1.5 IPOs and M&A

There are three companies that come to mind as big winners in crypto’s war of attrition, by virtue of their positioning, teams, and access to capital: Coinbase, Circle, and Galaxy Digital.

Coinbase continues to be the most important company in crypto. The most valuable, tightly run crypto exchange in the U.S. warrants its own section (6.1, with the other
top exchanges covered in sections 6.2 and 6.3.) It’s unlikely Coinbase will see major competition in the U.S. public markets next year, though one of its top partners, Circle, may soon join them with a 2024 IPO.

Circle CEO Jeremy Allaire shared at Mainnet that his company did $ 800 million in revenue and $ 200 million in EBITDA in the first half of 2023 — a number that matched the company’s full 2022 numbers and could swell further under a “higher for longer” interest rate environment. They are also well-positioned to capitalize on any forward progress with U.S. stablecoin policy or a boom in international stablecoin growth. How the company gets valued will depend almost entirely on the credit the market is willing to give the company for its products and tech growth story versus its “we earn interest on your float” economics.*

I used to think DCG would be a promising IPO candidate because of its diversified mix
of services. But the company is under siege and probably off the market for a long,
long time. At a minimum, DCG will have an uphill battle building back its institutional rep following a scathing fraud complaint from the New York Attorney General’s office, ongoing bankruptcy litigation (and public shitshow) surrounding its lending subsidiary Genesis, and the rapid liquidation of a number of its core assets over the past 12 months (GBTC shares, CoinDesk spinout, etc.).

In the meantime, another New York-based crypto financial conglomerate has seen its stock rise, both figuratively and literally. Galaxy Digital’s venture portfolio, trading desk, mining operation, and research outfit could help it take DCG’s place in the industry’s narrative: Mike Novogratz’s company is already publicly traded (on the Toronto Stock Exchange) and commands a $ 3 billion market cap. That’s enough liquid public equity
to allow Novo’s team to pursue an aggressive consolidation strategy in 2024 if they so choose. Some prime assets will inevitably become distressed amidst the ongoing venture capital stress, and Novo’s already got a full investment banking advisory team in-house.

Aside from this cohort, I wouldn’t hold my breath for any other breakout crypto IPOs. I doubt the window is open to others before the 2024 election. As such, the path to liquidity in crypto under the current regulatory regime remains through the token markets. Good thing you’re about to get a full 100+ pages on those tokens.

*(Tether is even stronger financially, having regained its market share since the SVB collapse this March...but don’t expect its S-1 anytime soon.)

19

1.6 Policy Meta

I have some stuff to say about Senator Elizabeth Warren and SEC Chair Gary Gensler in later sections. We’ll get to these fine people soon. Don’t worry.

But for starters, we need to zoom out. America has the technical talent, the financial markets, and the policy playbook to win the global crypto market and to ensure that the U.S. runs the financial and technological powerhouses of the 21st century. But I don’t think we have enough cypherpunks to save us this time around.

The past 30 years are more than just the formative years of the Millenials among us; they provide hints, and the backdrop, for what we might expect with respect to crypto policy
in the short and medium terms. Of the events and changes most impactful for crypto in these past decades, one historical analogue to our current struggle, and two mega-trends, are the most important to focus on:

The Crypto Wars (of the 90s): The first thing you should know about crypto policy, young Padawan, is that we’ve been here before. The original crypto wars of the 90s included unfair fights with hardasses at the NSA, legislative proposals for a literal government chip inside all of your devices that would unlock them on demand, and a popular, developer-led grassroots rebellion against government overreach. This

is where the term “cypherpunks write code” comes from. You should read this book on the crypto wars, or at least this paper, which speedruns through encryption’s history. It’s a great underdog story, though this victory seems unlikely to be repeated with our crypto due to deep cultural changes in America.

