Crypto’s ‘artificial boom’ is VC-driven, claims Kavita Gupta

Kavita Gupta, founder of a blockchain venture fund, expressed concerns about the sustainability of the current crypto market in a recent column, suggesting that it is driven by an “artificial boom” fueled by venture capital spending rather than genuine user interest.

Writing about his experience at the recent Token2049 conference in Singapore, Gupta observed a pattern of overspending on crypto projects, with lavish parties, over-the-top DJs and extravagant marketing events.

In the Fortune article, Gupta wrote that unlike the last bull cycle in 2021, when retail investors and real capital inflows drove interest, the current cycle is primarily supported by VC money.

“The money is coming from venture capitalists who are pumping funds into new layer 1 and layer 2 blockchains that have yet to launch a testnet but are still rising at multi-billion dollar valuations,” Gupta wrote.

According to Gupta, the money is spent on marketing and events rather than building a sustainable product or community.

“And frankly, a lot of this funding goes to so-called ‘marketing expenses,’ which are actually just giant parties,” Gupta wrote.

For those unfamiliar with crypto, layer-1 and layer-2 refer to the different ways blockchain projects conduct transactions. Layer 1 blockchains are underlying networks like Bitcoin (BTC) or Ethereum (ETH); layer 2 solutions build on top of these to increase speed and reduce costs.

Gupta’s concern is that venture capitalists invest heavily in projects that have not yet proven their value or utility.

Token valuations

Gupta also warned about the impact of these practices on token valuations. Most crypto projects raise funds by issuing tokens that represent a stake in their ecosystem.

My first surgery @FortuneMagazine
As a crypto VC of 8 years, this trip to SG made me introspect on who pays the bills for wild parties and who backs val for billions of dollars for pre-testnet product. Exchanges and multi-billion dollar token launches with no liquidity and no major fdv hit…

— Kavita Gupta (@KavitaGupta19) October 1, 2024

But when projects prioritize hype and parties over real use cases, this leads to unsustainably inflated valuations. This could result in sharp declines in token prices, as seen in recent high-profile projects such as Wormhole and Celestia (TIA).

Gupta is an investor and entrepreneur in the blockchain and crypto space. He served as co-founder and managing partner of ConsenSys Ventures, a $50 million blockchain venture fund.