whales, both crypto-native and from TradFi. Add to it tactics such as front running of orders by some exchanges and repeated squeezes and liquidations of leveraged (in some cases up to 100x!) retail traders (both long and short). It is clear that at the moment, it’s a ‘win-lose’ situation in ‘whales vs retail’. Some regulation is overdue here, including the ban on front-running orders, limiting leverage and introducing competition for retail orders.
And now to VC investments. You may wonder if there’s a disconnect between the existing revenue-generating use cases for VC-funded companies and the volume of crypto investments by VCs, both TradFi and crypto. It’s all about how they realise the value of their investments. First, they get a proportionate allocation of token options at the stage when they invest $$$ in early rounds. There are well-established mechanics for them to offload (parts of) their tokens at a profit shortly after token issuance, even during the lockup periods. This means risk-free exists for VC even on weaker projects, again at the expense of retail investors who are often left to hold assets with a value close to zero after these pumps and dumps.
And lastly, the industry will need many more sustainable use cases for using the technology and digital assets to build value within token economies. This means wider adoption will be required.
The crypto industry now has the opportunity to emerge from the ‘crypto winter’ in a stronger, more sustainable form. We (at Engelworks) are actively participating in the space as investors, helping existing businesses develop their crypto / Web3 propositions and capabilities and enabling crypto-native businesses to cross the chasm into wider adoption.