Complacency & Woke Shibboleths: Unfortunately, Gen X got old and teamed up with the Boomers to do some pretty awful and unconstitutional sh*t ever since then. Today’s “crypto” is a major threat to the “surveil and control” national order. And when we look at our younger protagonists (Millennials and Zoomers), the problem is they simply might not care enough to fight. They’re accustomed to eroded civil liberties in a post-Patriot Act, post-COVID world. They’ve never lived without an inward-looking national security apparatus flailing wildly after a 20- year, $ 7 trillion global military misadventure. And many of them have even shrugged off the Twitter Files, and Big Tech’s censorship industrial complex. Peter Thiel

and David Sacks wrote the prediction piece on the dangers of campus cultural uniformity in the early 90s, SBF merely reminded people what we already knew, the conformity may be performative, but it’s now pernicious..

The End of American Hegemony: The thing you really need to understand when you combine #1 and #2 is that there is a large chunk of government officials who genuinely believe that 90s era tech policy was a mistake and that the miracle of the open internet — and the economic growth that it spawned — has been a net detriment to American society. Tech has emerged as a convenient scapegoat. While there is some merit to the concerns that we hollowed out our manufacturing base and over-financialized our economy, it is a bit grotesque that many look at the closed internet of China with envy and only see a “missed opportunity to curb disinformation.” We aren’t the only superpower anymore, and because rival Big- Brother bureaucracies like China’s appear to be working in some areas, our leaders

20

want to grab more control, too.

Our culture has weakened, our gerontocracy is delusional, and we have powerful rivals this time around. We have to play a different game and focus on “moneyball” elections instead. There is good news on this front: we’re going to win. (Much more on how that will happen in Chapter 5.)

(I know you might think these trends are totally unrelated or at best tenuously connected to crypto, but they also said that about Pepe Silvia. We’re fighting an existential information war.)

1.7 Can Devs Do Something?!

Despite the deep crypto recession, dips in trading volumes, and regulatory headwinds, crypto developer activity held up well this year. At the midyear point, Alchemy found that the number of smart contracts deployed on EVM chains saw an increase of 300% QoQ, while crypto wallet installations reached a new all-time high.

Electric Capital found that, by October, monthly active developers contributing to open- source projects had dropped precipitously year-over-year, but chalked it up to a variety of factors: the regulatory chill cast over the open-source ecosystem following this year’s Ooki DAO ruling; more innovation and development at the application and infrastructure layer; and the general bear market tendency to remain a bit cagier about competitive threats.

a16z’s State of Crypto Index is perhaps the best glimpse at overall market health. Its tracking also highlights the 30% drop in open-source developers, but it also includes a number of mitigating data points as well: developer library downloads hit a record in Q3, and active addresses and mobile wallet activity reached new record highs. Is that the spark that ignites a blaze of breakout crypto apps in 2024? If I could invest blindly into crypto based on a single chart, it’s this one:

(Source: a16z)

21

Just wait until the AI devs realize that crypto is the yin to their yang. That’s when the party will really get started. Speaking of which...

1.8 AI & Crypto: Money for the Machines

In an age of digital abundance and generative AI, tech that provides reliable, global, and mathematically guaranteed provenance and digital scarcity will be critical.

Think of deep fakes: crypto will be invaluable for timestamping and verifying devices and data. Without crypto, good luck verifying whether certain images or text come from AI or non-AI sources, or from D.C. or Beijing. And good luck preventing generative DDOS attacks without the fees required by public blockchains.

AI’s rise is a “threat” to crypto in the way that mobile was a threat to the internet. It’s absurd on its face. Progress in AI will only increase demand for crypto solutions. We might argue whether AI is a net good or bad for humanity (in the same way we debate whether iPhones are net good or bad...but still know they have obviously been a net good), but AI is great for crypto, and I for one, welcome our machine overlords.

I come bearing gifts of the perfect machine money: bitcoin.

I really don’t feel the need to overthink this, but I liked (as usual) Arthur Hayes’ post on the subject this summer. The two most critical inputs for any AI are data and compute power, and as such, it seems likely that “AI will transact in a currency that preserves its energy purchasing power over time.” That’s bitcoin in a nutshell.

