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With the days of October upon us, the last vestiges of summer fade from our collective thermostats and memories. Winter is coming, and its very much back to business as usual after the holiday period… But it isn’t, not really… The world is in a very different place today than it was three, let alone six months ago. Markets have made monumental moves downwards, inflation is rife, rates are rising and we have an ongoing armed conflict not far from our doorsteps. Geopolitical tensions are a high, the Euro has fallen below parity with the USD, and we haven’t even mentioned what’s been going on in crypto!

I had the benefit of taking some time off over the summer, and with the macro backdrop as bad as I’ve seen it in my career, it wasn’t a hard decision. Investing in tumultuous times is both incredibly risky, and difficult. People like to throw Warren Buffet’s quote around - “Be greedy when others are fearful” - but I am yet to meet anyone who has actually followed that consistently. Hard times are not without opportunity though, and I continue to believe in the long-term potential for crypto. It is hard to say where prices will go from here, however I feel we are not out of the woods yet, with few positive price catalysts to counteract the macro negativity in the near-term. That being said, it feels like a much needed chill has fallen over our industry, which I am ever so pleased about. The previous twelve months were nothing short of ridiculous and impossible to predict. The hype obfuscated the truth and only in its absence that we can start to see what has actually been achieved.

What follows are 7 observations on the current state of crypto, reflecting on what came before us and what may lie ahead…

Observation #1. Mass market consumers don’t give a damn about crypto.

The mainstream consumer still has no idea what crypto is, how it will impact them, or any idea why they should care about it. ‘Crypto’ and ‘NFT’ are now part of the common vernacular, but actual real-world applications remain absent. The great success stories of the past 12 months - Sorare, Axie Infinity or even STEPN - remain far from mainstream adoption. Axie at its peak had ~2.7 million monthly players (10x more than any other crypto game), when compared to Fortnight who consistently see more than 100 million per month, you can see the gulf. This isn’t necessarily a bad thing, its just stating the obvious - we are are yet to have any real mass-market use cases for crypto. NFTs, Gaming, DeFi, they have all pushed our industry forward, but sadly none have captured the hearts and minds of billions. I am confident the magic use case will arrive, and I’ve written about some of the areas I’m most excited about, however we have to face the facts, we are still early and who knows when we will cross that chasm. My thesis is a web3 game will come along which is actually playable and incorporates crypto in a non-intrusive / additive manner, becoming the first real consumer onramp at scale into the ecosystem.

Observation #2: DeFi is the leading use case.

Linked to Observation #1, it is apparent that DeFi is the main use case today. Gas consumption is the clearest indicator of where the network is spending resources, and DeFi has been the significant majority since Ethereum went live. Uniswap has been the whale in the room since mid 2020, consistently claiming >30% of gas usage, with Tether, 1Inch, Aave, 0x and several other DeFi projects collectively accounting for another +20%.

DeFi has the potential to help billions, but it is at the same time an impediment to mass-market adoption due to its complexity and public perception. Luna’s collapse and subsequent issues with centralised projects like Celsius have cast a long shadow which I believe will take many years to dissipate. APYs of +200% may have caught the attention of yield farmers, but I fear they only deterred mom and pop consumers from entering the space.

Observation #3. Crypto is largely cultural.

This might be contrarian, but I feel given crypto’s relatively limited real-world impact, it found its first home in the world of culture. Art, Music, Literature have little use beyond their modes of enjoyment (vs. software or natural resources for example) however they are no less an important part of our society. Culture tends to have an outsized voice vs. its real-world physical impact, and the same is true of Web3. I’ve previously talked about how NFTs are the tokenisation of culture, and I think this extends to the whole Web3 ecosystem (in its current form).

Personally, I’ve been most interested with the emergence of web3 native brands such as RTFKT, Azuki, Doodles and even Yuga. I believe these are the first generations of truly digital, next generation brands, which will redefine the consumer landscape. You don’t have to believe in the ‘metaverse’ to see how these brands have already started taking share from incumbents. Nike’s acquisition of RTFKT may become one of the most savvy pieces of M&A in recent years, and I’m willing to bet not the last time a Web3 brand is acquired by a traditional counterpart. With +5ETH floor prices ($8k) these brands remain completely inaccessible to the modern consumer, thereby reinforcing Observation #1, however exclusivity is the name of the luxury game.

I’d argue all of these brands have fallen well short on their promises of utility and use cases beyond speculation, which leads me to believe we have barely scratched the surface of ‘what it means to be a web3 brand’, and I’m sure many more exciting iterations will emerge in the future

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Observation #4. Prices are coupled to the rest of the market.

