This week’s “hot topic” on crypto Twitter seems to be a widespread concern: Does the shrinking pool of available capital mean crypto is losing its appeal? The scale of crypto venture capital is clearly contracting—this point is undisputed. Where greater debate exists is over why this is happening and what it signifies.
Rob Hadick’s view is that crypto VC is consolidating around the very best founders and the very best funds—a hallmark of industry maturity. Meltem, by contrast, argues the contraction stems from (a) a lack of high-quality early-stage founders, and (b) crypto’s relatively small “surface area” for scalability compared to other high-growth sectors. I have little to add to this specific debate. Clearly, exceptional founders are still building in crypto. But there are far fewer founders launching crypto startups today than in 2021—and significantly more founders launching in other areas like AI. Is this due to capital scarcity, or does this gap itself cause capital scarcity? Both likely play a role.
There’s no doubt this job has also become much harder. As capital flooded in, returns were compressed. Tokens face structurally greater challenges today than they did between 2017–2021. Since the AI boom, allocators willing to commit capital to crypto VC funds have dwindled considerably. If you’re not genuinely passionate about crypto VC, now is an excellent time to pivot to something else.
Last week I traveled to El Segundo to attend Disciplus’ Demo Day, themed around industrial tech. I was surprised to see many crypto investors there. It felt like running into another married friend at a bar—neither of us should have been there. Industrial tech isn’t Lattice’s focus (though personally, I’m an investor in Disciplus), but I wanted deeper insight into non-crypto VC market dynamics. The most fascinating question is how crypto investors are responding to the current market environment—because their choices directly shape the future architecture of crypto capital markets. Clearly, some are heading to “Gundo.” But not everyone is. Right now, I observe three main responses among crypto investors:
First, a full exit—to do something entirely different. This could mean moving into operational roles within crypto, or taking on work completely unrelated to crypto. As many zero-interest-era funds continue to wind down, departures from legacy firms are becoming increasingly common across the broader VC industry. Yes, mega-funds are growing in AUM—but their pace of team expansion is unlikely to offset the number of funds quietly dying off. Some crypto fund managers have performed well enough to now invest in anything they choose, freed from fund mandate constraints. Kyle Samani is the most public example. Samani reminds us that while underperformance may push people down this path, there are also outstanding performers who simply feel more compelling problems exist elsewhere.
Second, continuing VC within one’s own fund—but broadening the investment mandate. For some, this is straightforward; for others, less so. Not all active crypto funds explicitly define crypto as their sole focus. My sense is Meltem’s scope was always broader than crypto alone, so teams like Crucible can readily shift attention to adjacent domains. Paradigm launched with an explicit, narrow identity as a crypto fund—yet today they describe themselves as investing in “frontier tech.” Many funds—including ours—have clear mandates to invest in digital assets and related businesses. Fund documents typically define these scopes broadly, but I believe most crypto fund managers share an unambiguous understanding with their LPs: they represent “crypto exposure.” So these peer managers either amend their LPAs to permit non-crypto investments, obtain verbal LP consent, or proceed covertly. This is clearly a spectrum—you could argue all AI businesses will eventually use stablecoins, thus qualifying as “crypto.” I’m not saying that argument is correct—only that the boundary can be highly ambiguous.
Third, staying the course. If you believe the industry will grow 100x from here—and that competition will be thinner and valuations lower—then now is precisely the right time to invest. That’s the path we’ve chosen. Which door leads to wealth? I understand the allure of the second option—but remain skeptical. Venture capital is both fiercely competitive and governed by power-law dynamics. There’s a reason Y Combinator captures ~90% of global accelerator returns. Top-tier VC funds consistently gain access to the highest-quality deals, generating the lion’s share of returns. That means unless you’re among the very best, participation is meaningless—and becoming one of the very best is extraordinarily, extraordinarily difficult.
The most common adjacent domain for crypto is artificial intelligence. AI is massive, accelerating rapidly, and will reshape the world. It’s almost certainly the most competitive VC market of the past two decades. More capital is flooding into companies with higher valuations—yet whose business models remain deeply questionable. You’ll compete not only with AI-dedicated funds, but with every generalist VC firm and nearly every source of VC capital on Earth. So I’m highly doubtful most crypto funds possess any real competitive advantage here. Of course, exceptions exist—some crypto fund managers have thought seriously about AI investment strategies. But I believe most crypto funds will ultimately fade away. Deep/industrial tech—like what we saw in El Segundo—may be less crowded, but it’s not without hurdles. You’re leaving historically the most capital-efficient industry (open-source protocols) and entering a capital-intensive one. And those industries demand specialized technical expertise for sound analysis.
That brings us back to crypto—which, in some ways, reflects… broader VC market trends: a concentration where fewer companies raise larger shares of available capital. The market is polarizing. In the past, many crypto funds raised $100M–$200M. Today, the landscape splits sharply between early-stage specialist funds (<$70M) and large platform funds. The key distinction between crypto VC and traditional VC is that crypto VC is contracting, while traditional VC is expanding at a staggering pace. Our focus remains on seeding—opportunities in sectors or categories that large institutional corporates haven’t yet recognized.
“The current crypto market clearly faces numerous challenges—but I believe equally abundant opportunities are visible to those paying close attention. Crypto-native financial applications are flourishing across many global markets. Non-USD stablecoin circulation remains minuscule. We may have completed only ~5% of upgrading the financial system—so vast opportunity remains ahead.”
[ChainCatcher]
Crypto VC Contraction: Market Maturity or Lost Momentum?
