When altcoins lose consensus, excess returns may be hidden in the overlooked "ruins of innovation"

Written by: Squid

Edited by: AididiaoJP, Foresight News

Part One: What is the current market sentiment?

“What’s the most exciting thing about cryptocurrencies for you?”

“What sectors are you investing in?”

When attending conferences, I always ask these questions to venture capitalists and hedge fund peers. They usually have the most macro insights into industry trends. But at the Breakpoint conference last December, the answers received were not very encouraging.

Most responses focused on the industry consensus tracks:

For example, “Stablecoins,” “Perpetual Contracts,” “Prediction Markets,” “Real-World Assets (RWA),” “Digital Banking.”

Some answers revealed deeper concerns:

Like “Nothing to be excited about,” “Using blockchain infrastructure for non-crypto businesses,” “Taking a break and observing for now.”

Overall, it seems that bets are more on industry “maturity” rather than “innovation.” Behind these conversations, there is a pervasive sense of nihilism.

Although this sentiment is rarely spoken aloud, most people can feel it. It stems from endless scams, listings of projects with low circulation and high valuations, exchange coin hype, and KOL marketing games. This mood reflects the current state of the industry but does not predict the future; in fact, it suggests that the future may no longer be a continuation of today.

Betting on mature tracks or fields with clear product-market fit (PMF) is essentially a subconscious “risk-avoidance behavior,” rooted in this nihilism. Participants want to avoid the industry’s worst aspects and, in an environment where tokens generally underperform, are reluctant to take risks on innovation.

I believe that by 2026, these directions will not be good liquidity trading options:

The problem is that market efficiency remains low, and this inefficiency continues to support the prices of many altcoins. Industry maturity means prices will revert to fundamental value—in reality, this will lead most tokens to decline in the medium to short term. Unless you are shorting, it’s hard to find investment opportunities based on fundamentals.

Engaging in trend continuation trades in fields with existing PMF is reasonable in direction but difficult to execute in a liquidity market because of the persistent “adverse selection” problem. Most of the time, if you buy tokens in consensus tracks, you are either buying low-quality follow-on projects or entering at valuations that are ridiculously high.

For example: You say you are optimistic about prediction markets in 2025? Which token did you actually buy?

Part Two: Where does the value of cryptocurrencies really lie?

Industry maturity means moving toward fundamental-based pricing. But this exposes a core issue: the scale of the fundamentals is too small to support current valuations or drive the market.

So, what is actually driving token prices? The following chart roughly divides the crypto market cap by asset class, with some adjustments for clarity:

Two main adjustments:

• Applying a 75% discount to the Layer 1 sector overall

• Applying a 50% discount to application-oriented sectors overall

This reflects a view: in these two major asset classes, a large portion lacks the fundamentals to justify current valuations.

After adjustment, two points stand out:

1. Market size cannot support grand narratives

Despite the attention on application layers, the actual market size remains small. Last year, total on-chain transaction fees were about $10 billion, and not all of that revenue belongs to token holders. From a global perspective, this number is insignificant. It can even be said that the total valuation of the entire on-chain application ecosystem, before adjustment, is less than that of a food delivery company like DoorDash.

2. Even after declines, speculative premiums still dominate altcoin valuations

Looking deeper:

Fundamentals

Fundamentals determine the price floor. For most tokens, this floor is far below current prices. Even at current valuation levels, the majority of tokens’ market caps are driven by speculative premiums—that is, the value assigned by people expecting to flip at higher prices in the future. This premium is highly correlated with overall market volatility and naturally diminishes over time. The more mature the track, the smaller the speculative space.

This situation is unlikely to change in the short term. Therefore, as speculative premiums fade, most existing altcoins will underperform Bitcoin. The faster the industry matures, the quicker this weakness will manifest.

Layer 1

Layer 1 remains an important category, but the game has changed. The dominant public chains are likely already in place. Small performance improvements are unlikely to shake the network effects of existing liquidity, developer ecosystems, and distribution channels. New general-purpose public chains will no longer enjoy the same premiums as in previous cycles. Application-specific chains will gradually be valued as “application” chains.

Revenue and Applications

“Focusing on revenue” is the right direction, but it is often misunderstood in crypto. People frequently discuss revenue multiples, but few crypto businesses have a durable moat. Much of the revenue comes from incentives, and cash flow has always been fragile. Even if a business is strong and cash flow is stable, whether the token can effectively capture this value is often unclear. Low valuation multiples do not necessarily mean it’s a good target.

