Crypto VC Underperformance and Maelstrom's Strategic Shift to Private Equity

The crypto investment landscape has entered a period of recalibration, marked by a stark divergence between the performance of venture capital (VC) funds and the broader market's resilience. As institutional capital re-enters the space and macroeconomic conditions stabilize, a critical question emerges: Why are crypto VC funds, despite their focus on innovation, delivering subpar risk-adjusted returns? This underperformance has prompted a notable strategic pivot from one of the sector's most prominent players, Maelstrom, which has shifted its focus from venture capital to private equity.

The Crypto VC Dilemma: Underperformance Amid Market Optimism

Data from Q3 2025 reveals a mixed picture for crypto VC funds. While median TVPI (Total Value to Paid-In Capital) has improved across multiple fund vintages, many funds from 2019 onward still struggle to meet the 3x TVPI benchmark, a key indicator of successful capital deployment. This underperformance is compounded by a growing disconnect between private round valuations and public market outcomes. For instance, projects such as Humanity Protocol, Fuel Network, and Privasea have seen significant declines in value after trading on public markets, exposing flaws in private valuation assumptions.

The root causes of this underperformance are multifaceted. High management and performance fees, coupled with the concentration of large funds on a limited set of successful projects, have eroded returns for many investors. Additionally, the sector's reliance on speculative tokens-often lacking tangible utility-has left portfolios vulnerable to market volatility. As one example, a $100,000 investment in a crypto VC fund by Maelstrom had dropped to $56,000 over four years, despite Bitcoin doubling in value and seed-stage tokens delivering up to 75x returns during the same period.

Maelstrom's Strategic Shift: From VC to Private Equity

Arthur Hayes' Maelstrom has responded to these challenges by pivoting from crypto VC to private equity. The firm's new fund, Maelstrom Equity Fund I, focuses on profitable, off-chain infrastructure businesses rather than speculative tokens. This shift is driven by a desire to address three key issues: poor liquidity for founders, limited acquisition options for traditional finance institutions, and the need for better risk-adjusted returns for institutional investors like pension funds.

The decision aligns with broader trends in the market. Q3 2025 data shows that later-stage deals in crypto VC accounted for 56% of capital raised, with institutional adoption increasingly favoring Centralized Finance (CeFi) and blockchain infrastructure over speculative projects. By targeting established, cash-generating businesses, Maelstrom aims to capitalize on the growing demand for institutional-grade utility in the crypto space.

Risk-Adjusted Returns: A Comparative Analysis

The underperformance of crypto VC funds highlights a critical opportunity for private equity strategies in crypto. Traditional private equity in crypto typically involves investments in liquid assets like Bitcoin, whereas crypto VC funds focus on early-stage innovation. However, the latter's high dispersion in performance- evidenced by a 20% interquartile range in net IRR over the past decade-underscores the risks of relying on speculative bets.

In contrast, crypto private equity has shown stronger risk-adjusted returns, particularly in infrastructure and AI-related ventures. Q3 2025 data reveals that blockchain infrastructure and real-world assets (RWAs) absorbed over 60% of funding, reflecting a shift toward projects with predictable cash flows. For example, Revolut and Kraken attracted $1.5 billion in combined investment, signaling a preference for established models. This trend aligns with Maelstrom's strategy, which prioritizes off-chain infrastructure businesses with clear revenue streams.

The Path Forward: Normalization or Reset?

While the crypto VC space faces headwinds, signs of normalization are emerging. The percentage of venture funds returning capital to LPs has increased, particularly for the 2023 vintage, with 15% of funds initiating returns after just six quarters. Additionally, median TVPI and IRR have shown positive trends, suggesting a gradual alignment with historical benchmarks. However, these improvements must be weighed against the sector's ongoing challenges, including regulatory uncertainty and the need for better liquidity mechanisms.

For investors, the key takeaway is clear: the era of narrative-driven optimism is giving way to a more disciplined approach. As Maelstrom's pivot demonstrates, success in the evolving crypto landscape will require a focus on risk-adjusted returns, diversified portfolios, and a willingness to adapt to shifting market dynamics.