Institutional Capital Inflow, Tokenization of Stocks, and Evolution of Liquidity: Insights from VanEck Investment Managers on the Future of the Crypto Market

As the crypto market experiences multiple rounds of bull and bear cycles, VanEck portfolio manager Pranav Kanade undoubtedly provides an excellent perspective on the flow of institutional funds. In a recent in-depth conversation, he revealed the strategic shifts of institutional investors, structural opportunities in the liquidity token market, and forward-looking thoughts on the upcoming wave of tokenized stocks, especially how institutions are re-evaluating their capital allocation in the crypto space after the market crash in 2022.

The true way for institutional funds to enter the crypto market.

Institutional funds are gradually entering the crypto market, primarily manifested in two forms: directly purchasing related assets and establishing on-chain products through asset tokenization. These two types of institutional groups are different; the former consists of asset buyers, while the latter focuses on product development.

Global capital flows are primarily controlled by family offices, high-net-worth individuals, endowment funds, foundations, pension funds, and sovereign wealth funds. These capital holders typically make investment decisions through passive strategies (such as ETFs) or active strategies (such as professional managers).

Institutions are getting involved in the crypto space in various ways, but have not truly "arrived" yet. Family offices may have entered early, focusing on the potential for liquidity returns. Last year, many institutions began purchasing Bitcoin ETFs. Another way is through venture capital, seeking large blue-chip managers for allocation. However, many institutions still have not ventured into liquidity assets or their proxy areas, which is precisely where the current advantage lies.

Opportunities and Challenges in the Liquidity Token Market

Since 2022, approximately $60 billion in capital has flowed into seed and seed round stage venture capital projects. Many founders prefer to exit in the form of tokens rather than through the traditional IPO path. It usually takes 6 to 8 years from seed round to IPO, while token issuance takes only about 18 months. For certain business models, exiting in the form of tokens is more attractive.

However, this trend also exposes the liquidity issues in the market. Many projects that exited through tokens have generally seen a decline in token prices over the past 12 to 24 months, due to a lack of sufficient market demand to support the value of these tokens. In traditional financial markets, companies supported by venture capital have a deep public equity market to back their IPOs, but a similar ecosystem has yet to be formed in the liquidity token market. This has led some capital pools to realize their over-allocation issues in the venture capital space.

Funding is shifting from early investments to liquidity assets.

The imbalance between supply and demand in the crypto market is significant, especially in terms of liquidity. Due to insufficient capital supply, while there is huge demand for tokens and projects in the market, investors need to sift through numerous tokens to identify potential projects. 99.9% of the tokens on CoinMarketCap are garbage, valued far below market value. Only a very small number of projects with clear product-market fit, capable of generating revenue and providing returns to token holders, are worth paying attention to.

If the market value of all cryptocurrencies, excluding Bitcoin, Ethereum, and stablecoins, achieves several times growth in the future (currently about $750 billion), certain projects will directly benefit, and their tokens may attract the majority of value inflow. Such investments are considered to have higher return potential on a risk-adjusted basis while retaining liquidity advantages. Investors can adjust their strategies at any time, enjoying returns similar to venture capital while maintaining exit flexibility.

Importance of Revenue Models and Cash Flow

The crypto industry faces a binary choice: either become an appendage of the internet or focus on creating actual value (such as revenue). Most large capital pools in the world either want to allocate to "value storage" assets or focus on "capital return-type" assets.

The crypto industry has long avoided the question of how to prove the true value of its assets. This avoidance is partly due to regulatory pressure, with many projects attempting to avoid being classified as securities and instead adopting narratives such as "community currency" or "store of value." However, if the crypto industry wishes to attract mainstream capital, it must focus on product-market fit and clearly articulate why these assets have value.

Tokenization of Stocks: The Next Trillion-Dollar Market

The future evolution of the market may have two main directions. One is to promote the growth of market capitalization through the tokenization of equity, for example, traditional enterprises choosing to exit the market in the form of tokens rather than equity. Tokenized equity not only possesses traditional equity attributes but can also achieve more uses through programmable features, such as rewarding users or creators.

Another scenario is the rise in prices of existing assets, similar to the previous "altcoin season". If there are again stimulus policies like those during the pandemic, investors may allocate funds into assets that have not yet surged significantly, driving up the prices of altcoins.

Stablecoin Legislation and New Opportunities

The legislation for stablecoins is about to be passed, which is expected to drive a series of companies to adopt stablecoins to optimize their business cost structures. Some investors have begun to pay attention to companies in the public market that may benefit from stablecoins, ranging from internet companies to e-commerce platforms, the gig economy, and sports betting. They are analyzing the proportion of fees paid to the banking system relative to the cost base and assessing whether utilizing stablecoins can effectively reduce costs.

If some companies can increase their gross profit margin from 40% to 60%-70% by using stablecoins, their profitability and market valuation multiples may significantly increase. This area has not yet received widespread attention from crypto investors and public equity investors, making it an asymmetric investment opportunity.

L1 Valuation: Now and Future

Most L1 Tokens do not enjoy a "currency premium" similar to Bitcoin. The market will ultimately view these tokens as assets valued based on cash flow multiples. From this perspective, some L1 tokens are undervalued, some are overvalued, and some are reasonably valued.

The key is to focus on the development over the next 2 to 5 years. Each blockchain has its own consumers for block space, such as ETH's L2 and consumer-facing applications on Solana. It is essential to consider the developers currently building applications on these chains; if their applications achieve great success in the future, how much demand will that create for the chain's block space? At the same time, these chains are continuously expanding their block space supply. Assuming both supply and demand expand synchronously, how will the revenue scale of these chains change in the future? Based on future revenue levels, is the current valuation of assets reasonable? These questions will become important bases for assessing the long-term value of L1 assets.

The Future of Infrastructure and Applications

Currently, there are no cases of killer applications migrating from their respective chains and independently building a complete tech stack. If an application chooses to independently build its tech stack, it may lead to two outcomes: one is user loss, and the other is enhanced user experience and achieving higher profits. However, the answer to this issue is still unclear.

L1 infrastructure may exhibit a pattern similar to that of the cloud computing sector, where applications might switch between a few giants rather than building their own chains. At the current stage, the value of holding liquidity assets lies in the ability to flexibly adjust investment strategies. Once a killer application can completely replace the underlying infrastructure and operate independently, the strategy of holding L1 assets may need to be reassessed.

Will cryptocurrency go mainstream through existing Web2 giants deciding to build on or utilize these technologies, or will it go mainstream through VC-backed startups creating killer applications? The answer to this question will influence the development direction of the entire industry.