Let's be blunt. The crypto environment, though, which is all too often depicted as a dazzling, high-tech world of easy wealth, is not. And crypto venture capital? It's even riskier. After all, you wouldn’t dump your life savings on a roulette table, right? So why not treat crypto VC with any less skepticism? In 2025, it’s a different world, and naivete will run you straight into the ground. Here are seven red flags telling you in all caps, “Get the hell outta here!”
Unsustainable Business Models Still Exist
Remember the ICO boom of 2017? Promises, vaporware, and then… nothing. And of course, a shiny-looking website doesn’t even begin to add up to a sustainable business. Many crypto projects are still built on hype, not on solid foundations. As a Ponzi scheme, they depend on bringing in a constant stream of new investors. This strategy artificially inflates the price of their tokens, a Ponzi scheme in disguise by way of the blockchain.
Before you even think about investing in a VC fund that invests in these projects, ask yourself: Does this project solve a real-world problem? First, is there real demand for its product or service. Alternatively, are they merely another “decentralized” iteration of something that works just fine already? If it is not a clear, enthusiastic and experienced “yes,” then run.
Unexpected Connection: Think of WeWork. A dynamic founder, lots of VC cash, and a theory that was incredibly compelling on an investor deck. But underneath, the business model was flawed. Crypto is full of WeWorks-in-waiting.
Regulatory Risks Are Amplifying Now
The Wild West days of crypto are over. Regulators are circling, and they're hungry. What appeared to be an ingenious loophole yesterday might turn into a potential multi-million dollar lawsuit by tomorrow. Funds that pay little or no attention to regulatory headwinds are just inviting trouble.
Aim for VC firms whose compliance effort is forward-looking. Are they engaging with regulators? Do they have in-house legal expertise? Or are they merely looking to avoid detection? For a private fund, its approach to regulation is a clear mirror on its longer-term sustainability.
Unexpected Connection: Remember the dot-com bubble? Perhaps that’s why so many companies were contrived on this idea that the internet was a libertarian free for all. By the time regulations caught up, many of them had vanished. Crypto is facing a similar reckoning.
Transparency? Still Largely A Myth
After all, crypto is all about transparency, amirite? Most VC funds are black boxes. Who are their investors? What are their holdings? How are they managing risk? If a fund isn't willing to answer these questions, that's a massive red flag.
Demand radical transparency. Demand ongoing reporting, third-party audits, and public access to all pertinent information. Remember, you're entrusting them with your money. You have a right to know what they’re doing with that money.
Think about the Madoff scandal. And it’s not surprising—it thrived on secrecy and a complete lack of oversight. Don’t allow the mistakes of the past to be repeated within the crypto movement.
Overvaluation Is Still Rampant
New won’t cut it There’s a myth going around that if something is new and shiny it’s automatically worth billions of dollars. The crypto market is especially susceptible to this irrational exuberance, and valuations can rapidly get out of whack. VC funds that follow kinds of hype, instead of valuing fundamental value, are going to be in trouble.
Avoid funds that are already patting themselves on the back for their “unicorn” bets. Dig deeper. Are those valuations justified? Or are they rooted in wishful thinking and pumped-up stats?
Unexpected Connection: Consider the housing bubble of 2008. Speculation and easy credit fueled demand to astronomical heights, pushing prices up to unsustainable levels. When that bubble finally burst, many of these people lost everything. Don't let crypto be your 2008.
Inexperienced Teams Are Everywhere
Everyone’s a crypto expert these days, just ask them. Creating a winning VC fund takes more than an understanding of the difference between Bitcoin and Ethereum. It draws on expertise in finance, investing, and risk management.
Don’t be afraid to seek out teams with deep experience. Have they successfully navigated previous market cycles? Have they successfully built and scaled companies themselves. Alternatively, are they simply a few lucky crypto bros who all hit it big in 2021?
Imagine a heart surgeon who learned everything from YouTube videos. Would you let them operate on you? Probably not. The same logic applies to crypto VC.
Reliance on Hype, Not Substance
Crypto thrives on hype. But hype is fleeting. But VC funds interested only in establishing their own brand are a danger to your pocketbook. They care so much more about their reputation that they wouldn’t dream of actually delivering value.
Pay attention to their marketing. Are they truly interested in substance—or simply seeking to create a splash? Are they making outlandish promises? So now they’re trying to lure new investors with celebrity endorsements. If it walks like a marketing campaign, it quacks like a marketing campaign, then it’s a marketing campaign.
Unexpected Connection: Think about the Fyre Festival. It was all hype and no substance. The result was a disaster. Don’t let your investment become crypto’s Fyre Festival.
Lack of Skin in the Game
A successful VC fund would also need to be quite deeply motivated for its own success. If the partners are not personally investing their own money, why should you be expected to.
Ask about the fund's structure. How much capital have the partners committed? What are their incentives? A fund where the partners have significant skin in the game is more likely to be aligned with your interests.
Imagine a restaurant owner who doesn't eat their own food. Are we willing to have them cook our next meal to perfection? Probably not. The same principle applies to crypto VC.
Crypto VC world is full of opportunity, but it’s filled with opportunity. Don't be blinded by the hype. Conduct your own due diligence, ask the hard questions and be willing to be the first to walk away. Your financial future depends on it.
