Thread by @BMBernstein

Early stage crypto is extremely crowded. There are 3 consequences:

(1) It’s a great time to be an early stage founder-not investor
(2) Builds a leveraging cycle that drives up valuations
(3) Creates a large dichotomy between early stage private and later stage liquid valuations

Why is this happening?

(1) SAFTs are attractive to investors because they feel similar to SAFEs--which investors understand

(2) Recent LP capital has gone to funds that will largely focus on early stage.$300m to a16z + $400m to Paradigm (i know they'll hold some liquid assets)

(3) Many investors like that early stage focused funds *dont* mark to market monthly. They'd rather not have to talk to their boss about the volatility

There’s probably >$1.5bn that’s looking to deploy to early stage SAFTs

In a normal world with regulatory uncertainty and value capture uncertainty, these projects wouldnt raise more than $2m on $10m val

But there aren’t 750 good early stage projects. There's a dearth of talent. Funds instead are concentrating capital into anything compelling

So, even with a huge crypto sell-off, we’re still seeing party rounds like Algorand for $60mm & Ncent.

Valuations are still > $500m in the private markets and haven't fallen nearly as much as their liquid counterparts

This is where the bubble is still concentrated. As regulations slow the ICO market, this will slowly start to unravel

Now the leveraging...

When they raise $60mm of capital for their tokens, it creates 5-10x that value of tokens out of thin air—in addition to the capital they raised

So Unlimited Scalability Chain (USC) that raises $60m in cash for 10% creates $540mm in tokens in their treasury

The companies are sitting on $100mms of excess cash they could never spend.

Why not generate a return and build their ecosystem?

Teams subsequently create ecosystem funds that invest in more early stage deals. Everything private around that network that increases in value

Fund Y that invested in USC created $600m of new value, which then goes on to create another $1bn+ of mcap in other projects (assume $250m invested at 20% ownership)

The $60m invested in USC ended up creating $1.6bn in value

Funds in these projects early mark up the assets. LPs funnel more capital in, igniting an even larger boom

Fund of funds have joined the party too with many even raising from ecosystem funds

The incest is everywhere. And most of it is concentrated in early stage markets.

The liquid market assets aren't participating to the same extent. A lot of the "institutional capital" came, but didnt pump anybody's liquid bags. Most is in SAFTs

The biggest arbitrage is currently here: in liquid valuations to private market valuations

Projects with no devt. or track record are *still* raising at $1bn valuations and BTC, with 10 years of track record is only 100x that (I’m not being facetious). It screams inefficiency

Even ETH looks undervalued relative to these projects. 🤓

Yet more and more capital continues to write off the liquid assets, like BTC, in favor of early stage tokens and in search of BTC 6.0

And this isn't even factoring in the almost nonexistent path to liquidity right now

If you're an LP / investor looking to join the crypto roller coaster, I'd think twice before you allocate heavily to SAFTs / early stage markets

Markets move in cycles. There will be an early stage deleveraging. That will be the time to invest.