For what it’s worth, others may critique this as overly simplistic given that two likely AI use cases, micropayments and smart contract execution, still haven’t panned out much on bitcoin. And AI agents will least-cost-route to the optimal blockchains (lowest cost and latency) when they are deployed, not necessarily settle for bitcoin’s friction thanks to its proof-of-work mining. Dustin thinks it’s more likely the whole “energy denominated money” thing is backwards: AI agents may be more likely to buy gas tokens (the relevant computation resource) directly.

Messari has been all over the crypto projects most likely to benefit from the boom in the AI x Crypto narrative, and this was one of my favorite mini-tracks at Mainnet 2023. Do yourselves a favor, and watch Dustin’s 101 session, Why AI needs Crypto, and Why Crypto needs AI.

[Required Reading: Decentralizing Machine Leaning, Growing Synergies in AI and Crypto]

22

1.9 Three New De’s: DePIN, DeSoc, DeSci

I am permabullish on decentralized finance (DeFi), but I’m not necessarily “overweight”
as I think other market segments will outperform over the coming year. I do think some of the top DeFi protocols in the sector (particularly in the decentralized exchange space) are due for a rebound after a flat year of trading volumes, but it’s not clear to me that DeFi’s unit economics and product-market fit will be enough to offset the hellish regulatory headwinds that lie ahead. And then there’s a matter of what type of assets are driving DeFi volumes. This year’s spikes were largely driven by memecoin rallies, not breakout new applications or adoption. Maybe I’ve just spent too much time considering the DeFi doomsday scenarios in D.C. (more in Chapter 8.)

My eyes are wandering to several critical, non-financial sectors of crypto. I like DePIN (Physical Infrastructure Networks), DeSoc (Social Media), and DeSci (Yeah, science!) because they feel like they will be less driven by rampant speculation and are all oriented around solutions critical to our industry well beyond finance.

Sami helped popularize the DePIN moniker last year, and no one has been better at mapping the landscape or outlining how these hardware networks can scale to truly compete with their centralized counterparts in Big Tech. Cloud infrastructure services are a $ 5 trillion market cap sector in the legacy markets, and DePIN sits at just 0.1% of that. Even if you assume 0% of online services leverage DePIN as their primary stack, the demand for decentralized redundancies alone could cause a boom in demand. A
1% “insurance premium” to eliminate Big Tech deplatforming risks would lead to a 10x in DePIN utilization rates. It doesn’t take much to move the needle, especially with AI-driven demand for GPUs and compute in general.

There’s a similar opportunity in social media, where the incumbent players made $ 230 billion in revenue last year (half from the Meta family of companies alone), while a

23

vanishingly small percentage of creators make enough money to make content creation worthwhile. We’ve seen signs of this changing (YouTube’s relentless growth, Elon’s revenue sharing) and a glimmer of potential breakout DeSoc apps (Farcaster, friend.tech, and Lens), but it feels like the early, barely imperceptible moment in the beginning of a J-curve of adoption versus a false start. Friend.tech shared $ 50 million with its creators in its first several months post-launch, which is one way to create an audience. I think DeSoc in 2024 follows the “DeFi Summer” boom of 2020.

Finally, there’s decentralized science. Some 50% of the DeSci projects we track were built in the past year. One of the best OG crypto investors I know has been dedicating 100%
of his time here. It’s a market where crypto incentives make sense: trust in our scientific establishment may be at all-time lows, and the current system is riddled with bureaucratic inefficiencies, poor data methodologies, and piss-poor incentive schemes (peer-reviewed papers that lead to tenure!), whereas crypto has already demonstrated a proven ability

to fund...science experiments! At a massive scale. Token sales and DAOs were built to revolutionize how we do research, and there is enough interest in longevity, rare disease treatments, and space exploration alone to drive development in this sector.

You can invest directly in DePIN, and you can start power using DeSoc apps today. But I don’t yet know of a way to lazily express a DeSci investment thesis. (VitaDAO?) If you think of any, let me know. My DMs are open.

[Required Reading: Our DeSoc, DePIN, and DeSci Enterprise reports.]