The “Crypto as an inflation hedge” narrative is well and truly dead. Personally, I never believed this, but I know a few maxi’s who’ve had a reality check. When rates go up, velocity of money goes down. Free cash is pulled from the economy and discretionary spending dries up. It is Economics 101.

I don’t talk about prices much because I think it attracts the wrong sort of readership and I am by no means an expert. What I will say is that I don’t see much in the way of positive price catalysts in the near-term which can outstrip the macro headwinds. Asset managers across the board have been paring back their exposure to high-risk sectors and crypto has not been spared. Retail has been the marginal buyer of crypto for the past +9 months, and this is not the place you want to be, especially in such an emotionally charged space. The market structure is still very immature and shallow - there are no sophisticated ‘long-only’ institutional buyers who hold positions over time, most only hold BTC due to its simplicity / security and the fact you can invest via ETFs and options without custody issues. VC’s will buy tokens privately not on-market, and Hedge Funds are volatility traders with matching long and short positions.

What all of this means, is we might have to get used to a quiet few quarters before things get better, and we should all be reading up on macroeconomic theory in the meantime.

Observation #5. Crypto infrastructure is not fit for purpose

Infrastructure encapsulates many aspects, from the underlying blockchains & their scalability, to the consumer onboarding experiencing, UI/UX and security systems. Without solid foundations, crypto will never go mainstream, and there are so many things we need to improve:

• Wallets still suck and are hard for people to use. It blows my mind that Metamask has not sorted their mobile experience and cant visualise my NFTs if I’m not using a laptop. Wallets are the first point of contact for consumers & web3, and we still haven’t fixed this part of the journey.

  

• We have not abstracted away blockchain complexity. This will take time and is more a requirement from the apps rather than the infrastructure. You don’t need to know how to operate Web2 protocols to use Uber, Slack or Facebook (because this has been abstracted away), so Web3 consumers shouldn’t need to think about things like gas fees, seed phrases or bridges.

• We have too many competing systems. We do not need 20+ subscale L1s... we need maybe 5 capable L1s. Having so many competing systems just divides an already scarce resource pool further, which ultimately slows down the rate of development for the industry. Competition is good. But up too a point. I think of L1’s like operating systems. In the real world we have 3 - Microsoft, Google & Apple. We need something like this in Web3 (maybe a few more), so that we can move onto building the applications of the future.

• Security issues persist. I’ve lost count of the number of hacks or scams in the past 12 months, or the quantum of funds lost. It’s easily in the billions of dollars. Web3 is a radically transparent ecosystem unlike anything we’ve seen before so all our issues are in plane sight. But that doesn’t excuse the lax security standards we have. Yes, criminals are everywhere and our space is evolving so we need to cut projects some slack. However some of these hacks have been downright negligent behaviour (from the projects, not naming names) and we need better. Every time a project gets hacked, a normie loses faith in crypto.

Observation #6. Regulation incoming

Regulation was always going to come to crypto, it was just a matter of time. Luna’s very visible collapse definitely accelerated events, and as a result we’ve seen a slew of activity from governments over the past 6 months, with more to come. I’m of the view that regulation will be net positive, if done in a measured manner and not an impediment to free markets, consumer choice and creativity.

In September the White House released their “Comprehensive Framework” for crypto regulation which I felt was fairly reasonable and attempted to address high risk areas (e.g. protecting consumer funds), while still fostering innovation. Regulators face a difficult task balancing these competing elements - push too hard and the industry will move offshore, come across too light and you may harm your voters. As it stands we are still in the grey, with no clear regulatory framework or guide to help entrepreneurs plan for the future.

Observation #7. Builders gonna build

On a more positive note, the quality and diversity of talent flowing into the ecosystem continues to impress on the upside. The price crash swept many of the charlatans away, and now the true believers remain. Six months ago we would receive 20+ Web3 pitch decks a week, the majority from questionable teams (some even anon) with barely thought out businesses trying to raise stupid sums of capital. These days, we see a fraction of this volume however it is of much higher quality. Engineers & PMs from Google, Meta, Microsoft. Designers from Apple, Tesla, Nike. Creative artists, musicians. The whole space has levelled up. It is now much easier as an investor to make decisions in the absence of all the noise, and similarly easier for projects to build for the future without the distractions of the present.

Reading the room, there is an air of optimism. Almost everyone agrees the crash was for the better and a chance to reset. Many of us lost money no doubt, however the future remains brighter than ever.

😎 About the Author

I’m an Investor at Felix Capital, a London based early-stage and growth fund specialising in the intersection between consumers and technology. We have been fortunate to support the likes of Ledger, Sorare, Lightspark, Rally, Flooz and others, and actively looking for great crypto founders to invest in. For entrepreneurs looking for funding (or wanting to chat), you can reach me via email - Joseph@felixcap.com or Twitter @Jpizzolat0