The crypto venture capital landscape is undergoing a significant transformation, with capital clearly contracting and investor attention increasingly diverted toward alternative sectors like AI. This shift represents more than a cyclical downturn—it signals a potential structural reconfiguration of the crypto ecosystem with profound implications for token prices, project viability, and investor returns.
Market Dynamics: Contraction and Polarization
The data is unequivocal: crypto VC is contracting. While Rob Hadick frames this as a natural consolidation around “the very best founders and the very best funds”—a hallmark of industry maturity—Meltem Demirors offers a more cautionary perspective, citing both a lack of high-quality early-stage founders and crypto’s relatively limited “surface area” for scalability compared to other high-growth sectors.
Both perspectives hold merit. The market is indeed polarizing, splitting sharply between early-stage specialist funds (<$70M) and large platform funds. This mirrors a broader trend in venture capital but with a critical difference: while traditional VC is expanding at a staggering pace, crypto VC is contracting. This divergence suggests that crypto is losing its competitive edge in attracting capital, not just temporarily, but potentially structurally.
Token Price Implications
The contraction in VC funding has several direct and indirect effects on token prices:
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Reduced Speculative Pressure: Fewer funding rounds mean fewer new tokens entering the market through secondary distributions, potentially reducing selling pressure on established projects.
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Quality Filter: The tighter capital environment acts as a quality filter, potentially reducing the number of low-quality projects that previously received funding. This could benefit fundamentally sound tokens by reducing market noise.
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Valuation Compression: As the article notes, “tokens face structurally greater challenges today than they did between 2017–2021.” This suggests a persistent valuation environment where only projects with clear utility and strong tokenomics can command premium valuations.
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Market Sentiment: The exodus of some crypto investors and the shift toward AI contributes to broader market sentiment headwinds, which can suppress token prices regardless of fundamental value.
Strategic Investor Responses: Three Paths Forward
The article outlines three distinct responses among crypto VCs, each representing a different thesis about the future of crypto:
1. Full Exit
This represents a bearish view on crypto’s long-term prospects. While some exits are driven by underperformance, others—like Kyle Samani’s—reflect a strategic pivot toward what the investor perceives as more compelling opportunities. For token holders, this path suggests continued pressure on projects without clear utility or strong network effects.
2. Broadening Investment Mandate
Many crypto funds are quietly expanding their mandates to include adjacent domains, particularly AI. While framed as diversification, this represents a strategic retreat from pure crypto exposure. For investors, this creates a dilemma: do these funds still offer the concentrated crypto exposure they were designed to provide, or have they become something else entirely?
3. Staying the Course
The author’s chosen path—doubling down on crypto with a focus on seeding opportunities that large institutional corporates haven’t yet recognized—represents a bullish view that crypto will “grow 100x from here.” This approach acknowledges the current challenges but bets on the market’s eventual recovery and expansion.
The AI Distraction: Competitive Reality Check
The article correctly identifies AI as the most common adjacent domain for crypto investors. However, it wisely questions whether crypto funds possess any real competitive advantage in this space. AI is “the most competitive VC market of the past two decades,” with massive capital inflows and questionable business models at many startups. For crypto funds to compete here, they would need to overcome significant barriers: established AI-specific networks, specialized technical expertise, and the sheer scale of competition from every major VC firm on Earth.
The Deep Tech Alternative: Capital Efficiency Concerns
Deep/industrial tech presents a less crowded alternative but comes with its own challenges. The article astutely notes that crypto represents “historically the most capital-efficient industry (open-source protocols)” while deep tech is “capital-intensive.” This efficiency gap is crucial: crypto protocols can achieve massive scale with relatively modest capital, while industrial tech often requires massive upfront investment with longer payback periods.
Untapped Opportunities in Crypto
Despite the overall contraction, significant opportunities remain:
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Crypto-Native Financial Applications: These are “flourishing across many global markets,” suggesting real utility and adoption that extends beyond Western markets.
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Non-USD Stablecoins: With “minuscule” circulation outside the USD ecosystem, there’s massive runway for growth in cross-border payments and financial inclusion.
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Financial System Upgrade: The claim that we’ve completed only “~5% of upgrading the financial system” indicates an enormous, multi-decade opportunity for crypto’s core value proposition.
Risk Assessment
Several risks merit attention:
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Talent Drain: As some investors exit and founders shift to AI, crypto risks losing its competitive edge in innovation.
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LP Confidence: The “dwindling” number of allocators willing to commit to crypto VC funds suggests a loss of confidence that could further tighten the funding environment.
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Market Fragmentation: The polarization between early-stage and large funds could create a bifurcated market where only well-connected projects receive significant funding.
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Regulatory Headwinds: As crypto competes with AI for investor attention and capital, regulatory scrutiny may increase, creating additional friction.
Strategic Recommendations
For experienced crypto investors navigating this environment:
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Focus on Fundamentals: In a contracting market, prioritize projects with clear utility, strong tokenomics, and real adoption over speculative narratives.
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Look Beyond Hype: Identify projects solving real problems in specific verticals, particularly those with global applications beyond Western markets.
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Monitor Crypto-Native Finance: The continuing development of financial applications represents the most direct path to crypto’s core value proposition.
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Consider Non-USD Opportunities: The stablecoin market outside the USD ecosystem remains largely untapped and represents significant potential.
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Differentiate Between Fund Strategies: As crypto funds broaden their mandates, carefully assess whether they still offer the concentrated crypto exposure you’re seeking.
The contraction in crypto VC is not necessarily a sign of decline but could represent a healthy maturation of the market. For investors who can identify quality projects in this more selective environment, the current challenges may create exceptional opportunities. As the author notes, “vast opportunity remains ahead” for those paying close attention to the evolving landscape.