The Exchanges

Q So I'd love to dive into all these aspects of an investment process. And Let's start with, you brought the lens of a large cap growth equity investor with some startup experience. How do you go about thinking about your investment process in this space? And maybe just walk right through it by starting with, what does liquid mean?

A So liquid means that the token trades either OTC or through exchanges or through DEXs, decentralized exchanges. And the investment process looks a ton like the equities process that I was doing at Jenison all of those years. And that's why I think the transition was actually pretty straightforward. I mean, we talked to teams. We talk to people who are at all different touch points throughout the ecosystem to derive a broader picture of what's happening. We build models of where we think the revenue is going to go for these protocols, what we think the addressable market is, and we figure out what price targets make sense. Now, there's kind of an interesting angle here where in equities, there's a little bit more of a solid line between fundamental analysis and Quant analysis and there's that gray area of quantum mental and you have all data being fed in. I'd say everything in crypto is kind of solidly in that quantum mental bucket because you have a lot of real time data that's visible on the blockchain. And what we're always doing is triangulating between the very soft or subjective dynamics that we're getting from talking to various ecosystem participants. And combining that with our own quant analysis, as well as the analysis or prosecuting what we're seeing on the blockchain. And that can be monitoring a wallet activity that can be monitoring trading activity on an ongoing …

AI assessment note: “So liquid means that the token trades either OTC or through exchanges or through DEXs”

Q So before we dive into what happened on your Coinbase investment and on, what other early stage investments did you make?

A So there were a bunch of investments that were kind of friends of friends investments before Coinbase. Coinbase was one of the first Y Combinator investments. I also invested in Instacart out of that vintage. A lot of these investments were on Funders Club, an accredited investor crowdfunding platform. So I invested in Funders Club itself. And then I've built up a portfolio of about 150 angel investments. And I'd say about 70, 80% of them have their provenance in one way or another back to Funders Club, either It was a direct investment there, or I got to know the CEO of one of the investments and they introduced me to other investments or other angels that I met through funders club. So really productive deal flow network and high graded, which was fantastic.

AI assessment note: “I also invested in Instacart out of that vintage. A lot of these investments were”

Q No, a lot of the chatter back in 2017, maybe to a lesser extent today is this question of, you know, when will we see cash flows? When will we see use cases? You mentioned DeFi decentralized finance, which is increasingly seen payments, lending, and other things as one of those use cases. I'd love to hear your perspective on the evolution of DeFi and where we are today.

A As we were talking about a little earlier, collateral locked in DeFi has just skyrocketed over the last year. Another core aspect, DeFi is really borrowing and lending protocols. It's decentralized exchanges and it's stable coins. Those are the three big buckets that we like to use. The collateral we talked about, decentralized exchange volumes, similar trajectory to collateral. July of last year, four and a half billion or so of trading volumes. That was more than all of 2019 combined. Fast forward to January of this year, sixty billion of trading volume. So it's just this exponential growth curve. Really two core innovations in our view that have led to this big pickup in activity across DeFi. One is what's called governance tokens. So these are what I'd say equity analogous types of tokens. They have voting rights for the protocol. These voting rights, though, go beyond voting rights that you would see in a proxy statement for an equity. They're actually voting rights. You can propose changes to the way that the protocol operates and bring a vote on that. So they end up almost being management decisions as well as proxy decisions. These protocols generate revenue. Some of the decentralized exchanges take 30 basis points in fees, and those revenues over time Could flow to the governance token holder. So that's kind of one of the core innovations. And then the second core inno…

AI assessment note: “two core innovations in our view that have led to this big pickup in activity”

Q How do you think about structuring your portfolio?

A Very interesting question. So I think of it very much the way that I would in equities portfolio. There are Varying degrees of risk that we're taking on with different protocols. Oftentimes there's a very interesting novel new concept. Let's say it's a primitive that allows you to build structured products on Ethereum and it doesn't have any activity yet. It's very risky. It hasn't really been battle tested from a security perspective either, but it's certainly in the lead in that vertical and we want exposure. That might be a 50 basis point position or a one point position. Whereas something like Aave that has been battle tested has a lot of collateral locked in it. It hasn't been hacked. It's I'd say probably lower risk, slightly lower reward as well, but a very high reward relative to just about anything in the traditional investment world and still in the first or second inning of its development. That could be in the five to 10% range on an initial cost basis. So I'd say that first layer is kind of traditional equity sizing based on risk and conviction. But then we put in an overlay of liquidity risk management, and there's a wide range of liquidity of these tokens going from small cap up through Bitcoin, the largest, most liquid. And we want to make sure that we're risk managing the portfolio in a way that Where we would be able to exit positions or reduce risk in a reaso…

AI assessment note: “I think of it very much the way that I would in equities portfolio.”

