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The Memecoin Frenzy in the Eyes of VC: Changes in Industry Structure and New Investment Opportunities
How does VC view the current Memecoin craze?
Recently, a colleague asked me at a dinner whether I felt anxious about the current market. He explained that many people believe that with the rise of Meme coins, the tokens invested by VC might lose their value. Indeed, at the recent DeVCon conference, Meme coins became a hot topic of discussion, and some even joked that focusing on primary market investments would make one miss the opportunity to speculate on Meme coins.
In fact, we do not feel particularly anxious. As an independently operated long-term investment fund, we are able to view this industry from a longer-term perspective. We do not need to explain our investment strategy to investors who do not understand this industry in order to raise funds, but instead follow our own interests to explore the value of the industry and the flow of talent.
In the environment of cryptocurrency where the boundaries between the primary and secondary markets are blurred and the secondary market is filled with bubbles, the essence of venture capital is further highlighted: to bet on projects with high return potential. Following any ideology or participating in any political struggle is meaningless; the key is to learn from the market.
Understanding Structural Changes in the Industry
At the beginning of this year, we conducted an in-depth analysis of the changes in the industry structure and concluded that the polarization trend in the industry is becoming increasingly evident. On one hand, with the expansion of the industry scale, traditional financial institutions are incorporating a large amount of crypto assets into the Wall Street system through compliant methods such as ETFs, and this part of the liquidity is being transferred, making it difficult to convert back into on-site funds. On the other hand, the strong expansion of populist capitalism has led to a further compression of the attention economy, making the entire financialization process more straightforward and crude. The approach that is closest to the essence of cryptocurrency has instead become the direct speculation of Meme coins, which is also an area difficult for traditional finance to reach.
In this macroeconomic and social context, liquidity in the market is continuously decreasing. The barbell strategy we discussed in the past originally hoped for a merger at both ends, but the result is precisely the opposite, with polarization becoming increasingly severe. As a result, the intermediate links in the industry are becoming increasingly difficult to survive.
Who do these intermediaries include? They include all institutions that rely on early dividends, such as offshore exchanges, trading companies, crypto financial service providers, and venture capital firms; no one is exempt.
This structural change will make offshore exchanges anxious, as the futures open interest on the Chicago Mercantile Exchange has already surpassed that of a well-known trading platform. If mainstream cryptocurrencies are increasingly traded on compliant trading venues due to the entry of traditional finance, and meme coins can create projects with a market value exceeding $1 billion on-chain, is the survival space of certain trading platforms being squeezed?
Apart from exchanges, how should market makers who rely on cryptocurrencies break through the difficulties when high-frequency quantitative teams from Wall Street enter the market with their own infrastructure and funds? As they decline, the presence of third-party financial institutions that provide services to them is also becoming weaker, not to mention the venture capital firms that cannot trade actively.
This polarization and liquidity squeeze is the fundamental change in our industry. Whoever finds the breakthrough will be able to prevail in the future.
The Issues with VC Token
I fully understand the negative sentiment in the market towards VC investment tokens. The project was listed with an extremely high fully diluted valuation, and after going live, it continuously unlocked and dumped profits. Since it’s all a gamble, why not play in a relatively fairer casino with Meme coins' PVP? If you lose, you can only blame your slow reaction time, rather than picking up the tab for VC coins valued at tens of billions.
What is the essence of this issue? It is that there is a problem with the liquidity supply chain in our industry.
Why can a certain well-known public chain continuously achieve new highs? Because they have real product implementation, and the products allow token holders to continuously earn money, thus the user community has transformed into a trading community, creating a positive feedback loop, which has become key in driving buying pressure.
The decentralized finance of the last cycle was actually like this. When products were launched, there were micro-innovations and fun aspects, decentralized exchanges created liquidity and continuously conducted value discovery. When the product community and the trading community reached a consensus, the listing on centralized exchanges further released liquidity, achieving a win-win-win situation for the project party, the community, and the exchanges.
A healthy ecosystem should be: everyone participating on the chain is willing to buy coins and even more willing to spread the word, thus forming a virtuous cycle in the liquidity supply chain.
And now? The problem with the tokens invested by VC is the division of these two communities. The mainnet just went live and the token generation event occurred, but the product has not been implemented at all. Community members are only here to claim airdrops, which brings about selling pressure. In the last cycle, we had some big players helping us leverage buy small-cap coins, but in this cycle, leverage has basically been cleaned up. At the same time, during the last bull market, many venture capitalists raised a large amount of funds and faced pressure to deploy, and in order to show attractive returns on paper to limited partners, they had to continuously push up the valuations of projects.
This has led to the current situation of VC investing in tokens, with high valuations at listing but no buying interest; what else can be done besides declining?