Diligence Reports

Your Compliance Hub for

Thorough Asset Diligence

Delve deep into the history and inner

workings of assets and protocols with

Messari Diligence Reports. Our

structured, in-depth analyses distills

must understand information into one

consolidated view, streamlining your

diligence process for informed listings,

investments, and integrations.

Learn more at messari.io/diligence-reports

Schedule A Demo

The big money managers agree, too. Binance had some excellent research recently that showed “bitcoin” sentiment crushing “crypto” sentiment among asset allocators over the

10

summer (though perhaps that sentiment is shifting with ETHBTC’s underperformance). With momentum like this, my bet is that bitcoin dominance retakes 60% in an ETF-driven rally (leading the way up) OR severe macro stress (consolidating the way down).

Even if I’m wrong, and we’ve already seen this cycle’s high-water mark for bitcoin dominance, I find it extremely unlikely that bitcoin prices decline nominally AND relatively. The highest EV play in the early stages of a crypto bull run has always been to bet on the king, and this cycle has been (and will continue to be) no different.

I will reiterate what I said last year: I find Ethereum’s “ultrasound money” thesis to be wholly unconvincing. If such a meme had legs, then the liquidity scoreboard wouldn’t look like this, even after an ETH futures ETF was approved:

We probably won’t see another 100x for bitcoin, but the asset could easily outperform other established asset classes once again in 2024. Eventual parity with gold would yield a price per BTC of over $ 600,000. And remember: gold has many of the same macro tailwinds, so that price isn’t necessarily a ceiling.

If monetary crises get bad enough, no price will be too high: 1 BTC will be worth 1 BTC.

[Required Reading: BTC Q3 Quarterly Report]

11

1.2 ETH & The World Computer(s)

Ethereum’s successful “Merge” (Sep. 2022) and its completion of the “Shapella” upgrade (Apr. 2023) were some of the most technically impressive software upgrades of all time. The Merge also ushered in a new era for ETH as a net deflationary digital asset.

I love Ethereum and everything it has spawned. Messari itself doesn’t exist without the cryptoasset ecosystem that Lord Vitalik built. But the long-term investment case for ETH looks more like Visa or JPMorgan than Google or Microsoft, or a commodity like gold or oil.

ETH is straddled. BTC outperforms ETH as digital money thanks to institutional allocators’ interest in the digital gold “pure play” while broad availability of Ethereum substitutes (L0s, L1s, L2s) will likely lead to those substitutes’ outperformance as they sop up
onchain volumes relative to the Ethereum main chain. I don’t see a scenario where ETH outperforms bitcoin AND its up-and-coming, higher-beta peers.

That said, I would not bet against ETH, nominally speaking.

It’s survived multiple technical challenges and market cycles. It’s (arguably) got better supply dynamics than bitcoin does today. I agree that any ETH bridged to other rollups is likely gone forever and “not coming back to hit the bid.”

If anything, being bearish on ETH relative to the field is not an indictment of Ethereum, but rather a clear-eyed realization that ETH as an asset has been incredibly dominant so far, and has set the bar impossibly high to maintain over a 60% market share in its network token peer group. When I think of Ethereum vs. Solana, I think of Visa vs. Mastercard, not Google vs. Bing in terms of relative strength.

Even if I give ETH maxis a fair shake, I must again point to the scoreboard and note that ETH is less of a bargain than BTC.

(Source: Coin Metrics)

12

I’ll be talking more about the tech later on, but I know you aren’t sitting around the fireplace salivating for my take on proto-danksharding. You want the 70 IQ bull/bear recommendation, and betting on ETH is right in the middle of the bell curve. I’ll argue about this with the Bankless guys sometime soon, I’m sure.

(Note: While I hate hedging, this strong opinion has weakened since I first drafted this section. With BTC now up ~150% and SOL up more than 6x year-to-date, we’re overdue for some mean reversion for ETH, which has been a stablecoin for too many months and lagged considerably.)

[Required Reading: ETH Q3 Quarterly Report] 1.3 The (Liquid) Field

BTC, ETH, and U.S. dollar-backed stablecoins represent 75% of the $ 1.6 trillion in total crypto market cap today. That won’t always be the case.