Q stone ages for this world. On the other hand, it was only, you know, six, seven years ago. We've talked already in this mini series a little bit about the macro case and the infrastructure evolution for institutions. I'd love to get your perspective over the last almost 10 years now. What's been the trajectory in both crypto assets and the blockchain that leads itself towards this institutional interest today?

A I'd say the trajectory toward institutional interest has been just as exponential in development as the price trajectory of, let's just say, Bitcoin as a proxy for the broader space. I remember back in 2012 sitting in my regulated mutual fund seat, feeling a little uneasy interacting with the ecosystem. I remember the first SEC filing that mentioned Bitcoin and kind of feeling a level of validation, a level of Excitement around this coming into the, just the first fold of mainstream. And it was the S one where PayPal spun out of eBay. From there, we started seeing more engagement. 2017 was another big watershed moment. But what was really surprising about the period from 2017 to today, and really I'd say 2017 through 20 19 was the capital that flowed into the space. And The development talent that came into the space out of the 20 17 bubble just completely changed the face of crypto, completely changed what institutional infrastructure looked like, completely changed the core players in the space, and completely changed the investment paradigm. Going from really supply demand dynamics for individual tokens to an investment paradigm that looks Quite analogous to equities with fundamentals that you can track, you can run valuation metrics, and you can put price targets on various tokens and really use the same investing skill set that one would use in equities or credit for crypt…

AI assessment note: “trajectory toward institutional interest has been just as exponential in development”

Q As we look out, there's been a lot of interest, particularly starting with Bitcoin, Elon Musk buying for Tesla's balance sheet and MassMutual, and obviously Michael Saylor at MicroStrategy. How do you think about the impact of these initial moves onto the evolving ecosystem?

A I'll say a few things here. One, I think what's happened with just about everyone I know from traditional finance, you start with Bitcoin and your antennae are up and you start to pick up on, well, there's a lot of exciting stuff happening in DeFi on Ethereum. And what's this whole NFT space? NBA top shot and the excitement there. What are these challenger blockchains? What does that mean? So You end up opening your eyes to the diversity of this ecosystem. And I think we're certainly seeing in the institutional conversations that we're having a very quick progression from either Bitcoin alone or Bitcoin and Ethereum to start to looking at a broader set of crypto assets. And it's not a two year progression. It's more like a three to six month progression. Specifically on the announcements, Michael Saylor and MicroStrategy, a big tailwind for the industry, really one of the core catalysts in the fall. You look at MassMutual and if you're one of their insurance competitors and MassMutual just added Bitcoin to their general investment account, you're going to seriously consider adding it because a big move in Bitcoin could affect their ability to price premiums in the near term. It creates real competitive dynamics. And then I think Elon, there's really a dynamic around Tesla's purchase, where if you were your typical board a few months ago, you were saying, do we really need to co…

AI assessment note: “Specifically on the announcements, Michael Saylor and MicroStrategy, a big tailwind for the industry”

Q What's your perspective on where regulation will have a role going forward?

A We think that regulation is going to have a very big role across the crypto ecosystem. I loved your podcast last week with the acting commissioner of the CFTC talking about how regulation has been one of the big advantages of the US commodities and securities markets, and I completely agree with that. I think regulation needs to be thoughtful. It needs to be supportive of the innovation that's happening here. I've never seen a cadence of innovation Like what I see right now in the broader crypto universe, it's global, but in many ways we can direct it toward benefiting different jurisdictions, whether it's the U S or another country that wants to be crypto supportive. And I very much hope that we see supportive regulations come into place in the U S in thinking about how regulation transforms this universe. It takes things like decentralized finance from being a really interesting parallel universe that broader traditional financial institutions are a little hesitant to interact with, and it brings it into the mainstream fold. I think 2020 was a watershed year from a regulatory perspective. We had some very positive pronouncements out of the Office of the Controller of Currency around federally chartered banks being able to custody crypto. Federally chartered banks being able to run crypto network nodes. And what that did was lead to announcements like the one last week from Ba…

AI assessment note: “We think that regulation is going to have a very big role across the crypto ecosystem.”

Q So you find your way into Coinbase, and how did that evolve with your interest in the crypto blockchain world?

A I believe luck favors the prepared mind. So I'd actually read a New Yorker article about Bitcoin in 2011. That kind of primed my perspective. Invested in Coinbase, and once you have skin in the game, that's like the catalyst for having everything associated with that space. Just capture your attention. So once I was invested in Coinbase, I set up a bunch of Google alerts. I was following what was happening with Bitcoin, but also what was happening outside of Bitcoin. And there were a handful of coins outside of Bitcoin at that time. And I started to see a lot of really interesting buzz around Ethereum. This was just at the ICO period in 2014, but I said, I want to put a little bit of a bet here. I think this is quite interesting. A lot of people who understand way more about what's happening here than I do think this is quite intriguing. So I invested a little bit in the ICO and then All of this starts to snowball. You have more and more chips on the table, more things to pay attention to, and over time you start to have a, a one-on-one understanding of what's happening.

