Venture Capitalists' Influence on Cryptos Raises Concerns Over Viability and Market Performance

Venture capitalists' influence on new cryptocurrencies is seen as harmful to their sustainability and market performance. Analyst Route 2 FI highlights the issue of permissionless token listing and money-hungry VCs leading to diluted values and inflated valuations through high fully diluted valuations (FDV), resulting in significant price drops and diminishing community trust.

Venture Capitalists' Influence on Cryptocurrencies Raises Concerns About Sustainability and Market Performance

The prominent role of venture capitalists (VCs) in the launch and development of cryptocurrencies has garnered scrutiny over its potential implications for their long-term viability and market performance. While VCs can provide essential liquidity and support during the early stages of a project, analysts argue that their influence may ultimately prove detrimental to the sustainability and value of the underlying asset.

In a comprehensive Substack post published on April 22, popular crypto analyst Route 2 FI voiced concerns regarding the negative impact of permissionless token listing and the excessive reliance on VC funding. According to Route 2 FI, the unchecked issuance and listing of new tokens on exchanges dilutes the value of existing assets and creates a competitive landscape where numerous projects vie for scarce liquidity.

The analyst further criticized the practice of setting inflated fully diluted valuations (FDV) for tokens at launch. While high FDVs may entice early adopters with the prospect of substantial airdrops, they can also lead to significant price drops later on due to the substantial unlocking schedules for early VC investors. Route 2 FI expressed skepticism about the long-term viability of such investments, suggesting that many new VC-backed tokens may ultimately experience a sharp decline in value.

Data from TradingView indicates that the total market capitalization of altcoins, excluding Bitcoin, has increased by 38% year-to-date to reach $1.05 trillion. However, this growth is overshadowed by the potential risks associated with large VC unlocks. The increased circulating supply of tokens, without a corresponding increase in demand, can exert significant downward pressure on prices.

Route 2 FI emphasized the negative consequences that can arise when early buyers and developers exit projects, eroding community trust and reducing the total value locked (TVL) in the underlying protocols. This can create a downward spiral, where the oversupply of tokens leads to a decline in demand, resulting in further price drops and a loss of confidence among investors.

In light of these concerns, the analyst questioned the likelihood of a traditional "altseason," where altcoins typically experience a surge following Bitcoin's cyclical peaks. Despite the existence of numerous noteworthy projects, Route 2 FI argued that the lack of sufficient liquidity could signal the end of this recurrent trend.

"We hear a lot about altseason, but this time around I think things will be different," Route 2 FI wrote. "But ask yourself who is going to buy all these tokens. Unless institutions or retail are coming in masses, it will just be a forever PvP fight."

The analyst's observations and criticisms highlight the complex and often paradoxical nature of the cryptocurrency market. While VCs and other early investors can provide essential support to new projects, their influence can also introduce risks and challenges that may ultimately undermine the long-term sustainability of the assets they invest in. As the cryptocurrency industry continues to evolve, it remains to be seen how these dynamics will play out and whether a more balanced and sustainable model can emerge in the future.