The application layer still holds the greatest long-term potential, but solving real problems takes time. From a liquidity investment perspective, there are huge opportunities here, but the timeline may be longer than the market generally expects.

“People always overestimate short-term changes and underestimate long-term transformations.” — Amara’s Law

The core conclusion remains: no matter how attractive the revenue narrative is, or how much capital is betting on industry maturity, speculation remains the main driver of market cap. Fundamental expansion to a sufficient scale will take time; until then, valuations will be set by expectations rather than cash flow.

Part Three: Investment directions to watch in 2026

In a single asset or market, speculative premiums tend to diminish over time. This is an old story in crypto—AI agents, early DeFi, NFTs have all gone through such cycles.

Speculation always flows into areas where valuations are still unclear, narratives are still forming, and market size is undefined (with unlimited imagination).

In one sentence: Bet on innovation.

Assets most likely to absorb speculative premiums in 2026 typically have the following characteristics:

• Capable of creating entirely new assets or markets on-chain

• Have a feasible path to “monetary premium”

• Difficult to value due to novelty or unclear cash flow attribution (a key reason for monetary premium narratives)

• Have some barrier: technical, cognitive, or access (hard to arbitrage + better distribution)

• Align with larger global trends—market size is unlimited

These conditions will delay market efficiency, extend the window for mispricing, and leave room for speculation.

Specific sectors and projects to watch:

1. uPOW (Practical Proof of Work)

uPOW shifts mining output from pure inflation to outputs with real utility, turning “mining for distribution” into “adding value to assets.” This direction has been discussed for a while, and the underlying technology is approaching feasibility. uPOW projects are novel and hard to value, representing a new class of productive assets with potential for monetary premium. Currently focusing on two:

@nockchain: An early-stage project, needs time to develop, fits the theme, and benefits from zero-knowledge proof and privacy narratives.

@ambient_xyz: In private pre-mine stage, expected to launch this year. Very cyberpunk style, using POW to provide computing power for evergreen large language models.

2. Ownership tokens

“The era of ‘meme coding’ has arrived.” Small teams developing short-cycle, niche MVPs will become the norm, some of which will grow into real companies. Lightweight fundraising processes and token growth effects will continue to be valuable. The core issue with these tokens is the claim on business value, but various mechanisms are exploring solutions. Opportunities exist both in the tokens themselves and in launch platforms. Focus on two:

@MetaDAOProject: A clear leader in the field, recommended multiple times.

@StreetFDN: An earlier stage, aimed at serving offline startups.

3. Distributed training and compute markets

Distributed training remains one of the most promising areas in AI x Crypto, but progress has been slower than expected. Leading teams have begun testing, hoping for full launch this year. Besides the project tokens themselves, they are more likely to spawn secondary applications and token ecosystems built on top. The real liquidity opportunities may be there, even if project tokens also rise. Leading teams:

@NousResearch

@primeintellect

@pluralis

4. Social Metaverse

Digital social spaces continue to evolve. Product-market fit remains elusive, but experiments are ongoing. Expect continued trial and error this year. Winners may not have emerged yet; ongoing attention:

@zora: Shows strong resilience, with huge potential for synergy between creators and content tokens.

@trendsdotfun: Solana ecosystem project, reaching Asia-Pacific markets, not yet widely recognized.

@tryfumo: Included because it proves that execution itself is a moat.

@ShagaLabs: Focused on Metaverse data—more similar projects expected.

5. Solana: @solana ($SOL)

General-purpose public chains are mature. As network effects strengthen, the importance of marginal technological improvements diminishes compared to existing liquidity, developer ecosystems, and distribution channels. Winners are likely already determined.

Solana has a strong core ecosystem, with rare long-term vision for builders and capital, and a reliable roadmap for continuous expansion. The next wave of speculation will occur on existing infrastructure. Regardless of the specific narrative, Solana is structurally prepared to host a large volume of such activities.

I believe the areas with limited opportunities: robots, meme coins.

Summary

Nihilism is not insight; it is a delayed emotional reaction to price trends, a symptom of industry issues rather than a prophecy of the future.

When sentiment is low, capital retreats to “mature trades” and consensus narratives to avoid risk. But in crypto, as in other industries, risk-avoidance cannot generate excess returns.

The industry remains in a “pre-fundamental” stage structurally, with price discovery dominated by speculative capital rather than cash flow. The shift away from this state will be slower than people imagine.

Speculative bubbles always follow innovation. Believe in innovation, try new applications, spend time engaging with builders, and bet on innovation.