I founded a company on the thesis that the other 25% of the crypto pie would grow 100x over the next decade and that investors would need sophisticated diligence tools to parse thousands of crypto assets, not just two. A 100x for “the field” from today’s market size would put the liquid crypto capital markets just north of the private capital markets ($ 20-25 trillion) and about 30% and 35% of the size of the global debt and equity capital markets, respectively.

What’s more: if you believe (as I do) that blockchains are accounting innovations at their cores, then all assets will eventually be “crypto” assets that trade on public blockchains versus legacy clearing and settlement systems, whether they are “utility tokens” or “security tokens.” Over time, the Venn diagram of crypto versus TradFi looks more like a circle.

There are pros to just sticking with a market cap weighted index of BTC and ETH, though.

For one thing, it’s been a winning hand historically, and you (definitionally) captured
75% of the market’s upside over the past ten years if you simply went to the 2014
North American Bitcoin conference in Miami and bought whatever Vitalik was selling
(the Ethereum ICO and bitcoin). Those blue-chip assets are now crypto’s best “hard” investments, in that you don’t run the risk of getting crushed by supply dilution over the course of time either. Many other top projects have gargantuan treasuries that get sold off by insiders over time. Their “market caps” could go up while their token prices stay flat or decline.

(This is one reason we launched our token unlocks dashboard this quarter. We want people to understand where sell-side pressure could come from, as I find it unlikely that we’ll return to the “bullish unlocks” madness of 2021.)

13

(Source: Messari)

Obviously not investment advice, but as a student of history, I know that:

A. BTC and ETH may be today’s market leaders, but they are not permanently unassailable; and

B. Of the 26,000 stocks traded since 1926, just 86 stocks were responsible for half of the appreciation in the U.S. markets.

Very few stock market leaders from the ‘20s are still around today, and crypto will be no different. So what is a passive index enjoyoooor like me supposed to do?

Not much to be honest. The current alternatives for crypto index products are not very
14

compelling, and I doubt that will change in 2024.

A low-fee, auto-rebalancing index that factored in token supply overhang and market liquidity would be a killer investment vehicle. But to get index exposure today, your options are to either pay too much on the AUM (200-250 bps like Grayscale’s products), transaction fees (actively managed crypto funds), or the methodology (complex to get right, with significant regulatory and technical risk to execute onchain).

The only “cheap” path for investing in crypto-assets #3 through #1,000 is to bet on yourself and your own investing prowess. I’ll give you one example.

A back-of-napkin index play to run at home might be to monitor this liquidity list from Kaiko and rebalance it quarterly. If you buy the assets in green (liquidity rank > market cap rank), and sell the assets in red (market cap rank > liquidity rank), you would mostly mirror my personal long/short list so far this year out of the large-cap assets (again not investment advice, people).

(Source: Kaiko)

It would be nice to build an index fund around this methodology without running the
risk of being sent to Gary’s gulags in the U.S. But for now, you can run these strategies manually by using tools like our asset screener to help select the critical filters and data transformations that help with portfolio balancing. (We’ll see if the “Kaiko trade” still looks attractive next quarter, and maybe we’ll do a follow-up report with Kaiko backtesting this strategy for our Pro subscribers.)

[Required Reading: Messari Unlocks Report, Crypto Portfolio Management]

15

1.4 The Resurgence of Private Crypto Markets?

I pissed off a bunch of crypto fund managers a few years ago when I wrote that their business models amounted to “losing alpha” on behalf of customers. I was right.

(I’m not gloating, so much as reassuring myself that I made the right decision in passing up the most lucrative business model in the world when I could have been on that 2-and- 20 grind since 2017 without having to clear a BTC/ETH hurdle rate. GLORIOUS.)

Many crypto investors are not only underperforming the market, but dead. Some liquid investors got caught up with bad levered positions (3AC), bad counterparties (Ikigai), or both (we cover DCG in Chapter 6). You already know all that. I don’t need to rehash last year’s crises.

