Major Web3 Backer a16z Sees ‘Winter,’ ‘Dark Days’ Ahead for Crypto

There are few firms as central to financing crypto as venture capital firm Andreessen Horowitz (a16z), which over the past few years has raised billions of dollars to become a major backer of projects that make up "web3." On Tuesday, a16z released its inaugural State of Crypto report, which attempts to paint a hopeful picture of the industry amid a brutal crash that has wiped out $1 trillion over six months but ends up acknowledging that crypto is in for "dark days.” 

“Markets are seasonal; crypto is no exception. Summers give way to the chill of winter, and winter thaws in the heat of summer,” a16z writes early in its summary of the annual report. “Advances made by builders during dark days eventually re-trigger optimism when the dust settles. With the recent market downturn, we may be entering such a period now.”

This is a familiar sentiment not just at a16z, but across the industry. On a disappointing earnings call and in its letter to shareholders, Coinbase still struck a triumphant tone and insisted it was focused on long-term growth. 

“We tend to be able to acquire great talent during those periods and others pivot, they get distracted, they get discouraged. And so we tend to do our best work in a down period,” Coinbase chief executive Brian Armstrong said during the call. 

In the first few months of the pandemic, a16z co-founder Marc Andreessen Horowtiz penned an essay expounding on the sentiment titled “It’s Time to Build,” warning that the reason why "every Western institution was unprepared" for the coronavirus pandemic traced back to a failure to separate our imperative to build necessary things "from ideology and politics." It was not enough to envision the future, Andreessen opined, but to act decisively by demanding more of our leaders, contributing more ourselves, anything, so long as we built.

And a16z has been building, or at least pouring money into crypto projects. The firm has created three crypto funds, with the last one raising $3.3 billion in June of last year. A16z led a $450 million funding round for Yuga Labs―the company behind the Bored Ape Yacht Club NFT collection and the disastrous Otherside “metaverse” NFT launch―is now valued at $5 billion thanks to a16z. A16z also led financing for Axie Infinity, the digital sharecropping "game" that was hailed as a darling of the play-to-earn ecosystem before the collapse of its in-game economy and a $600 million hack by North Korea that a16z helped raise $150 million to partially bail it out.

Of the 16 out of the 17 companies a16z portfolio companies that have gone public since December 2020, all but Airbnb are trading significantly below their debut value and posting disappointing financial reports. Notably, Coinbase is down about 80 percent since its IPO and the company anticipates further declines in users and revenue across the board.

Still, the report is bullish as ever. A16z looks at the industry and sees consistently higher valuations, and more monthly activity among blockchain Ethereum blockchain blockchain, on social media as people discuss crypto, and among crypto-related startups as more initial funding rounds are announced. They see a potential to break away from centralized models of tech development and consumption (though one might ask how letting one major venture capital firm shape the development and terms of technological development for profit is that different). 

The report even favorably quotes an op-ed from U.S. Rep. Ritchie Torres who said "Big Tech has a higher take rate than the mafia." Torres himself is bullish on crypto, framing his March op-ed as a liberal defense of cryptocurrency and its potential for innovative growth. He failed to mention in that op-ed, however, the April 13 fundraiser that a16z leaders were planning on throwing for him.

A key plank of the report insists there is unprecedented economic wealth to be gained in crypto, claiming $3.9 billion in revenue has been generated for 22,400 NFT collections, making for an average of $174,000 per collection. There's good reason to take this with a grain of salt: The top few NFT collections have staggering valuations compared to the majority, there’s rampant wash trading and fraud in the ecosystem, and many much-hyped NFTs are turning out to be relatively worthless. 

The report also maintains that crypto is in its "early" days when it comes to finding genuinely useful applications, products, and services for people.

“Analogizing to the early commercial internet, that puts us somewhere circa 1995 in terms of development,” a16z writes in its report summary. “The internet reached 1 billion users by 2005 – incidentally, right around the time web2 started taking shape amid the founding of future giants such as Facebook and YouTube.”

This has been a rhetorical point thrown around numerous times and it has been dismissed numerous times. On her personal blog, web3 critic Molly White noted that crypto exchanges have been around since 2010, stablecoins and NFTs since 2014, Ethereum smart contracts since 2015, DAOs since 2016, decentralized finance projects since 2017, and in 2018 financiers like Alexis Ohanian were saying it was still "early days."

“How many people must be scammed for all they’re worth while technologists talk about just beginning to think about building safeguards into their platforms?” White wrote. “How long must the laymen, who are so eagerly hustled into blockchain-based projects that promise to make them millionaires, be scolded as though it is their fault when they are scammed as if they should be capable of auditing smart contracts themselves?”