By Alana Levin, Investment Partner, Variant Fund
Compiled by: Gu Yu, ChainCatcher
When thinking about the market, I usually start by trying to figure out the right questions to ask.
All summer long, the most lingering question about the crypto market has been: When will we hit the bottom? I wrote in early July — when BTC was $59k, ETH was $1600, and ZEC was $420 — that the bottom seemed to be near.
We now have the answer to that question: The bottom has likely already occurred, and indeed occurred sometime in July. So the most haunting questions have shifted. Right now, what I'm thinking about most is:
Has the bull market really started, or is this just a false rally?
If we were in the early stages of a full-blown bull market, which projects would be most likely to benefit the most?
Topic #1 has a series of follow-up questions. How long is the bull market likely to last? What factors will support it? What could discourage markets? etc. This is the subject of another (forthcoming) article.
For now, let’s assume that we are indeed in the early stages of a new crypto bull market. There seems to be a growing consensus that there are two categories of projects that will attract marginal dollars: protocols that are currencies in their own right (e.g. stores of value) and protocols that make money. These groups are most likely to attract the marginal dollars in inflows.
So the follow-up question becomes: What are the second-order effects if everyone believes these are the asset classes to hold?
Second-order considerations
For assets that are currencies in their own right: BTC is the current king of digital SOV. Every asset expected to compete for digital SOV status will likely be valued relative to BTC – i.e., what is the asset’s market cap as a percentage of Bitcoin’s market cap, and how does that ratio change over time? Store-of-value assets have theoretically unlimited upside (TAM literally means money), so the “market cap relative to BTC” metric at least gives investors something to benchmark against.
Profitable agreements have other considerations. Specifically, I expect investors will start to look at the quality of revenue - whether it comes from crypto-native sources (such as Pump) or exposure to the tailwinds of more traditional financial activity (such as Hyperliquid), and how durable that revenue is even if the crypto market pulls back, margin profile, etc. In other words, the kind of questions public market investors typically ask of listed companies.
The answers to these questions will likely drive multiple premiums. Projects that 1) are exposed to RWA and stablecoin growth/are not solely reliant on crypto-native activity, 2) have a visible path to attracting institutional users, and 3) have demonstrated durability in previous bear markets and still have their founders as CEOs, appear to be best positioned for higher revenue and earnings multiples.
There is also a third category of assets not mentioned above: on-chain projects that can be compared to non-crypto businesses. These are most likely narrative transactions. (And, to really emphasize, I think most of these will be trades, not long-term investments). Its theoretical appeal comes from being able to point to the known valuation of the non-crypto version and ask: What if the on-chain version could get there too?
Prominent themes are those projects that benchmark certain parts of the AI technology stack: routers, inference, compute, data acquisition, and interfaces. I'm skeptical about the extent to which most of these things require blockchain. (If you have a counterexample, please let me know)! Relatedly, these projects tend to have questionable token/stake splits - value essentially goes to the stake, while there is some sort of arbitrary buyback of the tokens. Just because a project makes money doesn't mean the token captures value. This is an old story in crypto. However, some of them may still be good deals. Personally, if I see an item like this really moving up/outperforming, I'd probably use it as a top signal, as it reflects a loosening of market discipline.
Why this three-pronged classification matters
Crypto markets tend to be highly cyclical. Bull and bear markets have shown a relatively consistent 4-year pattern over the past decade. But this year, some assets never really entered a bear market. They are based on continued compounding of ever-strengthening fundamentals. I continue to believe that capital will become increasingly aligned with these types of projects. While they may retrace, I expect it to start to look more like a traditional market pullback (10-30%) rather than the >90% retracement we've seen in some previous cycles.
Overall, these are exciting signs of real market maturity.