Institutional Capital Flows, Tokenized Stocks, and Liquidity Transformation: Veteran Investment Managers Outlook on the Future of the Crypto Market

After experiencing multiple rounds of bull and bear cycles, Pranav Kanade, the portfolio manager of an investment firm, has undoubtedly become one of the best perspectives to observe the flow of institutional funds. In a recent in-depth interview, he revealed the strategic shifts that institutional investors are undergoing, the structural opportunities in the liquidity token market, and forward-looking thoughts on the upcoming wave of tokenization of stocks, especially regarding how institutions are reassessing their capital allocation in the crypto field after the market adjustment in 2022.

The true entry of institutional funds

Institutional capital is gradually entering the crypto space, mainly in two forms: direct purchase of related assets and the establishment of on-chain products through asset tokenization. Currently, global capital flows are primarily controlled by family offices, high-net-worth individuals, donor funds, foundations, pension funds, and sovereign wealth funds. These capital holders typically make investment decisions through passive strategies (such as ETFs) or active strategies.

Family offices may have entered earlier because they saw the potential for returns in terms of liquidity. Last year, many institutions began purchasing Bitcoin ETFs, which is a straightforward way to gain exposure. Another method is through venture capital, looking for large managers for allocation. However, many institutions have yet to engage in liquidity assets or their proxy areas, which is precisely where the current advantage lies.

Opportunities in the Liquidity Token Market

Since 2022, approximately $60 billion in capital has flowed into early-stage venture capital projects, with many founders opting for exits in the form of tokens rather than the traditional IPO route. The time from seed round to IPO typically takes 6 to 8 years, while token issuance requires only about 18 months. For certain business models, exits in the form of tokens are more attractive.

However, this trend also exposes the liquidity issues in the market. Many projects that exited through tokenization have seen a general 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, venture-backed companies have a deep public equity market to rely on during their IPOs, but a similar ecosystem has yet to form in the liquidity token market.

Early Investment VS Secondary Market: Changes in Fund Flow

In the crypto market, the phenomenon of supply and demand imbalance is significant, especially in terms of liquidity. Due to insufficient capital supply and huge market demand for tokens and projects, investors need to filter out promising projects among numerous tokens. Only a very few projects with clear product-market fit, capable of generating revenue and rewarding token holders, are worth paying attention to.

If the market value of all cryptocurrencies other than mainstream cryptocurrencies achieves multiple growth in the future, certain projects will directly benefit from this trend, and their tokens may attract the majority of value inflows. Such investments are considered to have high return potential on a risk-adjusted basis while retaining liquidity advantages.

income model and cash flow narrative

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

The crypto industry has seemingly avoided the critical question of how to prove the true value of its assets. If the crypto industry wants to attract mainstream capital, it must focus on product-market fit and clearly explain why these assets have value. Only when the answer to this question becomes obvious will there be a large influx of funds, and the scale of the crypto asset category will expand.

Tokenization of Stocks: The Next Trillion-Dollar Valve

The future evolution of the market may take two main directions. One is to drive market capitalization growth through the popularization of tokenization of equity, for example, traditional companies choosing to exit the market in token form rather than equity form. Tokenized equity not only possesses the attributes of traditional equity 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 stimulus policies similar to those during the pandemic reappear, investors may allocate funds into assets that have not yet surged significantly, thereby driving up the prices of altcoins.

Stablecoin Legislation and Business Opportunities

The stablecoin legislation 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 already begun to pay attention to companies in the public market that may benefit from stablecoins, analyzing sectors from internet companies to e-commerce platforms, gig economies, and sports betting, assessing the proportion of fees paid to the banking system relative to their cost bases, and evaluating whether using stablecoins can effectively reduce costs.

L1 Valuation: Now VS Future

Most L1 Tokens will not enjoy a "currency premium" similar to Bitcoin. The market will ultimately view these tokens as assets valued based on cash flow multiples. The key is to focus on the developments over the next 2 to 5 years, assessing the developers currently building applications on these chains, and how much demand their applications will create for the chain's block space if they achieve great success in the future.

The Future of Infrastructure and Applications

Currently, there have been no cases of any killer applications migrating from their native chain and independently building a complete technology stack. L1 infrastructure may form a pattern similar to that in the cloud computing field, where applications may switch between a few giants rather than building their own chains.

Whether cryptocurrency will go mainstream through existing Web2 giants deciding to build on or utilize these technologies, or through VC-backed startups creating killer applications, remains to be seen. In the future, functionalities like WhatsApp integrating stablecoins may become the next breakthrough, but the specific implementation is not yet clear.