Crypto Founders Beware! Arthur Hayes Shares Advice On Initial Fundings And Primary Listings
"If someone makes money with your project, it should be you and your users."
In his latest post, Arthur Hayes warned project founders that focusing on a primary listing on a centralized exchange is a losing strategy.
In an October 8th post on his Substack account, the co-founder of BitMEX used data collected by analysts of his family-run investment fund, Maelstrom, to argue that centralized exchanges and venture capitalist firms prey on crypto projects to satisfy their own profit motives.
He pleaded for project founders to focus on building a strong use case for their tokens and to downplay token launches. He advocated doing this in decentralized exchanges, where the cost of listing a token is minimal compared with the "egregious listing fees that the major exchanges charge."
A VC-Created Market Issue
During the past year, there has been a wave of new crypto projects that launch with a high fully diluted valuation (FDV) - the total value of a crypto project, assuming all of its tokens are in circulation. According to a Binance report from May 2024, "it has become increasingly common for tokens to launch with a low circulating supply and allocating a significant portion for future release."
Despite having zero reputation and an empty track record, these new projects launch with valuations similar to those of the most prestigious and soundproofing projects in the space.
A report by Token Unlocks estimates that due to this surging market structure, around $155 billion worth of tokens will be unlocked by 2030, creating mass selling pressure.
"High valuations, coupled with constant selling pressure from token unlocks, are structurally negative for token prices."
The major driver of this trend is venture capitalist firms' profit tactics.
"While you might believe that VCs are in the game to generate positive returns, the most successful managers realize they are in the asset accumulation game. If you can charge a management fee, usually 2%, on a large notional, you make money regardless of whether your investments appreciated in value," Hayes explained in his post.
Venture capitalist firms invest in illiquid assets—future token unlocks—and keep their value rising on the spreadsheet by convincing founders to do more private funding rounds, delaying the tokens' launch. "This shows great unrealized returns, which allows the VC to raise the next fund based on stellar past performance," which allows them to raise the management fee.
This influx of private money raises the prices of the tokens, making them inaccessible for retail investors who, at lower valuations, could have purchased the assets and explored their real use cases.
How Do CEXs Contribute To The Problem?
Before these high-valued tokens enter circulation, a significant portion has been locked away for the core teams, the VCs who invested in the project, and the central exchanges where the projects are first listed.
CEX's main charge on projects is listing fees, which Hayes claims will be up to 8% of the token supply in Binance and between $250,000 and $500,000 on other exchanges.
They also require a deposit—redeemed if the project is unlisted—which in the world's largest crypto exchange must be in BNB and can be as much as $5,000,000, while in other CEXs, it is between $250,000 and $500,000, paid in stablecoins.
Finally, most of them require a budget for on-platform retail marketing, such as token airdrops. In medium exchanges, this is around 3%, while on Binance, it can go up to 8%.
Having done the maths, he concluded that the total listing price can be as much as 16% of the total supply. "Projects with too high of an initial price are paying an egregious amount of money in the form of project tokens and stablecoins for the privilege of listing a turd."
As a crypto project advisor, the co-founder of BitMEX says that there are one too many project founders obsessed with getting their tokens listed on a major exchange, which they believe to be the surest way to pump up the price of their tokens. But it isn't:
"This Binance or nothing sentiment is very good for … Binance, which can charge the highest all-in listing fee of any exchange."
Hayes' Advice For Crypto Founders
The influential crypto voice pleaded with project founders to focus on the use case of their tokens.
He suggested crypto founders start low, with a "small seed private round" that truly reflects the project's riskiness but also opens the doors to retail investors who, for much less skin in the game, will remain loyal if they see the project succeeding.
"You want your users on a wealth-generation journey with you," advised Hayes.
Regarding the token listing, the crypto mogul advocated the use of decentralized exchanges, where the whole process can be done at 0% fees.
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