What’s on deck for 2024? The liquid crypto markets remain a jungle of technical and counterparty risks, high transaction fees, and ruthless competition. Next to that jungle is a veritable valley of death that is the private crypto venture markets.

VC markets in general have been decimated by the Fed’s whiplash-inducing monetary policy of the past several years. Crypto infrastructure has been hit even harder by fraud and widespread regulatory crackdowns. New users and customers are sidelined from touching “long-tail” crypto until they get some much-needed legal clarity, while old users and customers cut spending and ride out the winter as best they can. That’s led to vicious demand destruction: service revenues go down, burn rates go up, budgets go down even more, and so on.

To add insult to injury, AI is the hot new Chad of tech. We’re the Virgins. Again. (As I explain in Chapter 1.8, I think that’s a silly meme and false choice. AI and crypto pair well together.)

Despite all this, I’m still pretty bullish for new crypto venture investors. The funds with a 2023 vintage will likely outperform the S&P in the medium- to long-term, and many may even have a fighting shot at outperforming the BTC/ETH benchmarks by virtue of this year’s anomalously low entry prices. The liquid markets have roared back to life, and there are some signs of a venture turnaround as well.

Private VC funding (seed through Series D+) hit its highest levels since May with more than $ 500 million of announced deals (track them all in our fundraising screener):

16

Here’s a partial list of crypto funds I’m keeping an eye on this year:

Multicoin: I had a three-part series written about their legendary 2021 performance. (It’s actually pretty good. One, Two, Three.) Though it’s unclear how their LPs managed the absolutely vicious 96% SOL drawdown in 2022. Even if Multicoin’s AUM rallies hard again this year, I’m not sure there have been many bigger rollercoasters for fund LPs.

1confirmation: Nick Tomaino is one of the most intellectually honest crypto investors I’ve met. He wrote candidly about the benchmarking issues I addressed above, the need for better accountability in crypto investing, and was one of the few contrarians to call out the Sams. First SBF, then Altman. He’s walked the walk too, even sharing his fund’s DPI, a rarity in venture capital markets.

There were a few “bullish at the bottom” investors whose tweets have aged well in hindsight. Framework (Vance), and Placeholder (Burniske) come to mind as two who posted specific calls AND are not simply up-only permabulls. (Even those bullish at the picotop will likely prove prescient long-term, though.)

a16z and Paradigm might be offsides in terms of the marks on their private portfolios, depending on how much capital they deployed into the top of the market in 2021, but I don’t want to bet against Chris Dixon, Matt Huang, and their teams. I’m actually somewhat relieved they (may) be flat or temporarily underwater on certain vintages. That makes them excellent fighters for the industry in D.C., and their policy teams are A+.

Syncracy Capital has beaten the crypto market since inception by quite a bit. Three former Messari analysts are on the team there, including co-founder Ryan Watkins. In full disclosure, I’m an LP and will shamelessly shill anyone who helped build Messari and continues to make me money after they leave. They are one of

17

the few new liquid funds I know of that is above the BTC/ETH benchmarks since inception.

For day-to-day monitoring, I use Messari’s asset and fundraising screeners. Nearly every day, I join the thousands of crypto investors looking to keep tabs on what the “smart money” is up to. We’ve got alerts, custom views, and AI-powered reports that help spot signs of life as we emerge from hibernation. Our full-year state of crypto venture report will be out in January, but you can use the tools now to start keeping track. (We released them this quarter, ICYMI).

New York’s premiere crypto

conference is returning!

Our immersive, annual conference will be held

from September 30 - October 2, 2024

Register today at

our lowest rate of

Since its inception, Bitcoin has gone through a super cycle 1 wave from 0 to 69,000, and a super cycle 2 wave since 69,000.

Within the super cycle 2 wave, 69,000 to 15,476 is an a wave or a w wave, 15,476 onwards is a b wave or an x wave, followed by a c wave or a y wave decline.

After the super cycle 2 wave ends, there will be a super cycle 3 wave surge.

Today, pay attention to the green dotted line at 43,508, above which it can still rise, below which it may stop rising.

This is only a discussion of the wave theory, not investment advice.