AI assessment note: “once you have skin in the game, that's like the catalyst”

Q So just for perspective, as we dive in, what was your lens on deciding what to invest in and what to turn down?

A I really came into startup investing saying, okay, I'm a deep fundamental investor from the large cap world. I get this. I do fundamental analysis on the companies that I'm looking at and make decisions. And what I realized really quickly was early stage investing is quite different from more mature later stage investing. And I sort of came up with a rubric of the quick decision process for these early stage investments. They had to be end markets that I was very excited about, and I have a lot of interest, so that's an easy one. Teams that I just loved and was really passionate about, but then no yellow or red flags. I always look for warm intros or having the deal flow come through the channels that we were discussing earlier. And part of that is just a test of the founders network, their grit, their ability to kind of get to investors that they want to engage with. And the last thing is just like no big concerns up Upfront. And look, there are going to be plenty of early stage startups that have big concerns up front and end up overcoming them. But my view is you're going to have roadblocks come up along the way. If I'm building a broad angel portfolio, why not start with companies that kind of have a clear path? The last thing that I'll say on that is I started out kind of modulating my investment size up or down based on the alchemy of how those different factors came toge…

AI assessment note: “I sort of came up with a rubric of the quick decision process”

Q In those conversations, when someone's close to the edge and then they reach the tipping point and they engage and they invest, what do you typically see as the key part of the case that gets someone who's done their research over the hump?

A What's fascinating is what resonates with one particular institution could be completely different from what resonates with another, but that's actually the beauty of the diversity of this ecosystem. There are institutions that are all about finding the fastest horse macro hedge, and Bitcoin is really what resonates. But then we have conversations that start out with, you know what, I don't really get Bitcoin. But man, the Ethereum ecosystem reminds me a lot of growth equities, and I'm just super excited about what's happening there. So what's great about crypto is it's as fundamental a technology as the internet. It spans verticals, it spans use cases, it spans even macro. And I think once we understand what a client or a potential client is looking for within their portfolio, We can then direct them into the part of the ecosystem that's the best fit for their needs.

AI assessment note: “Bitcoin is really what resonates. But then we have conversations that start out with”

Q At this point in time, how much of what you're assessing are trading dynamics in comparison to say longer term investment themes in protocols that are getting developed?

A That's a really interesting question. And I'd say by virtue of, I think one of our core advantages at coin fund is being relatively small and having venture through to liquid crypto and having both partner and analyst resources that are all looking across the entire gamut from early stage through to later. The dialogue that we have in our morning meeting every day for an hour, where we're talking about everything from venture through to liquid. Really spans the earliest embryonic companies within crypto that really have a vision, but no product yet all the way through to projects that have demonstrable traction that we can track on the blockchain. And in crypto, the time from early stage to liquid is much shorter than an equity. So you can go from being this embryonic company to Being relevant in liquid crypto in six months and having a five hundred million or billion dollar network value. So we're constantly drawing connections between what we're seeing emerge in the early stage and how to tie that into not just what we're seeing real time in the liquid markets, but how that informs where the liquid markets are likely to go in the next year, in the next two years. And that really informs position sizing on the liquid side. So we could have a protocol that's just going from win to win to win. And we're seeing that on the liquid side in their adoption and engagement, but we're s…

AI assessment note: “we're constantly drawing connections between what we're seeing emerge in the early stage and”

Q You see, particularly with Bitcoin, this question of how central banks will respond should Bitcoin get increasing importance over the next couple of years. What do you think happens with central banking activity in the digital asset space?

A It's quite interesting. At the beginning of last year, China launched a pilot of the digital RMB, and before that pilot launched, there was very little talk of central bank digital currencies among the western big central banks. After that successful pilot, the rest of twenty-twenty was the year of central bank digital currencies. The IMF held a full day event on central bank digital currencies in the fall. Brian Brooks, who was head of the OCC, talked a lot about a push towards central bank digital currencies and, and maybe having some of the private stable coins be a bridge to true central bank digital currencies. So when we think about what central bank digital currencies mean and what private stable coins mean for crypto, that really comes down to this idea of an advancing regulatory regime One in which you start having KYC in the wallet again in a thoughtful way over time. And that kind of gets into if you'll allow me to talk about like the multiple years out type of really interesting things that you could imagine doing. You can start thinking about taking securities off of venues and allowing for peer to peer securities trading and by peer to peer that could be in these decentralized exchanges. That we're kind of like talking about now with Uniswap and SushiSwap. You can imagine a world where startups incentivize users to come use their products by giving away equity, li…

AI assessment note: “the rest of twenty-twenty was the year of central bank digital currencies.”