This naturally helps to understand the logic behind the creation of Meme coins. Since the projects that VC invests in cannot be realized, they are just speculation on air. Why not speculate on one with a lower and fairer valuation?
Meme coins have become an opportunity that cannot be ignored.
In the context of the polarization analyzed at the beginning of the article, Meme coins have become one of the most significant tracks in our industry.
I always thought that Meme coins were purely speculative, but it wasn't until recently that I realized I was wrong. They are carriers of cultural trends, and their value lies not in specific functions and technologies, but in their unique ability to embody collective consciousness, emotions, and identity, which is very similar to the logic of religion. Beneath the surface absurdity lies a profound social psychological need and value system; it commodifies and capitalizes on ideologies and emotions.
In other words, the core of its product is the ideologies and narratives it carries, and the scale of these ideologies and narratives determines the potential ceiling of a Meme coin. Cutting-edge technology, idol worship, IP sentiment, subcultural trends—we analyze the potential behind it just like venture capitalists analyze the prospects and positioning of a product in its track.
For Meme coins, the token is its product, and what it needs to do around the product is to promote the interaction between price and community. In a sense, price is the iterative development of the product. By building a solid community foundation amidst price fluctuations, it transforms short-term speculators into long-term holders, encouraging them to spread the word and ultimately fulfill the self-fulfilling prophecy.
At this point, Meme tokens actually have a significant advantage that VC investment tokens do not possess. Since the token itself is the product, the product community and the speculative trading community merge into one, creating a synergy between the two.
Meme coins have a very low investment signal-to-noise ratio due to low issuance capital, and it is impossible to analyze them from a tangible product form. It requires a deep understanding and taste of trends and market sentiments. I am still working hard to learn if there is a structured way to study this sector, so that we can select targets in an environment with extremely low signal-to-noise ratios. If possible, what kind of targets are suitable for us to intervene in and at what timing should we intervene.
But I firmly believe that Meme coins will become a cross-cycle opportunity, as it is essentially a cultural phenomenon of the digital age, with thoughts and emotions iterating endlessly.
More importantly, I have always believed that giving marginalized groups the opportunity to become wealthy is what makes our industry vibrant. Before this wave of Meme coins, people said that the demands on entrepreneurs in this cycle were at least ten times greater than before, and it seemed that all the investment had been consumed by VCs, greatly suppressing the feelings of the community and retail investors. However, through Meme coins, young people can have the opportunity to achieve hundredfold returns through early positioning. Anti-authoritarianism is one of the core spirits of cryptocurrency, and I believe it will always exist.
How much longer can Meme coins last in this cycle?
When everyone is enthusiastic and believes they can contribute everything to the community and can earn money forever, don't forget that profit-taking will inevitably occur; this is an unchanging truth in the financial industry. Think back to the NFT community back then: everyone took pride in using certain avatars, helping them connect with brands, holding events and collaborations everywhere, and NFT parties were all over the globe, and then what?
When various inflated confidence and unrealistic expectations arise, when it seems that holding mainstream coins is not as good as holding Meme coins, and when various hacking attacks and exit scams occur, we should start to be vigilant. Once our industry does not have greater liquidity opportunities and Bitcoin starts to encounter resistance, all enhanced high-risk investments will fall at a faster pace.
By the way, is the logic of decentralized science the same as certain community projects from the last cycle and saving a certain well-known person? In the name of "justice," do we have the ability to discern between belief and speculation?
In fact, the huge turnaround of Meme coins occurred after a small project was launched on a certain trading platform. At that time, the tokens invested by VC were in trouble, and the breakthrough came from discovering the launch of this small project. Embracing the community Meme allowed the project party, the community, and the exchange users to make money, leading to subsequent developments.
But now, is the blind liquidity of on-chain Meme coins similar to the TVL competition after the high total locked value projects on a certain trading platform, or is it similar to the competition after the launch of a certain ecosystem token on a certain trading platform?
Exchanges will change their listing strategies based on market expectations, thereby guiding the market direction. However, our industry will inevitably fall into a homogenized competitive chaos due to the low issuance cost of assets and liquidity premiums, which will make everyone feel numb and weary of this chaos.
This is the power of cycles.
In the short term, do not act based on what you think the exchange supports; projects that genuinely contribute to industry development will definitely stand out.
In a long-term cycle, a bear market will inevitably eliminate those stagnant surplus projects from the market, allowing the market to return to a proper track.
The market always swings between long-termism and short-termism; it is a spectrum, with major players and Meme coins at either end, fluctuating with market sentiment.
No need to worry, just find your own rhythm.
Investment is just such a game; we make judgments based on our understanding and place our bets. If we're right, we make money; if we're wrong, we review. Always maintain curiosity and always maintain respect.